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Black & Decker (BDK)

Q3 2007 Earnings Call

October 25, 2007 10:00 AM ET

Executives

Mark Rothleitner - IR

Mike Mangan - CFO

Analysts

Analyst for Kenneth Zener - Merrill Lynch

Michael Rehaut - JP Morgan

Armando Lopez - Morgan Stanley

Mark Montana for Stephen Kim - Citigroup

Nishu Sood - Deutsche Bank

David McGregor - Longbow Research

Peter Lisnic - Robert Baird

Omar Lim - Cleveland Research.

Analyst for Sam Darkatsh - Raymond James

Operator

At this time, I would like to welcome everyone to the Black & Decker third quarter conference call. (Operator Instructions) I would now like to turn the call over to Mr. Mark Rothleitner, Vice President, Investor Relations and Treasurer. Sir, you may proceed.

Mark Rothleitner

Thank you operator. Good morning and welcome to Black & Decker’s third quarter conference call. On today’s call our Chief Financial Officer, Mike Mangan, will discuss our third quarter results and outlook for the remainder of 2007. His comments should take about 15 minutes and then we will 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 and 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 will turn it over to Mike.

Mike Mangan

Thanks Mark. This morning Black & Decker announced earnings per share of $1.59 for the third quarter, above our guidance of $1.40 to $1.45. Sales were also better than our forecast, which drove most of the EPS out-performance. As we anticipated, margins were down primarily due to raw material and inflation. Therefore, EPS was 9% below the record $1.74 per share in the third quarter of 2006.

Sales increased 1% to $1.6 billion for the quarter, ahead of our projection. Organic volume was down 1%, price was flat and foreign exchange contributed 2%. As we have described all year, outstanding international sales growth mitigated weakness related to the U.S. housing industry. This quarter, we also posted sales gains in two of our segments, Hardware and Home Improvement and Fastening and Assembly Systems.

Operating margin for the third quarter was 10.1% slightly ahead of our expectations. Commodity inflation remains the biggest challenge to our margins. We had roughly $40 million of year-on-year pressure this quarter, which we could not fully offset with productivity gains. Our SG&A percentage also increased, largely due to lower sales volumes in the North American Power Tools and Accessories business.

We generated $113 million of free cash flow in the third quarter bringing the year-to-date total to 413. Adjusting for a one-time tax payment related to HACA in early 2006, free cash flow increased by more than $50 million year-to-date. We continue to hold capital spending below depreciation and working capital remains favorable to 2006 year-to-date. Each quarter, this year inventory has been below the prior year level excluding currency.

As we announced last week, we used our cash to repurchase 4.3 million shares during the quarter. This brings the total 5.4 million year-to-date and 7 million over the last four quarters. As a result, our outstanding and average diluted shares are 8% lower than a year ago. Share repurchase activity contributed approximately $0.02 to EPS versus our prior guidance. Our average purchase price this quarter was approximately $85 below the average closing price for the quarter and year-to-date. Last week, our board added 4 million shares to our authorization bringing our repurchase capacity to nearly 5 billion shares. We will continue to repurchase our stock opportunistically and pursue bulk on acquisitions.

Now I’ll discuss our individual businesses in more detail. Sales in our Worldwide Power Tools and Accessories segment decreased 3% in the quarter. Sales outside of North America remained extremely strong; however, these results could not fully offset the North American decline.

In the U.S. Industrial Products Group, sales decreased mid single-digits. Considering the dramatic decline in housing and the high single-digit sales decrease in the second quarter, we consider this a respectable performance. The year-on-year change again driven by a double-digit decline in the independent channel. Many of our customers in this channel served the residential construction market and their orders declined across all categories.

In the Home Center channel, sales were down low single-digits and the sellthrough trends continued to stabilize. In addition, our Cordless business faced a tough comparison. Last year XRP launched late in the second quarter where as our new nano 18-volt line is launching in the fourth quarter this year. The Accessories category was a bright spot for the Industrial business as successful promotions and new products helped us grow sales in a tough environment.

The U.S. Consumer Products Group had a disappointing quarter with the sales decline in the teens. Sellthrough at the home centers was down only modestly similar to the second quarter. Order rates however were down significantly at all key customers. Two categories were most responsible for the decline: automotive and electronics and consumer tools.

The Vector Automotive and Electronics business we acquired in 2006 had fewer new products this year and some existing products did not meet our expectations. We are rebuilding that portfolio and rolling it out internationally which should help our 2008 results.

