Executives
Mark M. Rothleitner - Vice President, Investor Relations and Treasurer
Michael D. Mangan - Chief Financial Officer, Senior Vice President
Analysts
Analyst for Michael Rehaut - J.P. Morgan Securities
Nishu Sood - Deutsche Bank
Ivy Zelman - Zelman & Associates
Susan Valari
Analyst for Peter Lisnic - Robert W. Baird
Sean Ross - Longbow Research
Analyst for Eric Bosshard - Cleveland Research
Analyst for Sam Darkatsh - Raymond James
The Black & Decker Corporation (BDK) Q1 2008 Earnings Call April 24, 2008 10:00 AM ET
Operator
Good morning. My name is Clark and I will be your conference operator today. At this time, I would like to welcome everyone to the Black & Decker first quarter conference call. (Operator Instructions) I would now like to turn the call over to Mr. Mark Rothleitner, Vice President, Investor Relations and Treasurer. Go ahead, sir.
Mark M. Rothleitner
Thank you, Operator. Good morning and welcome to Black & Decker's first quarter conference call. On today’s call, our Chief Financial Officer, Mike Mangan, will discuss our first quarter results and outlook for the remainder of 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 website under the investor relations section.
And now I’ll turn it over to Mike.
Michael D. Mangan
Thanks, Mark. This morning, Black & Decker announced earnings per share of $1.09 for the first quarter, or $1.29 before a restructuring charge of $0.20 per share. Excluding this charge, EPS was above our guidance of $1.10 to $1.20 but below the strong $1.61 per share in the first quarter of 2007.
Sales decreased 5% to $1.5 billion for the quarter. This was in line with our projections due to a better-than-expected 4% contribution from foreign exchange. Organic volume was down 9% and price was flat for the quarter. U.S. housing downturn and related credit tightening have sharply lowered demand for tools, locksets, and faucets. In addition, retailers continue to order very cautiously in contrast to heavy restocking for some categories which took place in early 2007. While growth in Latin America and Asia was very strong again this quarter, we have begun to see some slowing in parts of Europe.
Operating margin before restructuring decreased 260 basis points to 8.2% for the quarter. As a percentage of sales, SG&A increased 160 basis points, reflecting lower volume. Excluding currency, SG&A spending decreased 3%, driven by reductions in power tools and favorable corporate items.
Gross margin decreased 100 basis points, primarily due to $55 million of component inflation across the segments. Inflation was partially offset by productivity, as well as favorable adjustments to certain reserves, including XRP recall costs.
Our effective tax rate of 23.5% is lower than last year in our guidance. This reflects the tax benefit associated with the restructuring charge, as well as the favorable settlement of certain tax audits. As we have noted in the past, FIN-48 will result in more quarterly tax rate volatility than in the past.
We continue to expect a full-year tax rate of approximately 27%, excluding the restructuring effect. Excluding the restructuring, tax rate favorability, and accounting adjustments, EPS would have been in the upper half of our guidance range of $1.10 to $1.20.
We repurchased 2 million shares during the quarter and 6.3 million over the past year. As a result, our average diluted shares are 8% lower than a year ago. In addition, net interest expense came in below our forecast due to favorable rates.
Free cash flow was negative $111 million in the first quarter versus a positive $137 million last year. This was roughly in line with our forecast. Free cash flow is often negative in the first quarter as it is our smallest sales quarter and we make significant payments on items accrued in the prior year. Our free cash flow was extremely strong throughout 2007, due in part to the timing of payments. Therefore we did not expect this to repeat in the first quarter of 2008. We continue to expect to covert approximately 100% of net earnings to free cash flow for the year.
In response to weakening demand, we are implementing additional actions to reduce costs across the company. As a result, we recorded an $18 million pretax restructuring charge in the first quarter. In our power tools and accessories segment, we are reorganizing the industrial and consumer businesses along functional lines rather than SBs based on product categories. This structure will reduce overhead and promote efficient customer relationship management.
