Black & Decker Corporation Q4 2007 (Qtr End 12/31/07) Earnings Call Transcript

Black & Decker Corporation (BDK)

Q4 2007 Earnings Call

January 28, 2008 9:00 am ET

Executives

Mark Rothleitner - IR

Nolan D. Archibald - Chairman, President and CEO

Mike Mangan - CFO

Analysts

Michael Rehaut - J.P. Morgan

Kenneth Zener - Merrill Lynch

Nishu Sood - Deutsche Bank

Mike Wood - Banc of America Securities

David S. MacGregor - Longbow Research

Sam Darkatsh - Raymond James

Eric Bosshard - Cleveland Research

John Houseltron - Robert W. Baird

Ivy Zelman - Zelman & Associates

Presentation

Operator

Good morning. My name is [Christy] and I will be your conference operator today. At this time, I would like to welcome everyone to the Black & Decker fourth quarter conference call. (Operator Instructions)

I would now like to turn today's conference over to Mr. Mark Rothleitner, Vice President, Investor Relations and Treasurer. Sir, you may begin your conference.

Mark Rothleitner - IR

Thank you, Christy. Good morning, and welcome to Black & Decker's fourth quarter conference call. On today's call our Chief Executive Officer, Nolan Archibald, will discuss our fourth quarter and full year results and outlook for 2008. His comments should take about 15 minutes, and then we'll answer your questions.

In keeping with SEC requirements, I advise that during this call we will be making forward-looking statements that involve risks and uncertainties. For a more detailed discussion of the risks and uncertainties that may affect the Black & Decker Corporation, please review the reports we have filed with the SEC, including the 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 web site under the Investor Relations section.

And now I'll turn it over to Nolan.

Nolan D. Archibald - Chairman, President and CEO

Thank you, Mark.

This morning Black & Decker announced fourth quarter results consistent with the revised guidance we provided in December.

Excluding certain items, EPS was $1.06 for the fourth quarter and $6.03 for the full year. Reported earnings per share were $2.94 for the fourth quarter and $7.85 for the full year. These results included $153 million from the tax settlement we announced in December as well as a $32 million environmental charge and a $19 million restructuring charge.

Macro conditions made 2007 a challenging year for Black & Decker, and the economy deteriorated further in the fourth quarter. U.S. housing starts were down approximately 25% for the year, significantly worse than we had expected a year ago. Commodity inflation during the year was also more severe, coming in roughly $60 million worse than our initial estimate. Yet despite these headwinds, our $6.03 adjusted EPS was only 4% below the full year range we provided last January.

Two factors enabled us to limit the impact of the downturn on our EPS. First, our international operations had an extremely strong year. All of our businesses outside North America posted outstanding sales growth combined with strong operating margins. Second, we generated a record $623 million in free cash flow and used that case effectively for share repurchases at attractive prices.

For the fourth quarter, sales increased 3% to $1.7 billion. Our organic volume was flat, price was negative 1%, and foreign exchange contributed 4%. For the year, sales increased 2% to $6.6 billion. Organic volume decreased 1%, price was flat, and foreign exchange added 3% for the year.

As we have described in the past, we estimate that 15% to 20% of our sales were tied to new U.S. housing starts. Therefore, the housing downturn probably had a 4 or 5 point impact on our sales for the year. In addition, we believe housing and the related credit market disruption had a negative affect on remodelling and consumer spending in the second half. Considering these trends, we are proud of our team's efforts outside the U.S. to limit our organic sales decline to 1%.

Operating margin for the fourth quarter was 6.8% excluding the restructuring charge and environmental expense well below the prior year. The product recall we announced in December accounted for roughly 120 basis points of the decline.

As we have faced all year, component costs rose significantly. The increase was driven by commodities such as nickel in batteries as well as the increase in China's currency and the new Chinese VAT rebate policy.

We had nearly $50 million of year-on-year pressure this quarter, which exceeded our productivity gains.

Our SG&A percentage also increased due to lower sales volume and spending to stimulate sales.

For the full year, our adjusted operating margin decreased to 9.6%. While our cost structure has improved in recent years, $180 million of inflation proved too much to overcome. The product recall also had a 30 basis point impact on full year margins.

One major area where we exceed our goal was setting a sixth straight record for free cash flow. By continuing to manage capital expenditures and working capital effectively, we generated $623 million of free cash flow for the year versus $533 million in 2006. Adjusting for a one-time tax payment related to the American Jobs Creation Act in early 2006, free cash flow increased more than $45 million. We converted over 120% of net earnings to free cash flow, even including the large tax settlement. That conversion ratio has been greater than 100% in six of the last seven years, averaging over 120% during that period.

For the year, we repurchased 5.4 million shares of stock, helping to reduce average diluted shares by 11%.

Our debt level was down year-on-year, our debt metrics remain strong, and we maintain investment-grade ratings.

Earlier this month when the stock came under pressure, we repurchased 2 million additional shares. We remain committed to using our cash to create value for our shareholders.

Now I'll discuss our individual businesses in more detail.

Sales in our worldwide Power Tools and Accessories segment decreased 2% in the quarter. A year ago, our customers dramatically reduced inventory levels, which gave us reason to expect modest sales growth this year. Unfortunately, the U.S. economic environment continued to deteriorate, and customers remained cautious regarding orders and inventory levels. The consistent strength of our international businesses offset most but not all of the domestic weakness.

In the U.S. Industrial Products groups, sales decreased low single digits. As you would expect, the weak residential construction market is a major factor. We believe that homeowners are also more cautious about remodelling projects, hurting sales at the home centers.

Sell-through in this channel deteriorated in the fourth quarter after stabilizing in recent quarters. Sale end results varied somewhat across channels, as some customers ordered to achieve rebate levels while others managed inventory tightly.