In Consumer Tools, part of the decline relates to timing of new products. We benefited from the Auto Wrench, Handy Saw, and other key products in the third quarter last year. This year, our major launch is the DPX lithium-ion cordless line, which recently started to ship to retailers. We expected sales in the Consumer business will stabilize in the fourth quarter and that DPX will provide a growth platform for 2008 and beyond.

In Europe, sales rose double-digits, our best organic growth in a number of years. The Industrial business delivered a double-digit gain for the third straight quarter. We posted outstanding performance in all key geographic regions driven by France, Eastern Europe and the UK. Our investments in new products, building a DeWalt brand and developing a salesforce are paying off.

The Consumer business also posted solid sales growth in Europe this quarter. We benefited from growth of key customers in Germany, the launch of automotive and electronic products and a late season rebound in the UK outdoor market.

In Latin America, sales grew in the high teens this quarter and over 20% year-to-date. All major product lines and regions posted sales growth again this quarter. The Asia region also contributed double-digit sales growth this quarter with strong gains in Korea, Japan and China.

Return on sales for the Power Tools and Accessories business decreased 190 basis points to 10.2%. Around two-thirds of the decline was from a higher SG&A percentage due to lower North American sales volume. The remainder was in gross margin, as productivity did not fully offset commodity inflation. The US Consumer business accounted for most of the segments margin decrease. Operating margins remained in the double-digits in both Europe and Latin America this quarter

In our Hardware and Home Improvement segment, sales increased 6%. Price Pfister continued to grow double-digits aided by a somewhat favorable comparison. Kwikset rebounded well this quarter posting sales growth in a very tough environment.

Our U.S. Lockset business had strong results at retail this quarter. We completed the launch of SmartKey to a large customer and the early sellthrough data is very encouraging. We also posted solid sales growth at another key retailer and benefited from price increases implemented late in 2006. Kwikset’s success in recent quarters supports our view that lock set purchases are less discretionary then purchases of higher ticket remodeling items.

The construction channel remains challenging but was more than offset by gains in retail. In addition, Baldwin delivered steady sales improvement each quarter this year.

The Price Pfister faucet business continues to make good progress as well. There have been a number of line reviews in this category and we have been successful in repositioning our product lineup. Largely as a result of these transitions, we posted a significant net increase in sales to key customers this quarter. We also continued to convert homebuilders to Price Pfister and grew in this channel despite weak housing starts.

The Hardware and Home Improvement segment had a year-on-year decrease in operating margin to 12.3%; however, margins continued to improve sequentially. The decline versus 2006 was primarily in the faucet business, which had not reached the anniversary of large commodity cost increases. We have also incurred significant store reset costs due to faucet line reviews.

The Lockset business has done a good job of offsetting inflation with price and productivity and margins for this segment should improve as we pass the anniversary of cost increases.

In the Fastening and Assembly Systems segment sales increased 7% led by the Automotive businesses. In Automotive, we had strong equipment shipments following delays by customers earlier in the year. We are especially pleased that our North American Automotive business rebounded this quarter.

Sales in Europe increased double-digits with sales growth outpacing automotive production. The Asian business posted a high single-digit increase including rapid expansion in China. Volume leverage and favorable pricing enabled the segment to increase its operating margin to 15.5% for the quarter.

Now let me discuss the outlook for the rest of 2007. As we have said all year, we are cautious about the macroeconomic environment. We are not expecting near-term improvement in housing or robust consumer spending this holiday season. However, we continue to expect sales and EPS growth in the fourth quarter for two reasons.

First, we have a very favorable comparison to the fourth quarter of 2006. You will recall that last year our U.S. customers dramatically reduced their inventory levels, which negatively affected our sales by roughly 5 percentage points. Our customers will likely remain cautious on inventory levels this quarter but we are not expecting an inventory correction like last year.

The second reason is our new products and commercial successes. These should help us build on the positive momentum from the third quarter. As I mentioned earlier, Dewalt’s much-anticipated 18-volt nano lithium-ion line launches this month. This line is backward compatible to take advantage of our #1 position in 18-volts. We’re confident it will further strengthen our leadership in cordless.

Under the Black & Decker brand, the DPX line offers consumers a new platform they can use around the house. Its lithium-ion batteries offer twice the power to weight ratio of Ni-Cad. They also hold the charge better to provide power when the user needs it. Some products take one DPX battery; some require two ensuring the right amount of power for the job. DPX will start with a wide variety of applications including drills, cut saws, screwdrivers, flashlights, inflators, handheld vacs and portable power. We intend to further build on this platform in the coming years.