In addition, the consumer business will shrink its operational footprint by closing a pressure washer plant and the Vector office in Florida.
In the hardware and home improvement segment, we took steps to reduce SG&A in 2007; therefore, incremental restructuring actions in this segment are focused on manufacturing. In both tools and HHI, we will reduce direct labor and production levels to reflect lower demand and bring inventory down. The fastening business has been proactive in cutting overhead and we’ll take additional actions on SG&A.
In addition to the restructuring actions, many parts of the company are cutting discretionary expenses, delaying merit increases, and looking for new ways to reduce spending. In total, the new restructuring program should result in 700 fewer positions, including roughly 450 of direct labor. We expect the elimination of 250 indirect positions, which will generate more than $10 million of savings in 2008 and an incremental $15 million in 2009.
Now I’ll discuss our individual businesses in more detail. Sales in our worldwide power tools and accessories segment decreased 10% in the quarter. Weak demand in the U.S. was compounded by a difficult comparison to early 2007 when key customers replenished their inventories from unusually low levels. In the U.S. industrial products group, sales decreased double-digits. Due to the housing downturn, orders fell at all key categories and channels. Lower sales of compressors and nailers, which are used heavily in new construction, accounted for roughly one-third of the group’s sales decrease.
The impact of the XRP recall announced in late 2007 is now largely behind us and reorders helped our cordless business perform better than our other portfolios. The decrease was less sever in the independent channel than in the home centers, which continued to manage inventory levels carefully. The sell-through trend at the home centers deteriorated but not as sharply as our order rates.
In the U.S. consumer products group, sales decreased more than 25% in the quarter. We came into the quarter expecting a large decrease. First, we knew the high single digit growth rate in the first quarter of 2007 was a very difficult comparison. In contrast to the inventory build a year ago, the home centers responded to weak demand by reducing our consumer tool inventories this quarter. This gap between sell-in and sell-through was more pronounced than in the industrial business.
The second factor which we also knew coming in was a loss of several low-end pressure washer listings at a key customer. This category accounted for over half of the group’s sales decline this quarter.
One positive in the U.S. consumer group was outdoor products, where new listings at a key retailer drove a strong sales increase.
The consumer group’s first quarter results were also affected by the draw-down of Firestorm products at Lowe’s. Firestorm is being replaced by an exciting new lineup of 21 Porter-Cable tools to address the high-end, do-it-yourself, and light contractor market. We are confident that our new platform, including a broader lithium-ion offering, will improve our competitive position in an important market segment. We will give you additional information about the specific products as the fall launch approaches.
In Europe, sales fell short of expectations, declining mid single digits year-on-year. In the industrial business, availability constraints on products such as XRP and nano cordless hampered sales in January and February. The situation improved in March but not in time to fully recover the shortfall.
The consumer business faced a tough comparison to a first quarter 2007 promotional campaign and lastly, we have observed some slowing in markets, most notably Spain and Italy.
Sales in Eastern Europe offset part of the decline with continued double-digit growth. Overall, while the first quarter was below expectations, we anticipate Europe will report sales growth in the second quarter and full year.
In the rest of the world, our impressive growth continued. Latin America sales grew more than 20% and Asia delivered a growth rate in the teens. Our China operation posted the highest growth rate in the segment and its sales exceeded those in Japan. Latin America sales topped $100 million in the quarter at double-digit margins with gains throughout Central and South America.
Return on sales for the power tools and accessories business decreased this quarter to 8.2%. Over half of the decline came from SG&A percentage on sharply lower sales. SG&A dollars were lower, reflecting cost reduction actions in North America.
Gross margin was also unfavorable to 2007, due to component inflation and excessive productivity improvements.
In our hardware and home improvement segment, sales decreased 14% as the housing downturn affected both the lock set and faucet businesses. In the U.S. lock set business, sales declined at a rate in the teens. Consistent with the housing starts trend, the new construction channel declined by roughly 25%.
