Black & Decker Corporation Q4 2009 Earnings Call Transcript

Executives

Mark Rothleitner – Vice President of Investor Relations, Treasurer

Nolan Archibald – Chief Executive Officer

Stephen Reeves – Chief Financial Officer

Analysts

Kenneth Ziner – Macquarie Capital

Daniel Oppenheim – Credit Suisse

Matt for Megan McGrath – Barclays Capital

Susan for David Goldberg – UBS

David Macgregor – Longbow Research

Michael Rehaut – J.P. Morgan

Sam Darkatsh – Raymond James

Eric Bosshard – Cleveland Research

Josh for Peter Lisnic – Robert W. Baird

Black & Decker Corporation (BDK) Q4 2009 Earnings Call February 3, 2010 10:00 AM ET

Operator

Welcome to the Black & Decker fourth quarter earnings conference call. (Operator Instructions) I would now like to turn today’s conference over to Mark Rothleitner, Vice President of Investor Relations and Treasurer.

Mark Rothleitner

Good morning and welcome to Black & Decker’s fourth quarter conference call. On today’s call are Chief Executive Officer Nolan Archibald and our Chief Financial Officer, Steve Reeves who will discuss our fourth quarter and full year results and outlook for 2010. Their comments should take about 20 minutes and then we’ll answer your questions.

In keeping with SEC requirements I advise that during this call we will be making forward-looking statements that involve 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 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 included on the corporation’s website under the investor relations section.

Now, I’ll turn it over to Nolan.

Nolan Archibald

Thanks Mark. This morning Black & Decker announced very positive results for the fourth quarter. While the results are down from our peak, I am proud of what our team achieved in 2009 in very difficult market conditions.

A year ago we were in the midst of a global credit crisis that decimated our key markets. We took aggressive steps to protect our liquidity, reduce our costs and revitalize key product lines. As a result, we delivered far better earnings and cash flow in 2009 than we anticipated.

Today our margins are heading in the right direction. Most of our markets have stabilized and we maintain the strongest brands in our industries and by joining forces with Stanley Works, we will create a global diversified industrial leader with outstanding growth potential.

Turning to our results, diluted earnings per share were $0.55 for the fourth quarter or $1.24 if you exclude the expenses related to the proposed Stanley merger. This was well above our guidance of $0.10 or the $0.68 to $0.78 guidance range excluding merger related expenses.

Over half of this out performance related to sales volume which was significantly better than we had expected. We’ll talk more about the drivers shortly.

For the full year, diluted earnings per share were $2.17 or $3.01 excluding restructuring charges and merger related expenses.

We addressed the economic environment by taking aggressive cost reductions, yet continuing to launch and promote new products. This enabled us to deliver adjusted EPS well above the guidance we gave at the beginning of the year.

Sales for the fourth quarter decreased 6% from the prior year reflecting 10% lower organic volume, flat price and a 4% favorable impact from currency translation. Better volume and ongoing cost control helped us post a 9.3% operating margin, again excluding merger costs.

For the full year sales declined 22% including 20% lower volume, 1% positive price and 3% unfavorable currency. While all areas of the company were down, the hardest hit businesses were the Fastening segment and our Tools businesses in Europe and North America.

Despite this tremendous top line pressure, our operating margin excluding merger costs fell only 110 basis points, a smaller drop than in 2008. Gross margin actually improved and we cut over $250 million of SG&A.

Net cash generation was outstanding this year at $584 million. This was among the highest in company history and dramatically exceeded our goals. Facing the credit crisis early in the year, we challenged our businesses to reduce working capital and limit capital expenditures. They delivered nearly $300 million of cash flow from working capital primarily inventory and we met all of our key new product launch commitments while reducing capital spending by $36 million.

This cash generation with some help from some option exercise proceeds resulted in net debt of below $650 million, nearly a 50% reduction. At year end we had a cash balance of $1.1 billion.

Now let me discuss our businesses in more detail. Sales in our worldwide Tools and Accessories segment decreased 11% for the quarter. In the United States, Industrial products group, sales decreased approximately 20%. Commercial construction continued to decline. While housing has stabilized somewhat, fourth quarter starts were still down double digits versus last year.