We are very pleased that our other two segments increased sales this quarter and expect continued growth in the fourth quarter. HHI should build on the success of Kwikset SmartKey and Smart Scan as well as higher sellthrough for Price Pfister. In fastening, we expect growth in the global auto industry as well as our sales. Across our segments, we believe our international momentum will continue. In total, we expect modest organic sales growth in the fourth quarter and mid single-digits including favorable currency.

The outlook for operating margins is mixed. Volume growth should help margins and we continue to get some benefit from currency. Commodity inflation will remain a headwind with pressure accelerating in Power Tools due to the timing of price increases on batteries. We expect $175 million of full year inflation including the impact of China’s new VAT policy. We should offset some of the commodity inflation with productivity gains. Considering all these factors, we expect modest year-on-year margin improvement in the fourth quarter.

For the full year this outlook implies roughly flat organic sales, and low single-digit reported sales growth including currency. We continue to expect an operating margin decline of approximately 100 basis points for the full year.

Based on shares repurchased through the third quarter expect a diluted share count around 63.5 million for the fourth quarter and 66 million for the full year. Due to share repurchases, our interest expense forecast has increased to around $85 million and we continue to expect a full-year tax rate of roughly 27%.

In total, we expect diluted EPS in the range of $1.55 to $1.65 for the fourth quarter and $6.50 to $6.60 for the full year. Our full year guidance is higher than in July as we expect most of our third quarter out performance to read through.

Finally we expect to convert over 100% of our full year net earnings to free cash flow. Because timing of receipts and payments around year-end can significantly skew cash flow, we generally do not give more specific forecasts. However, our outstanding cash generation so far this year gives us confidence we will deliver another strong free cash flow performance.

In summary, Black & Decker’s results significantly exceeded our expectations this quarter. We reported EPS of a $1.59, $0.14 above the top end of our guidance range. Despite a difficult environment, we grew sales. We delivered impressive sales growth in two of our segments and outside North America. We continue to develop and market new products with meaningful innovation for end users including cordless and lockset technologies.

We generated an outstanding $413 million of free cash flow year-to-date. We used our cash to repurchase over 4 million shares of our stock during the quarter and 5.4 million year-to-date while continuing to evaluate potential acquisitions, and we increased our EPS guidance to virtually flat for the full year, which would represent a strong performance in light of our housing and commodity headwinds.

Black & Decker has made significance structural changes in recent years, to become a more balanced, consistent company. We have a talented, experienced management team that is committed to weathering the current downturn effectively. With outstanding people and sustainable competitive advantages we are in an excellent position to become even a better company in the future.

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

Question-and-Answer Session

Operator

Your next question comes from Kenneth Zener - Merrill Lynch.

Analyst for Kenneth Zener - Merrill Lynch

Your 4Q guidance, it seems to have remained relatively stable, maybe be even declined slightly from what was implied last quarter despite the $4.3 million buybacks. Am I thinking about this correctly? It this mainly due to just incremental commodity inflation or a more cautious outlook on sales? What else could be going on there?

Mike Mangan

I think you’re thinking about it correctly. If you just look at quarter-on-quarter guidance and look at the math from share repurchase our guidance for the fourth quarter is a bit more cautious than it would have been implied last quarter. So a little more cautious on the outlook for one, a little incremental commodity inflation two, and as a result you’re seeing the $1.55 to $1.65 guidance for the fourth quarter.

Analyst for Kenneth Zener - Merrill Lynch

You’d previously mentioned, I think back in Q1 that there is a couple of bolt-on acquisitions in the pipeline that you are pretty optimistic about. Are you still looking at these? Generally, how is the acquisition environment looking?

Mike Mangan

We continue to look at a handful of opportunities is maybe the best way to characterize that. There’s one earlier on in the year that I’ve mentioned which was probable, it is still on the drawing board. I would characterize it now as possible as opposed to probable, but that as well as a handful of others are acquisition opportunities we’re continuing to evaluate.

In terms of the overall market, certainly deal flow has slowed. To this point, I’m not sure we’ve seen a significant change in pricing expectations, but you would expect over time that those will probably come in, not only because of the amount of money chasing deals, less leverage obviously but as well probably a bit more cautious outlook in the underlying businesses.

Again we still have a handful that we’re looking at, continuing to evaluate that and hopefully we’ll be able to bring one or more of those to the finish line in the coming months.

Operator

Your next question comes from Michael Rehaut - JP Morgan.

Michael Rehaut - JP Morgan

Just going back to the power tools segment and you continue to look for a positive contribution in the fourth quarter from DPX and the nano Lithium-ion lines. If you look at ‘07 and perhaps are looking at ‘08 in terms of the overall net impact from new products, as far as I understand, for ‘07 perhaps or even ‘06, the new product contribution may have been a little bit less than previous years.