Results at retail were mixed. KWIKSET Smart Key continues to drive growth in the mid price point category and the rollout to additional customers is progressing well; overall, however, retail sales decreased primarily at the opening price point.
Price Pfister, which is less tied to new housing than the lock business, also had a sales decline in the teens. Both the home center and wholesale channels reduced inventory levels this quarter. In addition, the impact of line resets in this business can make quarterly results somewhat volatile. We were hurt this quarter by the inventory draw-down for our bath reset. Later in the year, we should benefit from SKUs gained in a recently completed kitchen line review. Therefore, results in our faucet business should improve in the second half.
Operating margin for the hardware and home improvement segment fell to 7.5% this quarter. Nearly all the decline was due to SG&A deleverage on lower sales. Gross margin percentage was down only slightly as favorable mix within the KWIKSET line nearly offset the impact of store resets on the faucet business.
Year-on-year commodity inflation was less significant than in 2007 and was essentially neutralized by productivity gains.
In the fastening assembly systems segment, sales increased 4%, led by the international businesses. Growth was solid in Europe and very strong in China and other Asia markets. In North America, sales were down only modestly despite the lowest level of light vehicle production since 1992.
Strong sales of stud welding equipment and higher vehicle penetration helped the automotive division perform well in a tough environment. Operating margin for the fastening segment decreased 50 basis points to 15.5% for the quarter, partly due to higher steel prices.
Now let me discuss the outlook for the rest of 2008. As I mentioned, since January the U.S. economic outlook has deteriorated both overall and for the construction and automotive sectors. While we still expect growth in Europe, some markets there have begun to slow.
As always, we expect new products to perform well in the market. Dewalt is launching a new plunge saw, corded drills, and demolition hammers, and continuing to roll out the industry’s broadest line of lithium-ion cordless products. KWIKSET Smart series has received tremendous attention in the press and continues to be rolled out in distribution.
For the outdoor season, our consumer business is highlighting a powerful 24-volt cordless lawnmower, the industry’s first with an Energy Star rating.
Our new products will not offset the macroeconomic headwinds, therefore we are lowering our sales guidance and now expect a mid to high single digit organic decline for the second quarter and full year. If exchange rates remain favorable, this would imply a low to mid single digit decrease in reported sales.
While we are aggressively targeting cost reductions, incremental volume pressure and component inflation are major headwinds. Due to rising steel, resin, and copper prices, our forecast for year-on-year inflation has increased to $135 million for the year. Therefore we now expect full year operating margins of around 8.5%.
Lower sales and margins will be mitigated by a few factors -- exchanges rates have moved in our favor since January, so currency will be more positive than we previously expected. Global interest rates have also changed favorably and we have reduced our interest expense forecast by roughly $10 million. Our outperformance in the first quarter also reduces the full year impact of a tougher environment.
In total, we expect EPS in the range of $1.40 to $1.50 for the second quarter and $5.25 to $5.65 for the full year. This full year range excludes the $0.20 restructuring charge we took in the first quarter.
In summary, despite a very difficult environment, results were at or above our forecast. We continued to offset part of the North American downturn with sales gains in Latin America and Asia. We continued to roll out innovative new products, such as Dewalt Corded and lithium-ion SKUs, and our game-changing Smart Key line. We continue to expect to convert approximately 100% of our net earnings to free cash flow for the year.
We repurchased 2 million shares of our stock at prices below the quarterly average and have authorization for another 4.9 million shares, and we took additional actions to reduce costs across the company.
The structural changes we have made since 2001 prepare the company to handle the macro environment we find ourselves in today. Our outstanding people are committed to protecting our key strengths -- innovation and user focus, global distribution and superior brands. We continue to believe that this strategy will position the company well for the eventual recovery.
That concludes my prepared remarks and we’ll turn it back to the operator and take your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Michael Rehaut.