In terms of product categories, Woodworking had the steepest decline. The XRP recall had a negative impact on the Construction category, which otherwise performed well given the housing slowdown. The Accessories and Equipment categories were positives, posting sales growth in a tough environment.

For the year, the Industrial Products group had a mid single-digit sales decline in the U.S. The housing downturn was the main driver of the group's sales performance, primarily affecting the independent channel. Sales were roughly flat in the home center channels for the year.

The U.S. Consumer Products group saw a double-digit sales decline in the fourth quarter. It was a difficult holiday season for many retailers and consumer manufacturers, and we were affected as well.

As we have discussed in previous quarter, the Vector, Automotive and Electronic business had fewer new products than last year, and sales were down significantly.

In our core categories, we did have some successful new products, including the Gecko Grip Level and a fairly strong second season for the Autowrench and Pivot Vac. However, our VPX Cordless line did not meet expectations. We continue to believe that VPX is a platform that we can build upon. We will add products and reposition the line to take advantage of this opportunity.

For the full year, sales in the U.S. Consumer division declined at a high single-digit rate. The Vector, Automotive and Electronic line in Pressure Washers were responsible for roughly half of the decline. Tools and Accessories sales slowed in the second half, along with the overall U.S. economy.

In Europe, sales grew at a low single-digit rate in the fourth quarter after a very strong double-digit gain in the third quarter. Unlike earlier in the year, the Consumer business led the way this quarter. The addition of Vector and the strong sales of blower vacs, Dustbusters, and consumer accessories drove the gain in Consumer.

Industrial sales in Europe were roughly flat this quarter, with double-digit sales growth through September, inventory in the channels were somewhat heavy entering the fourth quarter. Customers ordered more cautiously in places such as the U.K. and Nordic region. Sales growth in Eastern Europe and the Middle East remain very strong.

For the full year, European sales grew mid single digits, with double-digit industrial growth. We continued to gain in concrete categories with new products such as the Pavement Breaker, Angle Grinders and Diamond Saws. Europe also had a modest in Consumer products for the full year.

In Latin America, we capped off a great year with sales growth over 20% for the quarter. All regions and nearly all product lines continue to deliver sales gains. This strong finish enabled the Latin America business to tout growth above 20% for the year.

The Asian business also left 2007 on a positive note, with sales growth in the teens for the quarter and full year.

Return on sales for the Power Tools and Accessories business decreased significantly to 4.9% for the quarter. The XRP recall caused roughly one-third of the decline. The remaining pressure was split between SG&A and gross margin.

We made SG&A investments to drive sales primarily growing international markets and had substantial negative leverage in North America.

Commodity inflation intensified in the fourth quarter as we felt the full impact of higher battery prices. At the same time, we reached the anniversary of our price increases in late 2006.

International margins remain strong with Europe and Latin America again in double digits.

For the full year, margins fell to 10% for Power Tools and Accessories. Commodity inflation was the overriding factor, with the XRP recall adding to the decline. The U.S. Consumer business felt the most pressure, in part due to weak performance by the Vector, Automotive and Electronic business.

In our Hardware and Home Improvement segment, sales decreased 4% for the fourth quarter. While our new products continue to do well, the housing impact on our lockset business more than offset this. Our U.S. lockset business, primarily under the Quick Set brand, saw a high single digit sales decline this quarter. Quick Set continues to have success with the launch of SmartKey. This is the most innovative security product in years, and we're very pleased with the support that we have gotten at retail. In the new construction channel, where we have not yet launched SmartKey, we saw a decline consistent with the drop in housing starts.

In addition, we passed the anniversary of the 2006 price increases, which had contributed to sales growth in the third quarter.

The Price Pfister Plumbing business posted sales growth for the fifth straight quarter. While the growth was modest this quarter, this is a significant accomplishment in today's housing market. We continued to see positive results from a repositioned product line up at key customers. Conversions of large builders to Price Pfister also had a favorable impact again this quarter.

Operating margin in the Hardware and Home Improvement segment declined to 9.6% for the quarter. This was driven by lower volume in the U.S. lock business. SG&A for this business was roughly flat in absolute dollars but rose as a percentage on weaker sales.

In addition, locksets are among our most vertically integrated product lines, so we incurred manufacturing absorption costs as production levels came down.

The increases in commodity costs were not as significant as earlier in the year, and we offset it with productivity this quarter.

For the year, sales in the Hardware and Home Improvement segment decreased 1%. Price Pfister had an outstanding year, growing sales high single digits. Over the last four years, Price Pfister has had nearly a 10% compounded annual growth rate. HHI's international group, despite being a small piece of the segment, contributed meaningful growth this year. These successes could not quite offset the construction-related decrease in sales for Quick Set.

The full year operating margin for the Hardware and Home Improvement segment decreased 11.3%. This team did an admirable job of offsetting cost inflation with price and productivity. The significant decrease in lockset volumes was the primary cause of the margin decline.

In the Fastening and Assembly Systems segment, momentum continued from the third quarter, with sales up 6%. Asian sales were up double digits, with strong results in China. Europe also had a solid quarter, particularly in the Automotive division. North America's sales were flat, but we are encouraged by continued success in Automotive. Operating margin for this segment increased to 14.6%, primarily due to volume leverage.

For the full year, sales in the Fastening and Assembly Systems segment grew 4%, its sixth straight annual increase. Asia and Europe drove the growth. Growth in North America improved as the year progressed. Full year operating margin for the segment rose to 15.4%, largely on the strength of higher volume.

In addition to the underlying operational results, three items had a significant impact on reported earnings for the fourth quarter and for a full year. First, earnings benefited from the tax settlement we announced in December. The $153 million P&L impact was slightly higher than we estimated at that time. We continue to expect a $50 million cash outlay in 2008 related to this settlement.