I was wondering if you’re thinking that ‘08 might be an above-average year or in terms of a contribution to sales growth? Perhaps you can couch it in those terms, in terms of helping us looking forward into 4Q in ‘08, how powerful this new product cycle is compared to the last couple of years?

Mike Mangan

It’s tough to put precise numbers around, Mike, but as you look here in the fourth quarter we have some outstanding products coming. You mentioned the Lithium-ion line and DeWalt as well as on the Black & Decker side, so ‘07 overall was probably an average year. The fourth quarter I think it’s clearly above average, which will drive at probably an above-average year for 2008.

Also we’ve rolled out significant new products in our HHI business as well with the SmartKey and Smart Scan product lines, and those are continuing to roll out through distribution and across channels. So that will provide us some momentum going into ‘08, and we will continue to see expansion for the channels for those products in ‘08 as well. So in general terms, ‘07 was a solid year, Q4 above average which will drive probably above average 2008.

Michael Rehaut - JP Morgan

My second question also in this vein, I guess. With hardware coming in well above our estimate in terms of sales, and I guess that also benefited margins coming in better than we were looking for given the higher volumes. You mentioned that you had particular success at one key retail customer.

How should we think about that going forward? Is this something where the Kwikset with the Smart Key is that something that maybe makes the next three quarters, given a higher level of sales, is that something that we can model in? Or the success with this one key customer, is that more of an initial buy-in?

Mike Mangan

Kwikset obviously is selling into some relatively volatile markets. Obviously the housing side of that has been challenged. Having said that, because of their new product portfolios into retail it’s been very solid. During the quarter we began the rollout of Smart Key. That went into a customer, provided some top line there and point-of-sale again was very encouraging. That product will continue to roll out so we’ll go to additional customers here in the fourth quarter and then go into some of the home-building channels into 2008.

So we’ve obviously got some tough end-markets. You have the new product portfolio there. It’s really helping to drive sales growth. Now predicting three quarters from now is a little tough, given some of the uncertainty in the environment, but we do certainly have some momentum in that business.

Michael Rehaut - JP Morgan

While there was a good benefit at one key customer this quarter, you are still expecting some incremental roll-out next quarter, so not to necessarily expect a drop back into a decline for 4Q?

Mike Mangan

That’s correct. We’re expecting growth in the HHI segment and in Kwikset specifically as we continue to roll out Smart Key.

Michael Rehaut - JP Morgan

Last question just on Price Pfister. Up double-digits. I was wondering if you could give us some insight in terms of obviously in that industry you have Delta and Moen being the two big shares positions in the industry. Have you been gaining share this quarter or the last few quarters? Where do you see the opportunity for that business over the next couple of years?

Mike Mangan

A couple of things that have helped us there. First off, it is not a business historically that has had much penetration in the new housing industry, so as a result we have not had that headwind. Now we are starting to gain some traction there because we have been working on trying to gain penetration into homebuilders. That grew during the quarter so that did help our top line.

As well, over the last let’s call it two quarters, there have been a number of line reviews that have allowed us to reposition some of our product in our key big-box customers. POS rates there have been very strong, again supporting us much more of a remodel product than a new housing market product. It’s really driven some much better selling.

So as we look to the fourth quarter, we would expect to have some continued momentum in that business and some positive sales based on the remixing of our product portfolios within the retail channel.

To your share question, I can’t imagine that the overall market is growing. Certainly not because of the new housing side, so as a result of that I don’t have specific data but would expect that we are probably increasing some share in the faucets’ business.

Operator

Your next question comes from the line of Armando Lopez with Morgan Stanley.

Armando Lopez - Morgan Stanley

Mike, can you comment on inventory in the channel? You had mentioned a slowdown in orders but the sellthrough continued to be relatively stable.

Mike Mangan

Sellthrough was pretty good during the quarter. We are basically flat year-on-year POS-wise at our big-box customers in both professional as well as consumer. As I mentioned, and to your point having said that, that we saw sell-in drop particularly on the consumer side. Net-net of that as we think inventory position in the channel is in good shape. Would not expect to take any dramatic actions relative to inventory. Having said that, given all the uncertainty in the market we would not expect them to be overly robust in terms of sell-in and will in large part match sellthrough that we would expect during the fourth quarter.

Armando Lopez - Morgan Stanley

Can you comment on the FX impact on the profit line from a transaction and translation perspective?