The product lines most tied to construction had the biggest sales declines this quarter. As we discussed in October, shipment occurred in the third quarter that we had expected for the fourth quarter. It’s also worth noting that although the economy began to collapse in the fourth quarter of 2008, key retail partners ordered their promotional commitments and took in substantial inventory.

During the quarter, we launched our new Lithium Ion Compact System which was very well received. While it’s early, much of this volume appears to be incremental to our Night cad offering.

For the full year, sales in the U.S. Industrial products group decreased more than 25%. This was clearly driven by the economic environment. Housing starts and commercial constructions were both down more than 30% for the year and home improvement spending declined as well.

All key product categories and channels were affected, especially the construction sensitive independent channel. We believe that commercial construction will continue to be soft in 2010.

In the U.S. Consumer products group, sales decreased double digits for the quarter. Within this group, sales of Tools and Accessories increased led by the Porter Cable line of Tradesman tools. In addition, the Ready Wrench was named amazon.com’s best selling home improvement gift for 2009.

Other categories however, experienced sharp decreases in volume this quarter. There were several contributing factors including timing of outdoor orders due to the Chinese New Year shut down schedule.

For the full year, sales in the U.S. Consumer products group decreased at a high single digit rate. As in the fourth quarter, this was driven by declines in non tool categories like automotive and electric and home products.

In the European Power Tools and Accessories business, sales fell at a high single digit rate. This business was the biggest contributor to the company’s sales out performance this quarter and represents a solid improvement sequentially. Professional cordless sales increased year on year driven by a major promotion at a key retailer.

In Consumer, Dust Buster Vac enjoyed wide spread success driving growth for both the household products portfolio. In the Consumer business we have been gaining listings throughout the downturn as a result of good commercial execution. Product lines more tied to construction however remained weak.

Most European countries posted narrower declines than in the third quarter against easier comparisons. Eastern Europe remained the most challenging region but we have begun to see signs of stabilization there as well with some customers replenishing inventory levels.

For the full year sales in the European Tools business decreased nearly 25%. Most regions posted 15% to 20% declines with significantly worst performance in Scandinavia and Eastern Europe.

Fourth quarter sales in Canada decreased at a low teen’s rate year on year but improved versus the third quarter. In Latin American and Asia Pacific, sales grew single digits this quarter. It is encouraging to begin to see regions of the world return to a growth mode.

In Latin America we experienced strong growth in the southern cone which offset weakness in Mexico. In Asia Pacific, we continue to capitalize on the investments we have made in the Indian market.

For the full year Canadian sales were down 25% similar to the U.S. Industrial products group performance. Full year sales declined single digits in Latin America and Asia Pacific.

Return on sales for the Power Tools and Accessory business improved sharply to 11.3% this quarter. This was driven by gross margin reflecting a number of favorable trends. As we began running our plants at more normal levels than in the first half, productivity and fixed cost absorption improved significantly.

Due to timing of contracts, component cost deflation was the most favorable of any quarter this year. SG&A spending remained below the prior year but rose as a percentage of sales due to lower volume.

For the full year, return on sales in the Power Tools and Accessories segment was flat at 7.4%. An increase in gross margin driven by favorable pricing and productivity improvement was offset by a higher SG&A percentage on lower sales volume.

In our Hardware and Home Improvement segment sales decreased 4% for the quarter against an easier comparison than we faced earlier in the year. This performance was better than we expected, reflecting both demand improvement and inventory restocking in some channels.

Fourth quarter sales in the U.S. Lock Set business were roughly flat to last year and the third quarter. For the U.S. Price Pfister faucet business sales declined at a double digit rate. Locks benefited in the quarter from inventory restocking, while faucets experienced pressure from a lowering of retail inventory.

For the full year sales in the Hardware and Home Improvement segment declined 15%. While the Lock Set business is more tied to the residential construction, it benefited from the continued success of Smart Key and posted less of a decline than the faucet business.

Operating margin for the Hardware and Home Improvement segment was 11.5% this quarter, a sharp increase versus 2008 and a little below the third quarter level. The year on year increase was driven by gross margin improvement.

Component costs remained favorable to last year and productivity continued to improve. SG&A spending increased slightly and therefore rose as a percentage of sales.