The second item, a $32 million environmental charge, relates to a former Emhart operation. Emhart sold that operation before being acquired by Black & Decker. We now expect to incur higher clean-up costs on the site, and therefore increased our reserve.

Third, we recorded a $19 million restructuring charge. It is critical that we continue aggressively reducing costs, especially in light of current economic conditions. The restructuring actions will affect the cost structure and workforce levels in our Power Tools and Accessories and Hardware and Home Improvement segments. The restructuring plan should generate approximately $7 million of savings in 2008 and additional benefit in future years.

Now let me discuss the outlook for 2008.

The U.S. economy clearly deteriorated in the fourth quarter of 2007. Whether the U.S. enters or avoids a recession in 2008, the new housing and remodelling markets will almost certainly remain weak. Consumer spending and nonresidential construction are likely to slow as well. Many of our international markets remain very strong, but not enough to outweigh the U.S. situation.

We plan to fight these trends with the approach that has worked for Black & Decker for decades. We will continue investing in our leading brands with innovative products that deliver value to end users and selling them through a broad global distribution network.

In Power Tools, we intend to strengthen our leading cordless position, both in NiCad and our Nano Lithium Ion lines. We'll also continue our efforts to gain in the independent channel.

The HHI segment will continue rolling out SmartKey to distribution channels and driving sell-through. Emhart's Engineered Solutions should drive higher content per vehicle in growing markets.

Considering both the macro trends and our initiatives, we expect sales to be down low single digits for the year. In the first quarter we have our most difficult comparison of the year; therefore we expect a mid single digit sales decline, including favorable currency.

We anticipate our margins will contract modestly in 2008. We will control expenses carefully, but expect a higher SG&A percentage on lower volume. Component inflation is expected to be approximately $120 million, mostly in the first half of the year. Batteries, changes in China's VAT policy, and appreciation of the Chinese currency remain the key issues. We plan to mitigate this pressure with productivity gains and favorable currency. In addition, we have a favorable comparison to the recall costs in late 2007.

In total, we expect operating margins will decline to around 9% for the year. The first quarter is our smallest, so margins will likely be below 9%.

Based on share repurchases to date, we expect a diluted share count around 62 million and interest expense flat to last year.

We continue to expect a full year tax rate of roughly 27%.

In total, we expect diluted EPS in the range of $1.10 to $1.20 for the first quarter, and $5.40 to $5.90 for the full year.

Finally, we expect to convert approximately 100% of full year net earnings to free cash flow. As always, we intend to use cash wisely to build shareholder value. Following last year's credit market disruption, we are hopeful that our efforts to find financially compelling acquisitions will bear fruit in 2008.

In summary, Black & Decker continues to weather a challenging economic environment and prepare for the future. We announced adjusted EPS consistent with our December guidance and only 4% below our forecast a year ago. We generated $623 million of free cash flow, setting a sixth straight record. We repurchased 8% of our shares and raised the dividend without increasing debt. We delivered impressive sales growth outside North America. We continued to reduce costs in response to declining markets, and at the same time, we moved ahead with innovation on key platforms that should provide opportunity when our markets recover.

Black & Decker has the best people in our industry executing a successful proven strategy. We believe that we are in an excellent position to take the company to an even higher level in the future when the economy recovers.

That concludes my prepared remarks. Mike Mangan, our Chief Financial Officer, is with me, and we'll turn it back to the Operator to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Rehaut of J.P. Morgan.

Michael Rehaut - J.P. Morgan

Hi, thanks. Good morning.

Nolan D. Archibald - Chairman, President and CEO

Good morning.

Michael Rehaut - J.P. Morgan

The first question is just on the '08 guidance, and I appreciate some of the detail there. It appears that excluding some of the cost inflation that you're expecting in '08 which is about a 180 basis point hit to margins roughly, that your margins could actually have been roughly flat even with a modest sales decline.

So I was wondering if you could help with how you're approaching this as this has been an ongoing issue for a number of years, and if you could kind of review maybe your hedging strategies or your sourcing strategies or if there are any other types of things that you might be thinking of doing that you're not already doing.

Then I have a follow up.

Mike Mangan - CFO

Mike, this is Mike Mangan.

To your point, we are looking at our margins to decline modestly here in 2008 inherent in the guidance from the 9.6% range to down to in and around 9% for the year for 2008.

Significant commodity inflation at $120 million, that'll put 180, 190 basis points of pressure on our margins, yet we'll be able to offset some of that with productivity improvements, we'll get some favorable FX. We won't have the recall charge that we saw in 2007. Probably some modest, flat but maybe a bit favorable on the pricing side. And as well, we'll get some restructuring benefits as well.

So, you know, net-net, our gross margins will be flat to up slightly, and we'll see some challenges with SG&A percentage given leverage.

In terms of fighting these costs, we are doing a number of things. A significant portion of that productivity is driven by value engineering activities. We drive productivity and look at not only alternate suppliers but alternate material usage in our products, so we're trying to substitute obviously away from higher-cost commodities down to lower-cost commodities, and that's one of the big items that drives our productivity benefits for 2008.

As well, we'll continue to work on dual sourcing to leverage that supply base in China and in other places around the world begin to drive productivity in our business.

Nolan D. Archibald - Chairman, President and CEO

You also noticed the restructuring charges I mentioned in my remarks that we're continuing to take costs out of our operations, reducing our headcount, and that restructuring charge also covers some manufacturing restructuring that we'll be doing.

Michael Rehaut - J.P. Morgan

I appreciate that, and that kind of leads into my second question which is if you could give us an idea what you estimate your productivity savings were in '07, and to your point just before, if you're able to give any quantitative guidance in terms of what you're expecting for productivity for '08.