Mike Mangan

Sure. FX continued to help our results as you would expect, given the weakness in the dollar during the third quarter. It added about $0.08 to the bottom line.$0.05 of that would be translation. About $0.03 of that would be transaction so it obviously accelerated a little bit from the first half pace where I think during the first half we had about $0.12 or $0.13 benefit to the bottom line.

You can expect that if the dollar continues in and around its current range that would be favorable to the fourth quarter as well.

Armando Lopez - Morgan Stanley

One last one. In terms of the fastening business and the auto side of things, can you talk a little bit about where you’re seeing pockets of strength, and from a margin perspective, was that more a mix issue or a pricing issue?

Mike Mangan

It was a bit of both. We had seen delays in some new product programs that were being rolled out to not only American but as well other global customers. We had a strong shipment quarter of new systems during Q3, and those tend to have higher margins, so we got some mix benefit there. We got some price benefit as well that we’ve been increasing prices and managing our price pretty aggressively. That’s been going on an ongoing basis, both of which helped our margins as well as volume leverage.

Armando Lopez - Morgan Stanley

How much is price up on year-over-year?

Mike Mangan

Overall for the company during the third quarter pricing was flat on a rounded basis. It was actually up a few basis points. We saw pricing significantly positive in our HHI business. I think we had some modest positive price in our fasting business and our tools business was down slightly.

Operator

Your next question comes from the line of Stephen Kim - Citigroup.

Mark Montana for Stephen Kim - Citigroup

With respect to the domestic TT&A results, I know you mentioned a new 18-volt line will hit the shelves this month. I’m just wondering when exactly the 28-volt lithium-ion hits the shelves and what type of response you are seeing to those introductions?

Mike Mangan

Okay; just for everyone’s background: the 18-volt product is shipping as we speak, so you’ll see that showing up on shelves very, very soon. Our 28-volt product is supposed to ship here later during the quarter, I think late November. That is primarily going into the industrial channels of distribution so you will not see that product in big boxes. That’s consistent with where you’re seeing our 36-volt line as well, which again is in the industrial channels.

Mark Montana for Stephen Kim - Citigroup

Gotcha. So you haven’t seen the traction from those results at all yet?

Mike Mangan

Starting to see that during this quarter, didn’t see that in the third quarter; but we now shipping 18-volts, so that is benefiting our fourth quarter.

Mark Montana for Stephen Kim - Citigroup

Secondly, HHI results were impressively strong, especially given this challenging macro environment. I know you mentioned price increases as well as Kwikset’s Smart Series products, as a couple of the reasons for this performance. In response, I’m just wondering is your pricing there fully offsetting the commodity cost inflation?

Mike Mangan

In HHI, and in particular at our Kwikset business, our combination of price and productivity has been offsetting inflation.

Mark Montana for Stephen Kim - Citigroup

Fully?

Mike Mangan

Fully.

Mark Montana for Stephen Kim - Citigroup

And then, is one of three Smart Series products, I know you have the key, the code and the scan, is one of those exhibiting particular strength relative to the others?

Mike Mangan

Well, SmartKey just began to rollout during the third quarter, so that’s gone into, as I mentioned, one channel and it’s done very, very well. So that, in size and scope as well, is a much bigger product line, so that will be a much more significant driver of Kwikset’s results than the other two.

Smart Scan has done well; that’s been out now for, I think, six months or so. The Smart code product, again, is a repackaging of an existing product, so that has been on the marketplace, actually, for a number of years. So in terms of the big incremental volume benefit, SmartKey is the key.

Mark Montana for Stephen Kim - Citigroup

Which month was that actually rolled out?

Mike Mangan

The SmartKey?

Mark Montana for Stephen Kim - Citigroup

Correct.

Mike Mangan

It began shipping in the third quarter, precisely which month, I’m not sure if it was July or August, I don’t recall.

Operator

Your next question comes from the line of Nishu Sood - Deutsche Bank.

Nishu Sood - Deutsche Bank

I had a bit of a longer-term question on your margins. Mike, a few years ago, when we were considering the longer-term margin potential of the power tools business, looking at your capacity for innovation, your restructured lower-cost manufacturing base, we talked about sustainable margins in the kind of low teens, maybe the 12% range. Obviously if I take the fourth quarter, barely double-digits, it does entail a pretty big gap there.

So my question is given the commodity cost environment, should we be reevaluating the longer-term sustainable margins and if not, what’s going to get us back to that?

Mike Mangan

I would not suggest to you that we should move off our long-term margin expectations in that 12% to 13% range. Obviously what we are seeing now are the challenges of weak end markets, particularly the US housing, and significant commodity inflation. We’ve taken, you know, $300 million, $400 million of commodity inflation over the last 3 or so years.