Analyst for Michael Rehaut - J.P. Morgan Securities
Hi, this is Jen [Consoly] on the line for Mike. My first question, last quarter you had mentioned that maybe the VPX line came in a little bit below your expectations and I know with the Dewalt 18 volt lithium ion line, you were trying to recoup some share losses from earlier in 2007, so I was wondering if you could give us an update on how the repositioning of those products was progressing this quarter, and if you can give any color as to type of volume of sales and if it met your expectations.
Michael D. Mangan
We certainly don’t give product line volumes but VPX, in the product category there certainly was a disappointment for us during the fourth quarter. We are working on some repositioning actions for that product category and VPX will I think be a smaller part of our future going forward. In large part, on the consumer or high end DIY, low end light contractor market, we are looking at the Porter-Cable offering, which will come out later this year to augment our lithium ion strategy in and around that market segment.
The Dewalt, on the Dewalt side, we had the challenge in the fourth quarter from the XRP recall. That is now in large part behind us and is back in the market and we have good availability now there of product, and we continue to roll out our lithium ion product across channels, as well as across geographies, so that includes not only the 36-volt product that came out about a year ago but our new introductions of 18-volt and 28-volt, and that product is meeting expectations.
Analyst for Michael Rehaut - J.P. Morgan Securities
Okay, great, thanks. And as part of your guidance, think last quarter you had mentioned that you expected pricing to have a roughly neutral impact and it had a neutral impact this quarter. Can you maybe talk about because your raw materials headwind is a little bit higher now, what you are expecting price to do in 2008? And also I think last quarter, you kind of walked through some of your macro assumptions underlying your sales growth guidance, so if you could give us a sense of how those have maybe changed as well, that would be really helpful.
Michael D. Mangan
Regarding price, as you mentioned and we mentioned in the remarks, our pricing was flat during the first quarter and we continue to expect that our pricing will be approximately flat for the year. So we continue to look for selected opportunities across products, across channels, across segments to increase price and have done that selective. Net, net, we would expect those activities, as well as some pricing actions to promote volume to be relatively neutral for the year.
Regarding macroeconomic assumptions, certainly our views have waned here since the first quarter -- [I’ve only provided guidance]. If you look across the segments, the market segments that we participate in, we would certainly still expect internationally to generate growth and those markets to generate growth, albeit at a slower rate than we would have expected I guess earlier this year, so if you are looking at those markets to grow 3% or 4%, it’s probably now in the 1% or 2% area. Again, still growth and as I mentioned in my prepared remarks, we are continuing to expect that business, our businesses internationally in the power tools side to grow second quarter and full year.
The U.S. repair/remodeling market, which is about 20% of our overall sales, we would have expected that to be down mid single digits coming into this year. That market has clearly slowed and we would expect that now to be down more in the what’s called low double-digit range.
The consumer has certainly weakened, so I would have expected some headwinds there. I think those have accelerated a bit as well and on the housing front, I think we mentioned on the call last time that we were looking at first starts to be down in and around 15%. That has turned out to be too aggressive an assumption. Where the data is coming in now, kind of planned our business around housing starts being down more like 25% as opposed to 15%.
And the industrial side and commercial side, still expecting commercial to grow, grow modestly. Industrial markets are still performing well but obviously that will be tampered a bit by what’s going on with autos, which will have some impact on our fastening business. So while up modestly in our original projections, we are now probably flat to up a bit less.
So overall as you look at pulling those through with the percentage of our sales we had guided with our sales being down before FX in the low single digit range earlier in the year. Now we are planning our business around mid to high single digit declines in organic sales, then mitigated by some very, very positive FX.
Analyst for Michael Rehaut - J.P. Morgan Securities
Great. Thanks a lot.
Operator
Your next question comes from Nishu Sood.