For the full year operating margin for the Hardware and Home Improvement segment increased 170 basis points to 10.2%. Component cost deflation and productivity were positive factors, especially in the second half.

In the Fastening and Assembly Systems segment, fourth quarter sales were down a modest 2% from the 2008 level. As a result of high auto production rates, our sales were significantly better than in previous quarters of 2009. While demand remained weak in Japan, other key regions posted roughly flat year on sales.

Operating margin of 11.3% was better than in the third quarter due to volume leverage and commodity deflation but was slightly below the prior year level.

For the full year, sales decreased 25% in the Fastening segment. The first half collapse of the automotive industry and the rapid pullback in industrial production levels drove declines across the globe. At 7.4% this segments operating margin was down significantly from the 15.1% in 2008 due to lower volume.

As we have noted in the past, this is our most vertically integrated business. Its margin improved steadily through the year as we aggressively took costs out and benefited from higher auto production levels in the second half.

Now I’ll turn the time over to Steve to review the financials in more detail.

Stephen Reeves

Thanks Nolan. Starting with the P&L, sales were down 6% to $1.3 billion for the quarter. This represents a significant sequential improvement as we begin to anniversary the economic decline associated with the 2008 credit crisis.

The decline was approximately six points better than our guidance. Of this, 1% was currency driven. The balance of the out performance was roughly equally split among increased demand, inventory restocking and programming adjustments. The demand increase was largely in the non U.S. parts of the Power Tool business and in the Fastening automotive business.

For the full year sales decreased 22% to $4.8 billion. Gross margin was 36.4% for the quarter, well above the 2008 level and our best performance in a number of years. We continue to benefit from restructuring savings and components cost deflation. Productivity was strong and price which had been positive through the third quarter was neutral in the fourth quarter.

Year on year, absorption was especially favorable as we had slowed production sharply for several quarters before increasing in the second half of 2009. The timing of these items resulted in a gross margin that was above our expected run rate.

The full year gross margin improved modestly to 33.2% as productivity, price and restructuring savings outweighed the unfavorable fixed cost absorption.

SG&A of $352 million was nearly flat to 2008 but higher than the third quarter. A number of factors caused the increase from the previous run rate including the typical higher promotional level in the fourth quarter and compensation related increases.

Also we incurred additional legal and environmental charges in the quarter at corporate due to changing facts on existing litigation.

For the full year, SG&A decreased $255 million or 17%. We reduced employment levels by 10% company wide and put management at a 5% pay reduction for most U.S. salaried employees for eight months and significantly reduced discretionary spending. As a percentage of sales, SG&A increased 150 basis points due to much lower volume.

Operating margins excluding transaction costs were well above our guidance for the fourth quarter. Operating leverage on the sales overdrive was the primary reason. We also benefited from better productivity and programming adjustments partially offset by increased compensation expense in the business and litigation and environmental expense at corporate.

We did not record a restructuring charge in the fourth quarter. For the full year, restructuring charges were $12 million versus $55 million in 2008. Our restructuring initiatives generated approximately $20 million of savings in the fourth quarter and $76 million for the full year. Because we are approaching the anniversary of many of these restructuring actions, we expect significantly lower full year savings in 2010.

Interest expense of $23 million was slightly above the third quarter level. It was $5 million higher than the prior year due to bond issuance earlier in the year. For the full year interest expense rose $21 million to $84 million, again primarily due to the bond issuance.

Our effective tax rate was approximately 17% this quarter or 23% excluding the impact of merger related expenses. This is lower than our guidance of approximately 30% partly due to the geographical mix of our earnings out performance. In addition, as we noted for the first quarter of 2009 when our tax rate was high, there is a fixed component of tax expanse; therefore we benefited from a leveraging effect on improved earnings.

For the full year our tax rate was 22% or 24% excluding restructuring and merger related expenses. This was below our expected long term run rate of 30% primarily due to favorable adjustments in the third quarter but higher than in 2008 when we benefited from the favorable effect of several discrete adjustments.

In summary, of the approximately $0.50 increase in EPS over prior fourth quarter guidance, excluding transaction costs, approximately $0.30 was driven by the sales over performance, $0.10 was driven by other margin improvement and the balance was due to favorable tax expenses.