Over time, obviously when markets settle back down and begin to grow, that will drive some volume leverage. We are continuing our productivity initiatives; we’ve continued to evolve our manufacturing footprint as well. They’re not as dramatic as the changes that we announced back in the 2001 timeframe, but we’ve done some plant consolidation in Asia; we’ve opened up a plant for HHI in Asia. We’ve closed down some accessories plants and consolidate some of that in Asia as well.

So there is continuing productivity to be had across our business categories. As well, new products are obviously going to continue to be a key so we can start driving that top line. Part of that will come from price and as we’ve rolled out new products as we’ve talked about in the past, that’s where we get our price and we’ve seen that here during 2007, obviously not as aggressive as we would like, given the weakness in the market. But pricing will be part of that as well.

So again as you look longer-term for us, I think we can see our way back to 12%, 13% margins now. Obviously one of the things we’re going to have to have to get that is some help from the market; hopefully we’ll see some either easing in commodity prices are we’re going to have to see some more aggressive pricing.

Nishu Sood - Deutsche Bank

Just on the issue of the volume getting back to better fixed cost absorption. Comparing to last year in the fourth quarter when you had awful fixed cost absorption because of that 11% organic decline, I was a bit surprised to see that obviously with your sales budgeted to be flat to slightly up here, that getting back that horrible fixed cost absorption of last year is almost entirely offset by the commodity cost issue. Is that something that is going to be a headwind going into the first half of next year? When should we really begin to see some improvement signs?

Mike Mangan

The challenge there to your point is that our volume levels running through the plants and we are down a couple of percentage points during the third quarter, our plants in the fourth quarter will run pretty flat. So the challenge on the gross margin side has not been absorption, particularly the way we run our manufacturing facilities these days. The challenge has been commodity inflation and that’s running $175 million incremental 2007 and we will carry some of that incremental into 2008, so we will start the front half of the year with some headwinds now.

One of the things impacting our fourth quarter is battery costs; nickel as you may recall, spiked up pretty significantly earlier in the year; that was in and around the time we were renegotiating our battery prices. As we get into 2008, we should see some productivity there given nickel coming back as it has.

We have not seen much in the way of copper prices coming down; zinc’s off its highs but we’ll have to see were all these go. The combination of easing and commodity prices and pricing will reestablish those margins back to those historical levels. But there will have to be a better end market environment to be able to accomplish that.

Nishu Sood - Deutsche Bank

Corporate expense. What should we be expecting for that in the next couple quarters?

Mike Mangan

As you think about it for the year, we’ve been guiding and been guiding all year long to the $95 million to $100 million range, so we were, I guess, what, about $19 million, I think, during the third quarter. I guess that will translate into a fourth quarter number is in and around $20 million, so relatively flat in the third quarter.

Operator

Your next question comes from the line of David McGregor - Longbow Research.

David McGregor - Longbow Research

I’m wondering to what extent was pre-VPX clearance a factor in the negative consumer revenues and margins?

Mike Mangan

That was not a factor for us, David. I’m not sure I’m exactly following your question, but we had expectations coming in to third quarter; it was inherent in our guidance that it was going to be a tough quarter for the consumer power tools business in the US.

On the tools side, we had some launch comparisons that made it a bit difficult; we had the Auto Ranch Handy Saw that rolled out last year, DPX this year is a fourth quarter item. So that led to some differential there. Automotive electronics, as I mentioned in my comments, has been disappointing.

Again, strong new products last year like Simple Start; we don’t have the breakthrough product this year and, candidly, some of the products we’ve introduced on the portable power side have been disappointing.

David McGregor - Longbow Research

The question I was driving at was more just with respect to the retail channel and whether retailers, in anticipation of a substantial DPX rollout, might’ve got a little lighter on the Firestorm line or some of the consumer tools in advance of that rollout. I was just wondering if that was a factor.

Mike Mangan

Yes, DPX really is more incremental, so we didn’t a pullback and sell into the channel as a result of DPX coming.

David McGregor - Longbow Research

And then, how should we think about launch costs as an incremental expense in fourth quarter?

Mike Mangan

Our launch costs and reset costs are much more significant in our HHI business, the way that business merchandises that retail. So we’ll have some headwinds in HHI for that. In our power tools business, the way that business merchandises and our historical experience there, we actually do a pretty good job of managing our way through those costs. So don’t expect that to be a significant challenging to margins and tools during the fourth quarter.

David McGregor - Longbow Research

The final question just had to do again with raw material costs. I’m just wondering if you’ve got some higher priced hedges that might have been set at some point when commodity prices were much higher than where they are today coming off here in early ‘08 and whether that would provide you with some relief?