And I guess the second part of that question, with the restructuring, what does this do now to your low-cost country makeup as a percent of overall manufacturing footprint across Power Tools and HHI, and where do you see that going over the next couple of years?

Nolan D. Archibald - Chairman, President and CEO

Let me answer your second question first, and that is we still think that, as we look at our competitive field, that we are still in an excellent position by the strategic locations of our manufacturing facilities. You're obviously seeing some costs increase in China. Most of our competition will share those very same increases. We believe that we have a very good structure about when you balance close to market versus costs and risk of inventory and transportation costs and all of that. So we still think that we're in a pretty good strategic manufacturing footprint that will effectively compete with anybody that is in our industry.

But we do look and we'll continue to look for opportunities to take costs out by closing down some manufacturing; when costs increase in one area, we my do some shifting into our factories, and part of that is this restructuring charge. We're not announcing the specific locations yet, but we'll be consolidating some operations here. That's inherent in this restructuring charge.

Mike, why don't you take the margin question?

Mike Mangan - CFO

Relative to productivity, Mike, we're generating in and around $80 million of productivity, both in 2007 and expect to be able to do that again in 2008. So if you look in and around 80, potentially up to 90, we're looking to offset from twothirds up to three-quarters of that component cost inflation issue, the $120 million that Nolan referenced in his comments.

Michael Rehaut - J.P. Morgan

Great. Thank you.

Operator

Your next question comes from the line of Kenneth Zener of Merrill Lynch.

Kenneth Zener - Merrill Lynch

Good morning.

Nolan D. Archibald - Chairman, President and CEO

Good morning.

Kenneth Zener - Merrill Lynch

Just a couple questions on the inventory that is up about 8% year-over-year, if you could address that. I know things had slowed down more than you guys had expected in the quarter, but could you address that a little bit in terms of the implications for the first half of '08?

Nolan D. Archibald - Chairman, President and CEO

There are two major components of the increase in inventory. One is FX and the second one is an increase in inventory in our HHI business. Most of our other inventories are in pretty good shape. We do need to work our HHI inventory down a bit.

Kenneth Zener - Merrill Lynch

Okay. And then I'm just trying to understand the U.S. side of the Power Tools business, the Consumer business which fell off. Was there loss of market share there relative to a competitor in a big box channel, and can you address why you think the Industrial Tools was down more in the independent channel versus the big box?

Nolan D. Archibald - Chairman, President and CEO

In our core Power Tool businesses, we do not think we have lost any share. We got some increased listings in our DeWalt business and therefore we believe that we maintain and maybe even probably increased market share in our DeWalt business.

Now there were certain pockets of that, like cordless Lithium Ion that we might not have been as strong because we were a bit later in coming out with our full line of our Lithium Ion products, but overall, our DeWalt business held pretty well, and with the additional listings, we think we gained share.

In the Consumer business, in our core Power Tool business we believe that we did maintain share. Our VPX launch was not quite as successful, but we did pretty well on a number of other products.

We did lose share in our Vector, Automotive and Electronic business. I mentioned in my remarks about not having a robust new product launch for this year. We still like that category very much, but it's going to take us awhile since we made the acquisition to gear up our new products machine in that business. And we probably lost some market share in that.

We might have lost a little market share - we lost some market share in the Pressure Washer business, but the overall core business we think we held share.

Kenneth Zener - Merrill Lynch

Okay. And then if you guys could just give me the macro thoughts for where you think housing starts are going in '08 as well as remodelling that is underlying your sales assumption. Thank you.

Nolan D. Archibald - Chairman, President and CEO

Well, we don't believe that we're going to see any recovery in 2008. We're assuming that the housing market - you know, it deteriorated 25% this year - we're assuming probably another 10% to 15% in 2008, and hopefully a recovery the following year in 2009.

Mike Mangan - CFO

And to the remodelling question, Ken, we expect the remodelling market to be down mid single digits year-on-year.

Kenneth Zener - Merrill Lynch

If you guys are off by 10% on the new side, what do you think the negative operating leverage is in terms of EPS? That's it, final question.

Mike Mangan - CFO

You mean housing down another 10%, so down 20% instead of -

Kenneth Zener - Merrill Lynch

Correct. Correct.

Mike Mangan - CFO

Well, you can do the math, as we've talked about in the past. You know, we think about 15% to 20% of our sales are tied to housing, so you can work that math through. If you end up with an additional 10% decline in housing, you've probably got another couple of points of pressure in our top line. And if you generally look at our economics, we tend to drop through in operating income 25% to 30% of reduction in sales.

Nolan D. Archibald - Chairman, President and CEO

And we factored that into the forecast and range that we've given you on our guidance.

Kenneth Zener - Merrill Lynch

Okay, good. Thank you for that clarification.

Operator

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

Nishu Sood - Deutsche Bank

Thanks. Good morning, guys.

Nolan D. Archibald - Chairman, President and CEO

Good morning.

Nishu Sood - Deutsche Bank

First question, in 2007 you had relative strength in Europe compared to both your professional and consumer businesses in the U.S., so my question was, how are your forecasts in each of those areas, geographically speaking, for 2008, and would that leave you susceptible to a further slowing down overseas?

Nolan D. Archibald - Chairman, President and CEO

We had an excellent year as you saw by the numbers and in my remarks for 2007 in Europe and Latin America. In fact, everywhere outside the United States was very strong, and that continued throughout the year.

We did see some slowing in Europe near the end of the year in the fourth quarter, and I think generally we're seeing some slowing in Europe at the beginning of this year.

Nishu Sood - Deutsche Bank

I guess my question was have you factored in a slowdown in Europe into your outlook for '08?

Nolan D. Archibald - Chairman, President and CEO

We have.