Turning to cash flow, we had a very strong year in this area. Due to excellent working capital management as well as earnings out performance and lower CapEx, we delivered $584 million of net cash generation.

We reduced inventory 24% during the year, a higher percentage than the sales decline. Receivables were down 10%, also more than the fourth quarter sales decline as DSO improved. Our businesses did a great job in managing through the downturn when we cleaned up significant past due accounts and pending deductions.

We also benefited from a $36 million reduction in capital spending versus 2008 as well as $60 million of positive net cash generation related to hedging.

Due to strong cash generation, and option exercise proceeds, our net debt decreased more than $600 million in 2009. We had no short term borrowings outstanding at year end and our cash balance was nearly $1.1 billion.

Now I will discuss the stand alone guidance for 2010. Overall, we anticipate a modest improvement this year in a number of our markets. While housing data remains mixed, activity should be up for the year.

The automotive sector has a very easy comparison early in the year and should show significant improvement globally. As Nolan noted, we have seen some positive signs in Europe; however, commercial constructions will likely be down significantly. We remain cautious regarding consumer spending and remodeling activity.

For the first quarter we expect mid single digit sales growth. This reflect continued stabilization of demand as well as an easy comparison to the weak demand environment and inventory reductions in the first quarter of 2009, partially mitigated by our view that retailers will continue to be very conservative on inventory.

For the full year we are projecting a low single digit growth rate as global consumer spending improves very gradually. The commercial construction continues to weaken. Based on current rates, currency should provide a 4% benefit from Q1 and a 2% benefit for the full year.

Our operating margin should improve significantly year on year in the first quarter. Our margin in the first quarter of 2009 was 3.5% excluding restructuring charges, by far the lowest in many years. Our first quarter sales and margin percentage are typically the lowest in the year and we expect that will be the case in 2010. However, we expect they will be more 200 basis points better than in 2009 excluding merger related expenses.

For the full year we expect operating margins will improve 100 to 150 basis points from the 6.7% level of 2009 excluding merger related expenses and restructuring charges. We should benefit from slightly higher volume on our fixed cost base.

We anticipate 2010 will be the inverse of 2009 with component deflation through the front half and inflationary pressure in the back half based on current commodity prices. Our expectation on price is flat to slightly negative.

As a result of the pending merger and subsequent elimination of our stand alone capital and tax structures, we are not providing EPS guidance.

From a cash flow perspective, we will likely add to inventory in the first quarter to replenish safety stock consumed by the sales overdrive, but in general nothing about our business model has changed relative to our ability to convert 90% of earnings into cash.

Now let me turn it back to Nolan to wrap up.

Nolan Archibald

Thanks Steve. While we expect challenges in areas such as commercial construction, we are encouraged that many of our end markets have largely stabilized. As we have discussed in prior quarters, we have positioned the stand alone company to generate operating leverage when the end markets do recover.

Aside from the macro economic environment, we will get a full year benefit of products launched in 2009 and have a robust new product line up for 2010. It should be a very good year for new outdoor products such as string trimmers, hedge trimmers and mowers. It appears our share in the cordless power tool market has stabilized and I am encouraged that our product road will allow us to be aggressive in this market going forward.

We’ll be launching a new line of DeWalt hammer drills with advanced vibration protection into the market. Our strategy of continuing to invest in new product development through the down turn has positioned us well to capitalize in the marketplace when commercial construction rebounds.

As Stanley mentioned last week, we remain on tract to complete the merger late in the first quarter or early in the second quarter. We will await certain regulatory approvals outside the U.S. and shareholder votes by both companies.

Integration planning is well underway and the business leadership teams were announced on Friday.

In summary, Black & Decker delivered strong financial results this quarter and is well positioned as the company enters a new era. We posted sales significantly better than expected. We have the best operating margin in two years.

We delivered EPS well above our guidance. We launched a number of well received new products, strengthening our position in the important cordless category. We remained on track to deliver a robust new product lineup in 2010.

We significantly improved working capital, driving $584 million of net cash generation for the year. Our strong cash flow generation drove nearly a 50% decrease in net debt for the year and have $1.1 billion of cash on our balance sheet.