Mike Mangan

On the battery side, nickel, we had reset those costs back in the late summer through year end 2007. As we go into 2008, we should be able to generate some productivity on batteries because of lower nickel prices.

On the other core commodities like copper, has really not come of its highs; zinc is off its highs, but still trading at a significant premium to where it was two or three years ago. So where it has spiked down, like nickel, you’ll see some productivity for us next year. You know copper, zinc really have not provided us much help at this point.

David McGregor - Longbow Research

Plastics and resins and steels and some of the other commodities?

Mike Mangan

Resins, I think have been down a bit, but and some concerns there with what’s going on with oil prices. We’ve seen some productivity, I think on the steel side. Again some of that is impacted by nickel as well, so as we go into 2008, that could be some benefit as well, particularly at our fastening business. Fastening we’ve been very successful in overcoming inflation; with the incremental price it’s been a little bit more challenging than some of our other business.

Operator

Your next question comes from Dan Oppenheim - Banc of America Securities.

Dan Oppenheim - Banc of America Securities

I was wondering if you could just talk about what you are doing with the launch of the 18-volt Lithium-ion? You talked about how you’re a little bit more cautious in the outlook for the fourth quarter. Are you doing anything, more promotions or marketing, just to ensure the sellthrough of those products?

Also a few just quick comments in terms of your negotiations with retailers in terms of having the right shelf space for those products as they’re launched?

Mike Mangan

Significant support from both our large customers, as well as our third large retailer on the consumer side for DPX. So it’s got a broad listing across all 3 channels there and then for our two major channels, Home Depot, Lowe’s and the 18-volt Lithium-ion product, very, very strong support.

So across the board getting support; as you looked at the quarter overall versus last year, and given some of the weakness out there, we plan to more aggressive relative to promotions. We’ve got a good promotional calendar played out for the fourth quarter, which we think will help continue to drive POS and POF rates. So we think we’re reasonably well set as we look here into the fourth quarter.

Now, obviously that will be modified or potentially changed as we see how POS actually does.

Operator

Your next question comes from the line of Peter Lisnic - Robert Baird.

Peter Lisnic - Robert Baird

Mike, can you give us some more insight into the North American power tools business and the independent channel being down double digits? Just trying to get a sense as to what really drove that in the quarter, you know?

Mike Mangan

What is driving that, obviously, is lower housing starts. Housing starts are down somewhere between 20% and 30%. That channel in large part serves US residential construction. Now there is a component of that as well that serves other markets like commercial, but in the portion of that channel that is serving US housing, is obviously having a difficult time.

Some people call it a recession in US housing, so that’s driving our results. Our listings are strong across those channels, but they’re being obviously cautious about their sell-in because of the difficulty of sellthrough with the decline in housing. On the commercial side: hanging in much better. Having said that, I think the channel as well is just cautious about the future. So we’re seeing sell-in basically match sell through.

Peter Lisnic - Robert Baird

If you wouldn’t mind maybe a little bit more insight on what happened at Vector and some of the product resets that need to occur there?

Mike Mangan

As I touched on earlier and touched on in our comments, 2006 good quarter for Vector. We rolled out Simple Start and some other products. This year our new product portfolio has not been as robust nor the products that we have rolled out, quite frankly, just have not been as successful as we would have hoped. Came out with a line of portable power products, which have just not done particularly well. So it’s been a disappointing couple of quarters for Vector’s top line.

Having said we’ve put significant resource into re-invigorating our portfolio, positioning it for Europe so we’re starting to roll their products out through our European product tools organization and that will drive some growth overall for that category for us during the fourth quarter and continuing to work on our product growth here for 2008.

Operator

Your next question comes from Omar Lim - Cleveland Research.

Omar Lim - Cleveland Research.

Two questions this morning. First you mentioned on pricing, power tools are down a little bit in the third quarter, how can we think about that for 4Q pricing and tools?

Mike Mangan

We expect, given our additional promotional activity that we would have negative price in power tools during the fourth quarter. Overall for the company we would expect our pricing to be relatively flat.

Omar Lim - Cleveland Research.

Should we expect the fourth quarter at the margin to be more negative than what we saw in the third quarter in tools?

Mike Mangan

Directionally yes it will probably get a bit more negative in the fourth quarter than it is in the third quarter.

Omar Lim - Cleveland Research.

Secondly you mention POS was flat year-over-year in both pro and consumer at the big box and you gave the color in the second quarter in terms of sell-in versus POS. Was sell-in, in the third quarter also flat?