Nishu Sood - Deutsche Bank
I wanted to ask first about the restructuring efforts, or charges that you take in the last quarter and this quarter. It sounds from the description you’ve given so far that it is more taking out cost to kind of adjust the size of the business, scope of the business, in line with what sales have been doing and obviously revised expectations. So my question was maybe if you could -- if that characterization is correct, and also if you can contrast it with the types of restructuring actions you took in the 2002, 2003 restructuring.
Michael D. Mangan
If you go back to the 2002, 2003 restructuring actions, we were remaking our manufacturing footprint and the major move of our production out of the industrialized areas of the globe to lower cost areas like China and the Czech Republic. Obviously a significant charge, a significant plant shutdowns, and again moving our production where we’ve gone at that time from 45% or so of our production coming out of low cost areas of the world where we are now sitting in and around 70%.
These two actions that we’ve taken this quarter and as well we announced one in the fourth quarter as you know as well, a lot of it has to do with headcount. It’s indirect headcount and aligning our overhead structure to the economic realities of the markets that we are dealing with.
Having said that, there were some manufacturing or operational footprint actions included in both of these. In the fourth quarter actions, we announced that we were closing our Spennymoor operation. It was a manufacturing operation that had been downsized significantly during the last three or four years but we were still doing some motor winding and some metal fabrication activities there. That plant is in the process now of being closed. Some of that production is moving to our Usti facility, in particular the motor winding, and then some of the other fabrication is moving to some of our other plants, as well as somewhat being outsourced.
As well at the time, given some of the difficulties in the housing related markets, we took actions to reduce our finishing capacity in our HHI business and that was some consolidation around Nogales, Mexico and Denison, Texas facilities in that segment, and then as well some significant SG&A actions.
And this restructuring action that we announced this morning, which includes about $18 million of charges, is primarily focused around indirect heads in terms of cost savings and we are taking some actions to reduce direct labor heads as well. And in terms of the operational footprint, we had a plant indicator that was dedicated to pressure washer manufacturing. Given what has gone on with that business, we are now closing that plant. It is actually being announced today and our remaining pressure washer assembly will be absorbed into our Jackson facilities. And as well, we had maintained a separate office for Vector down in Fort Lauderdale and that is now being consolidated back up here into Towson.
So in both cases, we are taking some operational actions, if you will, but as well in both cases taking some significant actions relative to indirect labor and reducing headcount.
Nishu Sood - Deutsche Bank
Thanks. That’s a very detailed answer. The second question I wanted to ask, your largest competitor recently has come out very aggressive growth targets for the year, double-digit growth. You folks are obviously looking for a mid single digit to high single digit decline. I know you can’t comment on competitors specifically, but either someone is being too pessimistic, someone is being too optimistic, or there is the potential for significant share shifts, market share shifts. I was wondering if you could just comment on that.
Michael D. Mangan
I wonder who you are talking about. Well, in terms of -- let me address the issue of share. As we look across our portfolios, clearly we think in Dewalt we are holding share, not only in the U.S. but across Europe as well, and our consumer business in Europe is doing well, so we do not think we are losing any share in Europe. We have lost some share in our consumer business in North America. As we had mentioned, we have lost significant opening price point pressure washer volume with a customer and that was acquired by a TTI.
And as well with the VPX not performing quite as well as we would have hoped, again we probably have lost a touch of share. Now that again is mitigated by -- if you’ll recall from my comments that we are doing much better in outdoor, so overall in consumer we’ve lost some share, principally in the pressure washer side, which was as we’ve talked about before, not a particularly profitable profit segment for us, and I would suspect for the person that won that at even more aggressive pricing, probably not a very profitable segment for them either.
In HHI, we are doing well with Smart Key, probably gaining share, maybe lost a touch of opening price point share to imports, but again I think overall that we are in pretty good shape. Pfister continues to do well. I think we are holding -- at least holding share there as well and with fastenings content per vehicle increasing, we would say that -- I guess theoretically gaining share there as well.