Mike Mangan - CFO

Yes, we have. I know if we look at our numbers for 2008, while we continue to expect growth outside the United States, we're certainly expecting growth at a lower rate than we saw in 2007.

Two factors are obviously - one is the slowing economies outside the U.S., but as well, obviously, we'll have tougher comps as well.

Nishu Sood - Deutsche Bank

Okay. Next question was on just I guess a follow up on what Mike was asking earlier about commodity costs.

If I just listen to some of the things you're describing, I think in Hardware and Home Improvement you described a slowing of direct commodity cost impact, but obviously you still have the wave of component stuff such as batteries ahead of you.

Do you kind of think about the wave of - the way that commodity costs have hit you, materials costs have hit you - that sounds to me like the stuff that hits you in a quicker timeframe, direct commodities, are beginning to wane whereas the stuff that hits you at a later stage such as components is still ahead of us here.

Does that tell us that we're getting closer to the end of the kind of impact of commodities and materials costs on your earnings?

Mike Mangan - CFO

I think your conclusion is correct. The $120 million, just to give you some background, if you look at the $120 million of inflation, component inflation, that we're talking about, about half of that is commodity driven, mostly batteries, so it'd be mostly seen in our Power Tools and Accessories business. Then that 50% is split between a weaker currency, U.S. currency, the strength in the Chinese yuan as well as VAT.

So again, those are side components from pure commodities, but to your point here, we're starting to see commodities flatten, and if you'd look at the inflation that we're seeing here, it is predominantly in the first half of the year. Of that $120 million, three-quarters of that we'll experience during the first half of the year, and we'll have anniversaried a lot of these increases and it will start to wane in the back half of the year.

So obviously we need to see where commodities go from here, but as an example, one of the underlying challenges in that area has been nickel. I guess as well, lead. Those have come off their peak so as we negotiate our contracts for the latter part of 2008, there's a potential productivity opportunity there, again depending on where those commodities go.

Nishu Sood - Deutsche Bank

Okay, great. And final question, on your guidance, given that the last two years things have turned out to be worse than you had forecasted at the beginning of the year, would you say that you took a more conservative tact this year, kind of given current conditions, or was it similar in terms of the approach you took in the past two years?

Nolan D. Archibald - Chairman, President and CEO

I think we've become a bit more conservative, but we think that's reflective of the marketplace that we're in right now, too.

Nishu Sood - Deutsche Bank

Okay. Thanks a lot.

Operator

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

Mike Wood - Banc of America Securities

Hi, this is Mike Wood.

In the Hardware and Home Improvement segment, can you give us some more color on the change in sales growth since the third quarter? Was that driven by just market conditions or was there a price increase attempted in the fourth quarter that led to the decline in sales, and could you just talk about that pricing strategy going forward in that segment?

Nolan D. Archibald - Chairman, President and CEO

Well, it was not a price strategy or price increase that affected sales. It was the general economic environment that we had.

Our pricing philosophy is we watch the market very closely. Right now, we don't anticipate our competition raising prices - I'm talking specifically Power Tools right now - and so we've assumed about flat price for the year in 2008.

We'll look for opportunities in our other businesses, wherever we can take price, and we'll do so whenever we can.

We have had some success in price with our businesses other than Power Tools. We did have a price increase in Power Tools a year ago. We gave part of that back because of competitive reasons, but we were able to get price in our other two segments.

Mike Wood - Banc of America Securities

Great. And in Europe and the other international markets, are there any new product rollouts there or new markets that could help accelerate growth in '08?

Nolan D. Archibald - Chairman, President and CEO

We've got some very aggressive and good product that will be rolled out in our international markets, and so we're going to have a very strong new product year in our international businesses.

Mike Wood - Banc of America Securities

Thanks.

Operator

Your next question comes from the line of David MacGregor if Longbow Research.

David S. MacGregor - Longbow Research

Yes. Good morning, everyone.

Nolan D. Archibald - Chairman, President and CEO

Good morning.

David S. MacGregor - Longbow Research

First question, just on HHI in the locksets, you mentioned in the press release that you'd seen some unfavorable mix, but in your prepared remarks you talked as well about some of the newer products doing well.

Was it just weakness within the good, better, best line up than was favorably offset by the new products, or how did that mix in HHI shake out?

Nolan D. Archibald - Chairman, President and CEO

It was some of our lower margin businesses that just didn't sell quite as well, so that did have some impact on us.

But generally we think it's the economic impact on locksets. That business does a lot of business in new construction and that hit us in that business.

David S. MacGregor - Longbow Research

Okay. Secondly, working capital for 2008, how should we think about this - source, use?

Mike Mangan - CFO

I think in terms of thinking through the year, David, just think relatively flat, maybe a small use. And we had some real favourability in working capital with receivables and as well payables and accruals, which would not expect to continue here into 2008 in terms of a source of cash so, again, timing of sales will impact that.

Obviously, it was a relatively weak fourth quarter so receivables did not grow. And we had a relatively weak or low payable and accrual period during the fourth quarter of 2006, so we had some favourability on that. I would not expect necessarily any favourability in payables or accruals in '08 year end to '07 year end.

David S. MacGregor - Longbow Research

Okay. And then just a couple small points. Latin America, you talked about a positive 20%. Was that an industry number? I know your number was 20%. Was the industry up about that or did you gain share there?

Nolan D. Archibald - Chairman, President and CEO

We clearly gained share in Latin America and have done so now for three years in a row.

David S. MacGregor - Longbow Research

Okay. What was the industry number, do you know?

Nolan D. Archibald - Chairman, President and CEO

It probably was in single digits.

David S. MacGregor - Longbow Research

Single digits. And then finally, Fasteners, what percentage of your revenues are in China?