Mike Mangan

No our sell-in during the third quarter was down so we saw declines not only in our professional business but, as well, particularly in our consumer business. So sell-in did not match sell through during the quarter. As a result that’s one of the reasons why we think our inventory positions in the channels are in reasonably good shape.

Operator

Your next question comes from Sam Darkatsh - Raymond James.

Analyst for Sam Darkatsh - Raymond James

My first question in the power tools and accessories segment, order rates you mentioned decreased significantly, it sounds like a lot of that may be due to timing. I was wondering, first of all, did you see any pick up in orders toward the end of the quarter or as you moved into Q4 because of that?

Could you provide us order rates for consumer and industrial tools maybe both in the US and overall?

Mike Mangan

Change in order rates through the quarter or going into Q4, we had mentioned in the comments our US professional business was down mid single-digits. Our U.S. consumer business sell-in would be down in the teens, mid double-digits.

Operator

We’ll proceed with your next follow-up question, sir. It is from Michael Rehaut with JP Morgan.

Michael Rehaut - JP Morgan

On the raw material side, Mike you had mentioned that you expected it to flow over into ‘08 given that it’s risen throughout this year and that you’ve been able to partially offset it through price and productivity.

Looking just though at the price and productivity part of the equation which is obviously a little bit more in your power to control, how are you thinking about ‘08 at this point in terms of what you can get in of either price increases or positive mix contribution as well as if you have an initial idea of productivity gains?

In the past, from the productivity side, you guys have talked about $90 million to $100 million a year, I think that’s edged down recently in the last year or two but if you can give us some idea in terms of what you expect from that side as well?

Mike Mangan

In terms of the pricing environment, we will continue to obviously assess that as we go. Clearly as we roll out new products we’ll be able to get some price. Absent some help from the marketplace here it’s difficult to get price when markets are as they are today with seeing some weakness particularly given the issues with housing.

You know productivity, if you go back historically, one of our goals is always to offset negative price with productivity. Over time we’ve done a pretty good job of doing that, your point getting to 2.5 points of productivity each year are the kind of goals we set out for our team.

Obviously those the been dwarfed by the commodity inflation that we’ve seen here of late so going into 2008 trying to drive productivity numbers like that would be expectations we would have for our team.

The wildcard there continues to be commodity inflation and we will take some carry on inflation in and then depending on what happens with commodities could obviously get some additional productivity or have some additional headwind.

Any other questions?

Operator

We will proceed with our next question, which is a follow-up from Raymond James.

Analyst for Sam Darkatsh - Raymond James

Yes, thanks for taking my follow-up. You sound comfortable with where retailer inventories are. I was wondering, end of Q4, the end of the year, where would you expect retailer inventories to be on a year-over-year basis?

Mike Mangan

End of Q4, year on year, I guess we would expect to be relatively flat, maybe up a touch because during the fourth quarter of last year we saw significant inventory corrections so we came into 2007 with very lean inventories in the channel.

I wouldn’t necessarily expect them to be as lean here in 2007. So flat, to maybe up marginally year on year.

Analyst for Sam Darkatsh - Raymond James

Okay and then for your inventories, would it be safe to assume kind of a similar flat to up slightly year-over-year?

Mike Mangan

We expect our inventories absent FX to be flat to down. We’ve been pretty tight on our inventory controls so you should see those again without foreign currency to be down year on year.

Analyst for Sam Darkatsh - Raymond James

Could you give us your expectation for unit production year-over-year for the full year?

Mike Mangan

For the full year our production volumes are relatively flat, that’s dollar wise not unit wise. So obviously that would include some inflation. Again, going to a unit basis our unit volumes for the year are probably flat, maybe down a bit.

Operator

Your next question is a follow-up question from Omar Lim - Cleveland Research.

Omar Lim - Cleveland Research.

I apologize, I misspoke earlier, just to be clear on the POS big box, in the second quarter POS was down modestly I recall and here it is improved to flat, both pro and consumer -- do I have the correct?

Mike Mangan

Right. If you go back through a bit of the history here as you may recall we had during the first quarter, our POS year-on-year was down around 5% that improved to the second quarter to being down around 2% and during the third quarter --again this is both pro and consumer combined, both large customers combined – it is in and around flat, down 1% Roughly flat.

Operator

Sir, there are no further questions at this time. Do you have any closing remarks?

Mark Rothleitner

Thank you very much. Again a great quarter for Black & Decker. Mark and myself as well as Roger Young will be available through the rest of the day to take any additional questions you may have. Thank you very much.

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Source: Black & Decker Q3 2007 Earnings Call Transcript
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