[Okay, so I don’t want to suggest to you] when you listen to the rhetoric from some of our competitors about sales growth and sales growth numbers and accomplishments, I would just go to their -- and analyze their results. If you looked at their sales last year excluding acquisitions, they were down 1%, not unlike we were down 1%. I know they tout some big numbers about double-digit growth but those include some acquired growth and businesses, like Hoover, as an example. They include gains in things like pressure washers, which are I don’t think particularly profitable, categories at the points they play and I think that shows up in their reported financial results, where they lost about 270 basis points of margin last year. Now we were down, certainly down less than that and as well, we are operating at margins twice the rate that they are, in the high 9s last year to their less than 5.
So again, a lot of rhetoric out there, a lot of claims of grabbing share and growing businesses, but I suggest you really pour through the numbers and look where they are growing and how they are growing and what that’s -- and what impact that is having to their financial results will probably give you some more insight.
Nishu Sood - Deutsche Bank
That’s very helpful and one quick last question; repurchasing 2 million shares during a negative free cash flow quarter, just wondering if you would comment on the timing. Normally I would have thought you would have waited until a positive free cash flow quarter, and what -- so how you thought about that timing and then timing for share repurchase the rest of the year.
Michael D. Mangan
We purchased about 2 million shares this year in the very beginning of the quarter. You’ll recall that we actually even announced that with our first quarter call, so that was done in early January when the stock was under particular pressure. And we look at our share repurchases on an opportunistic basis and don’t particularly time those necessarily by quarter or to particularly align with our free cash flow. Very confident in our cash flow capabilities. Again, I know we were down in the first quarter. I am sure that will cause some people concerns. That is not atypical. We very firmly believe that we will continue to convert 100% of our net earnings to free cash flow this year. So in part, that was just timing driven opportunity in the marketplace. As we look forward here, you can expect, as you’ve seen in the past, that we will take our free cash flow, which again we expect to be 100% conversion, and we will put that to work in acquisitions and share repurchase.
Nishu Sood - Deutsche Bank
Thanks a lot.
Operator
Your next question comes from Ivy Zelman.
Ivy Zelman - Zelman & Associates
Just a housekeeping question; you said that the savings from the restructuring, Mike, was $15 million in ’09. What was it in ’08, I’m sorry?
Michael D. Mangan
$10 million, so $10 million and it’s an incremental $15 million in 2009, so that’s for a total of $25 million.
Ivy Zelman - Zelman & Associates
Got it. My second question really relates to the question asked earlier on the macro outlook and maybe just more of a detailed update on what is going in the non-res commercial area. You had indicated in worldwide power tools a 10% decline you experienced there that you did see weakness in the industrial group down double-digits. Can you distinguish for us sort of understanding what’s going on in commercial versus industrial and when we think about your customers, [Stafta] would still be really the new residential market, so maybe understanding a little bit away from new res as it relates to non-res and what you are seeing in the marketplace.
Michael D. Mangan
The statistics that you see out there, Ivy, as I am sure you are well aware, are showing that commercial construction is slowing, albeit still growing but slowing from the growth rates it experienced in 2006 and 2007. We are hearing those kinds of things from our customers as well but when you get into our industrial channels of distribution and it’s a tale of two customers -- the ones that are really focused on commercial, while cautious, are certainly much more optimistic than the ones that are focused on residential construction, who are seeing obviously some difficult end markets. You are seeing starts down in the 20% to 25% area, so as a result their sales are down.
If you look at our Dewalt, our industrial business’ sales during the first quarter, I mean, our declines were much more dramatic in the retail channels than they were in our industrial channels of distribution -- again, evidence to the end market customers that those two customer groups are serving.
I think our sales results in the first quarter continue to support the view that obviously residential is very weak. We are seeing significant declines there but at commercial, again while slowing from the growth rate continues to grow, and it’s been a good avenue for us.