Nolan D. Archibald - Chairman, President and CEO

It's still a relatively low percentage of our overall sales. That's still an emerging market. We've got a good presence there. We've got the infrastructure there to take advantage of it when it turns around.

We're also selling a very premium price product in that market with our DeWalt business and we need to wait for that market to evolve before we have the kind of growth that we'll eventually have there.

But it's relatively a small piece of our business in China itself.

David S. MacGregor - Longbow Research

Okay, great. Thanks very much.

Operator

Your next question comes from the line of Sam Darkatsh of Raymond James.

Sam Darkatsh - Raymond James

Good morning, gentlemen. Just three quick questions, if I might.

You noted a lower pension expense for '08, and I noticed that your post-retirement liabilities line went down meaningfully sequentially from Q3. Can you help, Mike, with respect to what you're expecting for pension expense in '08 versus '07?

Mike Mangan - CFO

Yeah, it should be down about $20 million year-on-year, so it should be a $20 million favorable impact on 2008.

Sam Darkatsh - Raymond James

Second question, on your corporate adjustments and eliminations line on the segment disclosure, if I back out - I'm guessing the remediation charge went through that line in the op inc side. If I back that out, it looks like your op inc for the corporate line was a positive in the quarter, and it's normally fairly negative, obviously, with overhead.

If my math holds, why would that have occurred this quarter?

Mike Mangan - CFO

As you know, I think as we've talked about in the past, Sam, that we're trying to, I guess, mark-to-market relative to allocations that are made to operations, so one of the things that benefited that quarter, to your point, which would have shown absent environmental not to be favourable, we reversed some incentive accruals that would have been in the operations numbers given the lower performance during 2007.

And as well, during the fourth quarter of 2006, we had some environmental reserve increases. If you take that environmental increase out for the onetime item, we actually have some favourability year-on-year due to environmental.

Sam Darkatsh - Raymond James

How should we look at that line for '08, then, throughout the course of the year in aggregate?

Mike Mangan - CFO

If you adjust out here for 2007, that number's about $76 million. You'll see some increases in that during 2008. You should plan around an $85 million number.

Sam Darkatsh - Raymond James

Okay, last question.

I think we had heard some rumblings that there were some management changes in DeWalt Europe. Can you address how that structure looks now from a managerial standpoint?

Nolan D. Archibald - Chairman, President and CEO

Les Ireland, who's been running that business now for several years, continues to do a great job, and we've got a good strong team around him.

We did lose the head of our industrial business, and so we did lose him and a couple of his team.

But overall, we've got a good strong bench, and we think we've got a very strong organization in Europe to continue the results there.

Sam Darkatsh - Raymond James

Okay. Thank you.

Operator

Your next question comes from the line of Eric Bosshard of Cleveland Research Company.

Eric Bosshard - Cleveland Research

Good morning.

Nolan D. Archibald - Chairman, President and CEO

Hi, Eric.

Eric Bosshard - Cleveland Research

Hey, can you talk a little bit about - you commented about the DeWalt share wins from 2007. Can you talk about how things are going in 2008 as you look at listings and you look at share competition? Obviously, the competitive environment's changed, a bit of competitive set has changed a little bit. But just talk a little bit about what you're seeing in that area.

Nolan D. Archibald - Chairman, President and CEO

DeWalt, we continue to hold our listings, and we are - you know, our listing is in very, very good shape, but all of our major competitors are in our DeWalt area.

As I mentioned, we did lose some of our Pressure Washing listings, the very low end, very low margin. There comes a point where, if we just can't get a good return on that business, we're not going to reduce it to levels where it just doesn't make sense for us, so we did lose some very low end, very low profit if profit at all in the Pressure Washer business.

But overall, our listings have held pretty well.

Eric Bosshard - Cleveland Research

Okay, so the assumption for '08 implied here is that pretty stable listings - no gains, no losses of substance?

Nolan D. Archibald - Chairman, President and CEO

Yes.

Eric Bosshard - Cleveland Research

Okay. And then secondly, is there any change going on within mix that you're seeing within the North American Power Tool business? Is there any trading down going on, or is there any need for you to be more aggressive with price or promotional support in this environment?

Nolan D. Archibald - Chairman, President and CEO

Well, there's - we call it the big middle. If you look at serious do-it-yourselfers to the low end of the pro business, there is - you know, that big middle continues to grow, and we believe that we've got a very aggressive, effective plan that we'll be rolling out this year to address that opportunity.

Eric Bosshard - Cleveland Research

Very good. Thank you.

Operator

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

John Houseltron - Robert W. Baird

Good morning. It's actually [John Houseltron] for Pete. Just couple questions for you.

First off, on the battery cost side, is that - I mean, you mentioned kind of lead and nickel costs as things. Is it safe to assume that cost pressure is not as significant in the Lithium product line?

Mike Mangan - CFO

We have not seen inflationary pressures on the Lithium side, that is correct.

John Houseltron - Robert W. Baird

Okay, so as those become more of a percentage of sales, hopefully this year, that should help in some regard?

Nolan D. Archibald - Chairman, President and CEO

Well, Lithium, you know, as we've said before, the Lithium margins that we have are lower than the NiCad margins, even with the price increase, as you have with any new product that you introduce.

And so we will expect the same evolution in costs and prices in that area. As time goes on, we think that that difference will shrink and we'll become much more closer to our NiCad margins right now.

But we're not seeing any increase in that area. And, as you would expect, as volumes grow in everything, we should gain some cost advantage there.

John Houseltron - Robert W. Baird

Okay. And then turning to the Woodworking market, which if I understood you right just experienced kind of the sharpest decline in the Industrial group. Wasn't that an area where you guys had pretty significant product rollouts this year, so is it something weird, the expert enthusiast, who's just off, or what's going on there? Because I thought that was an area where you guys had a pretty good product rollout this year.