And, we announced a transformational merger with Stanley that will be highly beneficial to our shareholders.

Black & Decker has delivered innovative solutions for 100 years. We are excited about the prospects of our merger with Stanley, a company with a similar tradition of excellence and iconic brands. We bring to the combination outstanding products, strong distribution, low cost operations and a very healthy financial position.

We believe that the combination will build on Black & Decker’s legacy and provide growth opportunities for our employees, our customers and our shareholders.

That concludes our 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 Kenneth Ziner – Macquarie Capital.

Kenneth Ziner – Macquarie Capital

Congratulations on your successful stewardship of the company. If you could expand on the comments largely came from sales outside the U.S. is what I believe I heard you say in Power Tools and Fastening. Could you go into description on the Power Tools and comment on Europe versus the U.K.?

Stephen Reeves

Our out performance was largely outside the U.S. and including especially in Europe. The U.K. was very favorable this quarter, some of which was generated from listing gains that we have picked up over the course of the year as well as some promotional activity that drove the professional business.

And outside of Europe, as Nolan mentioned in his prepared remarks, we saw growth in Latin America especially in the southern cone and in Asia except for Japan.

Kenneth Ziner – Macquarie Capital

If you could talk about the 1Q guidance where you’re talking about margins being up 200 basis points and sales in the mid digit is what it looks like, is it really just, because 200 seems like given the strong performance in 4Q, I realize that was driven by better absorption rates, but can you talk about why the margins are falling so much sequentially? Is there seasonality there or are you pulling back after the stronger sell through that you saw in 4Q?

Stephen Reeves

I said more than 200 by the way, but the first quarter is our smallest quarter so there is a step down in terms of pure volume. It would be probably inappropriate to take the fourth quarter and extrapolate that given some of the timing we saw in absorption that would in a normal year be more smoothed out over the course of an entire year.

Operator

Your next question comes from Daniel Oppenheim – Credit Suisse.

Daniel Oppenheim – Credit Suisse

I was wondering given your experience over time, you talked about end markets stabilizing but expecting your current model to be weak for some time. So just thinking back to the prior cycles how do you think this is going to play out? What would be your expectation here?

Stephen Reeves

You mean through the year?

Daniel Oppenheim – Credit Suisse

Through the year and just generally what is the, taking about cautious on repair and metal. What does that mean? When do you think it would come back obviously knowing that there won’t be a stand alone company?

Nolan Archibald

Our crystal ball is not probably any better than yours. We think this downturn has been a bit different than others and we as I mentioned as Steve mentioned, we’re seeing stabilization in our markets with some improvement in certain areas, but I think, my own personal guess is that it’s probably going to be a longer, slower recovery than we’ve seen in normal recessions because of all of the things we read every day what’s going on in Washington as well as how far down the markets went.

I was encouraged yesterday by seeing that people are coming back to auto showrooms and so you’re starting to see some life in the consumer sector, and of course that’s what’s going to drive all of this back, so we sure feel a lot better about things now than we did a year ago.

Daniel Oppenheim – Credit Suisse

If you could elaborate a bit, you talked about stabilizing tool share. What do you think is driving that? Is it new products, marketing? What do you think it is?

Nolan Archibald

I think new products are the main thing. We’ve come out with some significant new products in a lot of the categories, particularly cordless. We also have a robust product road for this year that we think will serve us very well in the marketplace.

Stephen Reeves

I think in the past we’ve spoken to the effect that we didn’t have an offering in the compact end of the lithium range and we actually launched that as you’re aware here in the fourth quarter. So it rounded out our offering at least in the U.S. that will launch in Europe in 2010. So it’s a better presence driven by the product.

Nolan Archibald

Also the Porter cable line of Tradesman tools continues to do well and take share.

Operator

Your next question comes from Matt for Megan McGrath – Barclays Capital.

Matt for Megan McGrath – Barclays Capital

I wanted to dig a little deeper on the operating margins. I’m just trying to get a sense if either COGS or SG&A benefited in any way from lower R&D and lower marketing as it relates to the proposed merger.

Stephen Reeves

We have not adjusted R&D spending. We’ve kept our investments up even through the downturn and have not adjusted them in relation to the transaction. We are still running the company as a stand alone business, so we are not really adjusting our strategies to address the merger combination.