Ivy Zelman - Zelman & Associates
Mike, in that respect, if you were to have your crystal ball, where would you see in the segments the biggest risk to your forecast? Because right now, it looks like you’ve captured the weakness on the housing front. Clearly housing starts being down 25 can be down a little bit more, but it sounds like you are being pretty realistic there, and certainly it sounds like now with your double-digit decline in repair and remodel, with 20% of that being your business, sounds like that’s more realistic. But where in the forecast if you would be concerned you were too optimistic, would it be in commercial non-res today given the credit crunch going on?
Michael D. Mangan
Not particularly there -- when we look overall, I think we are actually -- and we are not looking for a tremendous amount of growth there, so I think we have conservatized that number. There is probably one area that obviously we are keeping a very close eye on, which is how growth is developing, or in Europe we’ve seen some slowing there. We’ve seen some slowing in a couple of markets, like Spain and Italy that I had mentioned, and we had some product availability challenges that hurt our first quarter sales. But again, we expect it to grow there. The markets continue to be, for the most part, solid. Eastern Europe is growing very, very well but -- particularly Western Europe that we will keep an eye.
Ivy Zelman - Zelman & Associates
And how much -- just to go back, you said earlier commercial is still not that big in the U.S. as a percent of your end market. What would you say it would be non-res related, roughly?
Michael D. Mangan
If you look at our overall U.S. consumer commercial mix in our sales mix, and this would include our fastening business as well, those industrial and commercial end markets account for about 10% to 15% of our top line, as opposed to housing, new housing starts, as you know, which would be more like 15 to 20. And that’s not all commercial construction. That’s industrial exposure that we see in our fastening business, so things like autos, aerospace, other end markets that we serve.
Ivy Zelman - Zelman & Associates
Okay, and going back to one thing you said earlier about your new products should help with your demolition hammers, your new lithium ion products, the Smart Key, if you were going to look at the vitality rate and what you think contribution wise to your forecast, how much would those new products offset -- what would sales be looking like without the new products in ’08?
Michael D. Mangan
We have new products every year, Ivy, as you know. I mean, that’s the strength of the company is the innovation of new products, so I -- we don’t even think about years without new products, so it’s just an ongoing part of our business. I mean, I don’t have the call for you in terms of what would happen if we had no new products out there.
Ivy Zelman - Zelman & Associates
And then sneaking one more in with respect to your position with Lowe’s, you obviously are in I think a very enviable position to grow and be more dominant there with some changes made at Home Depot, with Makita getting exclusive, as well as Milwaukee and [Ridge] and Ryobi. It looks as if Dewalt has been more aggressive in promotion activity at the home centers. You know, if you go through the stores, you see it. What is your strategy there with those tough competitors having exclusive?
Michael D. Mangan
First off, just to clarify on the promotion comment, if you look at our promotional spending during the first quarter, and this would include promotional activities that would be included in SG&A, like advertising and other things, as well as some pricing, and as you’ll recall, our pricing was flat. Our actual promotional spending was down slightly this first quarter versus first quarter last year, so we are being very careful and very targeted with our promotional spending.
If you look to the two channels, to your point, obviously some of our competitors have decided to go exclusive in the retail channels with the Home Depot. That has not -- underscore the word not -- has not translated into any SKU losses for Dewalt, so we continue to be very well-positioned at Home Depot. And obviously with the exit of those products from Lowe’s, we’ve actually picked up a number of SKUs at Lowe’s as a result of the exit of Makita and Milwaukee, so those two -- I mean, that shift has obviously been positive for us, particularly to your point at Lowe’s.
As we go forward, continue to focus on both customers. They are both big and good customers of ours. We’ve got a great product portfolio. We recognize that we may have some additional challenges at Home Depot with their exclusive arrangements with folks like Makita and Milwaukee. Having said that, ultimately we think best product wins. It has in the past, it will in the future, and we’ve spent a lot of time with end users to make sure when they come into the stores, they demand our products.
So again, obviously we will watch that carefully. It’s early, early days. Probably lose a few jump balls there in the future, given the exclusive arrangements with those two other customers, or two other suppliers, but again I think we are well-positioned across the channels and across our -- with a strong product portfolio that we’ll continue to be fine.