Nolan D. Archibald - Chairman, President and CEO

We did have a good product rollout there, but the Woodworking thing, if you just think about it, is much more related to new construction as you have cabinet shops and things like that that, you know, is for new construction.

So we think the major falloff there was really economic related.

John Houseltron - Robert W. Baird

Okay, so it would be safe to say within that kind of niche you probably gained share this year?

Nolan D. Archibald - Chairman, President and CEO

We'll say we held share. The numbers are really hard to get on market share, and we think we're holding our own there - and in some accounts we've lost a couple of listings where we didn't have some of the new product - so overall we think we've held our own in a pretty down market.

John Houseltron - Robert W. Baird

Okay. Thank you.

Operator

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

Ivy Zelman - Zelman & Associates

Hey, good morning, guys.

Nolan D. Archibald - Chairman, President and CEO

Hi, Ivy.

Ivy Zelman - Zelman & Associates

If you could take a step back a minute and think about the outlook for margins, I think that at least, Mike, you and I have had discussions about the fact that you have a more variable cost platform today, and I think you probably would agree with some of the noise related to the VAT tax and the weak dollar and understanding commodity costs, it's hard for us to sort of understand what the opportunity would be for sort of more normalized margins. And right now, it's considerably below the threshold that we had talked about. I think you caveated your comments that - you know, with barring a recession.

So now that we're arguably in a recession for housing, can you help us frame it and how we should think about the outlook, and then I have a follow up, please.

Mike Mangan - CFO

As we talked about, Ivy, for the outlook here for 2008, we're expecting our margins to be around 9%.

That is lower than some of the numbers we've talked about in the past with 10% margins, we thought, potentially would be the floor for us.

I mean, two things that weren't included in that, one is an economic environment like we're seeing today and potentially we're in a recession, certainly on the housing side. And some of our ad markets are obviously very, very challenged.

And over the last four years, we had - or including 2008 - we'll have taken on, you know, $500 million of commodity inflation.

So those are two factors that weren't anticipated in those numbers.

As we go forward and as we look to 2008, we're obviously trying to balance short-term profitability with long-term capability to make sure we're continuing to invest in new products. So as a result, yeah, our margins are under some pressure here.

As the markets improve - and hopefully they will as we get into 2009 - we'll see some better leverage on our SG&A, we'll start growing our top line, we'll see some easing in these commodities and seeing our way back quickly to double digits I think is something clearly in the cards.

But we've got obviously some very significant variables here - economic conditions, you know, not only in the U.S. but globally, and as well, where do these commodities go and how weak does the dollar get and in particular, how weak is the dollar versus the Chinese currency, the Chinese yuan.

Nolan D. Archibald - Chairman, President and CEO

And just to underscore, Mike, if you think about it, a $500 million commodity increase over the last four to five years, that's a pretty strong headwind.

Ivy Zelman - Zelman & Associates

No question. Just a second question related to your outlook again. With respect to the performance in '08 and you've obviously used some conservative assumptions, what can happen that you would miss?

For example, if you look at the consumer today and we've seen slowing, is there, you know, an understanding if consumer spending or if the economy goes into a recession, what are you using for your economic backdrop in your outlook for '08 and therefore, you know, for the full year, what can therefore require that you have to adjust again downward on your expectations?

Mike Mangan - CFO

I think the biggest variable as we look at 2008, Ivy, is to try to figure out where the top line is going to ultimately end up.

I think Nolan touched on a few of these in his comments as well as some of the questions, but we're looking at continued modest growth, low to low single-digit-type growth in our non-U.S. businesses, the U.S. industrial-commercial side, again, we'd expect some growth there, but when you look at some of our strong or our big end markets like U.S. housing, expecting that to be down 10% to 15%, expecting the consumer to be relatively weak, so we're seeing some negative pressure there as well. And expecting the remodelling market to be down.

So if those are down more severely than that, obviously that will put some more pressure on our top line, and while our gross margins probably will reasonably hang in, you know, the challenge is some of the SG&A de-leveraging.

And if we find ourselves well into 2008 and the outlook isn't beginning to improve for 2009, we'll have to take a look at some additional costs here that we'll have to ratchet back on to reposition the business in light of the market opportunity.

Ivy Zelman - Zelman & Associates

Can you just be a little bit more specific, though, with respect to your assumptions? I think I heard you correctly that maybe new construction would be down 10% to 15% in '08, and what your quantified expectations would be for Repair and Remodel in your assumptions, please?

Mike Mangan - CFO

Our Repair and Remodel markets are expecting to be down around 5%.

Ivy Zelman - Zelman & Associates

Okay.

Mike Mangan - CFO

In the mid single digits, as we talked about earlier.

Ivy Zelman - Zelman & Associates

And the new construction was 10% to 15%, is that correct?

Mike Mangan - CFO

That's correct.

Ivy Zelman - Zelman & Associates

And then lastly and I'll let others ask, just on inventories, I think, Nolan, you mentioned going into the quarter, you know, your customers especially in the retail channel were more conservative in orders on inventories. Can you just give us an update in the last several weeks how the inventory picture looks, specifically at the home centers?

Nolan D. Archibald - Chairman, President and CEO

Well, we think the inventories are in reasonable shape, other than the inventory I mentioned in HHI, but that's our inventory, that's not the dealers' inventory. So we think they're in reasonable shape, but our customers are very, very cautious about POS and order levels and all of that, so the kind of cautiousness that we saw in the fourth quarter has continued in the first quarter.

Ivy Zelman - Zelman & Associates

Right. Thank you very much.

Nolan D. Archibald - Chairman, President and CEO

And we have factored that into the range in guidance that we've given you.

Ivy Zelman - Zelman & Associates

Great. Thanks.