Matt for Megan McGrath – Barclays Capital

Is there any chance you could speak to your expectations for merger related expenses going forward? Have you done essentially what you need to do this Q?

Stephen Reeves

For Black & Decker specifically, there will continue to some legal and advisory costs that come through here in the first quarter.

Matt for Megan McGrath – Barclays Capital

Is there any way you can quantify that?

Stephen Reeves

I couldn’t off the top of my head, no.

Operator

Your next question comes from Susan for David Goldberg – UBS.

Susan for David Goldberg – UBS

I’m wondering if you could talk a little bit about given the impressive results in hardware and home improvement, do you think you’re seeing any benefit from some of the rehabbing of foreclosures, especially since a lot of that work is sort of do it yourself or small kind of local contractor type of work?

Nolan Archibald

We could. I’m not sure that we know for sure. I think the main driver there particularly in locks is the new products that we’ve introduced. The Smart Key series of product that we’ve introduced continues to do very well in the marketplace.

Stephen Reeves

I think historically we’ve seen a lag effect between existing home sales and when it affects us in the hardware business but it’s likely having some effect. It’s hard to predict exactly what that is.

Susan for David Goldberg – UBS

Are you seeing any regional trends that would suggest anything? Is it stronger out west or the south or anything like that that you can speak to?

Stephen Reeves

Not really. I think the housing issues are well known that some pockets of the country are worse than others. I don’t think we have any greater intelligence into that.

Operator

Your next question comes from David Macgregor – Longbow Research.

David Macgregor – Longbow Research

You talked about in terms of the 2010 outlook volumes being up and pricing being up slightly, component prices being down yet it seems like yet it seems like in Forex you’re forecasting a top line flat kind of outlook. Can you talk a little bit about that component price decline you’re expecting for next year, raw materials and component costs and how much relief are you expecting to get there?

Stephen Reeves

I think our outlook on pricing is actually flat to negative, not positive next year on our own pricing. Relative to commodities, as we carried inflation into 2009 we are carrying into 2010 deflation. During 2009 we had a net deflationary year for us obviously split between the halves of the year.

We would expect 2010 to be deflationary as well on balance, but not an immaterial amount.

David Macgregor – Longbow Research

You’ve quantified that for us in the past. Is there any way you could do that now?

Stephen Reeves

It’s not a huge number. We quantified it when it was a more material number, but it’s in the tens of million, that order of magnitude.

David Macgregor – Longbow Research

You never really talked much in the past about royalty payments on small appliances, but was there a meaningful change there that would have moved the needle in some respect this quarter?

Stephen Reeves

No. It’s been consistent. We’re in a longer term contract. It hasn’t really changed.

Operator

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

Michael Rehaut – J.P. Morgan

I wanted to drill down a little bit in terms of where you are with the new products and I think you had mentioned the Tradesman line getting some traction out there, but as you look at 2010 I was wondering number one if you could review which new product efforts you expect to be the most impactful. Number two if you could quantify overall contribution from these new products, i.e. Tradesman or some of the other lithium ion cordless, and finally if you could talk about actual share gains in percentage terms, if you have any sense of that.

Nolan Archibald

First of all new products, we do have a robust product plan this year with the launch of we think significant introductions. We’re going to be a bit careful on what we say later on in the year because we don’t want the competition to be any more prepared than they are.

We’re going to have I think some impressive hammer drills coming out in the DeWalt line of product that we think will have a significant impact in the marketplace. We’ve concentrated on hammers. We’ve already introduced a number of them and they’re doing extremely well in the marketplace and we believe the ones that are yet to be introduced will also do extremely well.

You’ll also see continued introductions in our lithium ion cordless in the future and I won’t be any more specific about that, but we believe that the introductions that we’ll be making that we’ll be getting market share that we might have lost in that lower end professional, higher end do it yourself market. We have a very impressive lineup coming down in the future in that area.

In consumer, the cordless is very, very strong. In outdoor you’ll see more and more products introduced in our outdoor line in cordless, the 24 volt hedge trimmer, the string trimmers and mowers will be very strong.