Operator

Your next question comes from the line of Michael Rehaut of J.P. Morgan.

Michael Rehaut - J.P. Morgan

Yes, hi. Thanks.

First question, just on going back to '08 for a moment, I think you had mentioned from a share count perspective 62 million, but that was just for the first quarter or was that for the full year?

Mike Mangan - CFO

About the first quarter and full year, Mike.

Michael Rehaut - J.P. Morgan

Okay. So given the cash flow generation, I was wondering if you could just kind of give us an update on how the M&A picture is looking to you and that, you know, historically you've always said that you'd like to be able to do either internal investment or accretive bolt-ons primarily, but I think in the last year or two, prices have run up.

Maybe now could you talk about how - with, you know, the OBOs and markets slowing and maybe less competition from that side of the picture - how pricing is with some of those bolt-ons and overall kind of pipeline update in terms of what you're looking at?

Nolan D. Archibald - Chairman, President and CEO

Well, we have seen prices come down on potential acquisitions. It's a very different market out there, as you probably are aware, then it was even a year ago, and so we think that there are more reasonable prices and, as I mentioned in my prepared remarks, we're hopeful that we'll be able to find some bolton acquisitions that are financially compelling. And so we continue to be very active at looking at businesses that we think can be accretive and financially compelling.

On the other hand, the competing piece of that is that our stock price is at a level right now that's also very, very attractive. And we'll try to balance those two to make sure that we spend that cash that would drive our stock price the best possible way.

Michael Rehaut - J.P. Morgan

Okay. I mean, you know, looking at maybe the longer-than-expected product revamp that you had with Delta and Porter-Cable to some extent and the difficulties with Vector, are you more inclined to try and continue to reap the benefits out of those businesses by focusing internally and more look primarily at the share repurchase, or are there still just some interesting bolt-ons that you feel you'd be compelled to do if the price was right?

Nolan D. Archibald - Chairman, President and CEO

Well, if it's financially compelling and it's an attractive business, we'll clearly look at that, but what we try to do is balance the two. And we've got a low stock price right now that's very, very attractive. We continue to generate significant cash flow. But if we find - you know, what we need to do now is balance this very low compelling stock price that we have with more moderate prices in the businesses that we're looking at to acquire. And I think we've done a reasonably good job of balancing those.

Despite not achieving the top line growth that we'd like to have seen in some of the acquired businesses - let's outboard Vector for just a minute because we've got some special issues with Vector right now, short-term with that - we've come in where we've said we would come in on the bottom line with the acquisitions that we have made.

And so we're very pleased with the ones that we have made to date, and they have contributed like we forecasted that they would.

Michael Rehaut - J.P. Morgan

Okay. Just lastly, a couple of operating line items, clarification.

If it's possible to give some degree - I know you kind of mentioned that you didn't want to give a full kind of breakout of the charges, but just a rough idea of how that $19 million splits across Power Tools and Hardware, and is it, you know, more driven by headcount versus some manufacturing capacity changes?

Nolan D. Archibald - Chairman, President and CEO

About 50:50 between the two.

Michael Rehaut - J.P. Morgan

Okay. And, you know, the corporate, excluding the environmental charge would have been up slightly. I was wondering, you know, typically maybe that's down, you know, that's a net negative of $10 to $15 million a quarter, give or take. Were there some one-time benefits in that as well?

Mike Mangan - CFO

Mike, we had talked about this a few minutes ago.

Michael Rehaut - J.P. Morgan

I'm sorry.

Mike Mangan - CFO

Yeah. A benefit of reversing some incentive accruals that we in the operating numbers that are controlled here at corporate, and as well we had some favourability outside this environmental charge. In our environmental comparison, we had some significant increase in reserves in the fourth quarter of 2006 for environmental which did not recur in the fourth quarter of 2007 absent the onetime charge.

Michael Rehaut - J.P. Morgan

Last question I want to sneak in, just bigger picture, with VPX, you know, maybe not meeting your expectations, and Nolan, you had mentioned that perhaps you lost a little bit of share in cordless and some of the Lithium Ion areas and that was an area of focus for you as well, what do you feel, you know, maybe went wrong or that you weren't expecting when you kind of set out earlier this year to launch those lines or market those lines? And what do you plan to do to perhaps reverse some of those trends that kind of went against you unexpectedly in the back half of this year?

Nolan D. Archibald - Chairman, President and CEO

Well, on VPX, it is a brand-new platform for us. It's a very high-priced Lithium product, and in this economic environment, you know, to come out at Christmas with the launch of this right here, it was a very high-priced item, and we think that that high price in a touch economic environment when people are really watching what they're spending, that that had to have some effect on our VPX.

In our Lithium, we were just late in coming to market with our Lithium line. But if you look at our Lithium line right now, with 36 volt, 28 volt, 18, we believe that we've got the most comprehensive, best line up of anybody in the industry as we now move into 2008.

We also have the best chemistry and, you know, if you look at our engineering capability and how we have been right historically on our product, we believe that the marketplace will eventually recognize the superior chemistry we have in our Lithium Ion technology, particularly when it comes to the recharging of batteries. I mean, we get more cycle life by far than any of our competition, and you're starting to see that in the marketplace by the return of some of our competitors when you're not getting the cycle life with their batteries.

So we believe we have the best chemistry and the most comprehensive line up in 36, 28 and 18 of anyone in the industry that will prove to our benefit as we move to 2008 and beyond.

With that, I think we've come to the end of our Q&A, and those of you who would like to ask additional questions, if you'll just contact us, we'll do that one on one with you.

We thank you very much for being part of our conference call today.

Mark Rothleitner - IR

Thank you, Operator.

Operator

Thank you, again, for participating in today's conference call. You may now disconnect.

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