Our outdoor offering this year will be excellent. In consumer tools you’ll continue to see us introduce power tools in cordless, in light weight drill drivers, gig saw. There will be new Porter cable drill and impact driver.

We’re already up to the mid 30’s on SKU’s on the Tradesman line. We’ll continue to add to that very successful line.

In our hardware and our home improvement group, we’re going to be introducing a key control deadbolt as well as a smart code lever, again adding to our Smart series. Those are just a few of the new products that we have coming on early in the year.

On market share, as we’ve said in the past, we probably lost some share in the lower end professional market and the higher end do it yourself market. The Tradesman area, I think the market share we lost there we’ve taken great strides to improve that. The product offerings that we have coming down in 2010 and early 2011 we think will address any market share declines we’ve had there.

In the premium market of DeWalt, we’ve held our own pretty well. We probably gained some share in Europe with new listings that we’ve gotten recently and those are just some examples.

Michael Rehaut – J.P. Morgan

Just to clarify, you said that when you hit on the lithium iron cordless where you expect to regain some share in the low end pro or higher end consumer, is that kind of expected to roll out second half this year, first half next year?

Stephen Reeves

We did some last year. You’ll see some in the first half this year. You’ll see more in the second half and early next year.

Michael Rehaut – J.P. Morgan

How does this all feed back to the outlook for pricing being flat to slightly negative? If you have these different new products coming out, and I assume that they would help maintain pricing to some extent if not expand it. Is this more just a function of a tentative end market where going back to your comments about the remodeling market. How should I think about the new product cycle relative to the comments on price?

Nolan Archibald

The price of our new products is not in our calculation of lower price. When we introduce new products, we try to price them where we fell like we’ll generate the most profitability for us, and that has nothing to do with the pricing of existing product. So that’s why you’ve seen over the years our margins improving with negative price, because of the new products we’ve introduced.

Michael Rehaut – J.P. Morgan

So is it safe to say you expect a positive mix in 2010?

Stephen Reeves

With our margins going up, yes.

Operator

Your next question comes from Sam Darkatsh – Raymond James.

Sam Darkatsh – Raymond James

What do you peg the normal sequential seasonality of sales from Q4 to Q1 and how would you compare? It looks like your guidance suggests sales down 13%. How does that compare with “normal seasonal trend” might look like?

Stephen Reeves

I think a normal seasonal; I think we’ve typically tried to guide around 25% to 30% incremental, detrimental margins. It doesn’t hold off in every given quarterly instance. I think what we were trying to convey is that the fourth quarter benefited unusually from the way that our volumes changed during 2009, so we had an unusual amount of absorption benefit in the fourth quarter that is not part of the ongoing, it would not be ongoing or able to be extrapolated.

Sam Darkatsh – Raymond James

I was referring to sales not so much the incremental margins. It looks like the sales guidance suggests down about 13% on a sequential basis Q4 to Q1 and going back in time it’s difficult because of things that are happening on a macro standpoint to oftentimes ascertain what the typical seasonal pattern would be Q4 to Q1 from a sales perspective. I guess what I’m getting at, do you see things sequentially improving more so than what normal seasonality would suggest or are you just guiding to normal seasonal patterns?

Stephen Reeves

I think the underlying economy is getting better in certain markets around the world. I think we called those out. I think consumer spending is very gradually improving whereas commercial is pressured. I think what’s unusual about the first quarter of 2010 would be as you look at it on a comp basis not a sequential basis, is the amount of inventory reduction we saw last year that we are not expecting to recur this year.

I think inventory levels largely; we saw a little add back in the fourth quarter. We’re not really calling for a lot of add back in the first quarter of 2010.

Sam Darkatsh – Raymond James

You’ve talked around it a little bit but talk about what you’re seeing in PTA and HHI in terms of market share trends as specific as you feel comfortable and what are you anticipating share trends looking like as we progress through 2010 assuming a stand alone business?

Nolan Archibald

I think I already addressed Power Tools and Accessories in my earlier comments. In HHI, the Hardware Home Improvement group, our lock and lock set business I think has seen improved market share and that’s happened ever since we introduced the Smart Key series. I think we might have lost a little market share in our Price Pfister plumbing business.

Operator

Your next question comes from Eric Bosshard – Cleveland Research.