Ivy Zelman - Zelman & Associates
Great. Thanks, Mike.
Operator
Your next question comes from Susan [Valari].
Susan Valari
A lot of our questions have been answered but just wondered if maybe you could give us an update in terms of what you are seeing in the acquisition pipeline.
Michael D. Mangan
Sure. We continue to look at opportunities there. We look at opportunities across the segments. We have a handful of opportunities that we are active in today. Mentioned in the past the challenge, certainly if you go back the last few years, has been to find deals that were financially compelling. Some of those economics are beginning to change. Sellers expectations are beginning to change and now we are starting to see some sellers consider offers on their business, even recognizing that they no longer have the private equity bid.
So nothing to announce today, nothing imminent. However, a number of things working. Hopefully as we get into the back half of this year, we’ll be able to get a couple of deals completed. We think as a strategic buyer with financial liquidity, the opportunities are very solid for us.
Susan Valari
Okay, so would you say that the competition in general for most of these deals has eased and that is giving you some better opportunities?
Michael D. Mangan
Certainly you are not seeing -- you know, the PE focus that you would have saw the last few years bidding on transactions because they don’t have the financial support in terms of the leverage that they were seeing the last couple of years, so I think in most cases when a company is looking to even take their business through an auction to sell, you are seeing a handful of strategic guys show up and historically you would see a dozen PE guys show up, so the dynamic there has changed.
Susan Valari
Okay, and then a quick housekeeping question -- the tax rate came in lower than we had been expecting for the quarter. As we model out for the upcoming quarters, can you give us some sense of what we should be using?
Michael D. Mangan
Just to clarify on the tax rate, because from some of the notes I saw, I think some of the people are a bit confused. There’s a significant benefit in that tax rate in the first quarter due to the restructuring charge, which would run through the tax rate at around 33%, so if you adjust our tax rate for the restructuring charge, our tax rate in the first quarter was 25.2% versus our run-rate, or average rate of about 27%. So during the first quarter, we had again a 25.2 versus 27, so that benefited our first quarter performance, absent restructuring charge, by about $0.03.
With FIN-48, you will continue to see some volatility but in terms of planning, you should plan your business as we do ours, our tax rate will be in and around 27%.
If I didn’t comment on it, just to be clear, the difference between the 27 and the 25.2 had to do with some state tax audits that were settled. That created some favorability that needed to be recognized under FIN-48 during the first quarter.
Susan Valari
Okay. Thank you.
Operator
Your next question comes from Peter Lisnic.
Analyst for Peter Lisnic - Robert W. Baird
Good morning. It’s John [Halshotner] on for Pete. Just a question on commodity costs; that estimate you gave, $135 million, just given how commodity costs kind of ramped on you guys over the course of 2007 and a lot of is it kind of purchase components, how comfortable are you with that number for the rest of 2008, kind of given what you are seeing in the marketplace right now?
Michael D. Mangan
It’s our best estimate, given the outlook that we have, which in -- what we’ve experienced here during the first quarter. As you’ll recall, our guidance for 2008 originally was $120 million. With what’s gone on with things like steel and copper, that has obviously increased to the 135 number that you quoted. It’s primarily weighted to the first half, as we start to comp some pretty high inflation, particularly in the back half. And we are seeing some relief in some areas, like batteries, where we had some significant nickel inflation in the latter part of last year, as well as the first quarter of 2008.
So as with all forecasts, I mean, we’ve tried to anticipate and look at what is going on in the macroeconomic environment and believe this is our best estimate of what we will see here in 2008. It also does include, as I think you’ll recall, some pressure from VAT taxes and China, as well as the pressure created by the weakness in the dollar versus the Chinese RMB. So in terms of that total $135 million, about 60% of that is commodity related and the remaining 40% is split between VAT and RMB.
Analyst for Peter Lisnic - Robert W. Baird
Okay, and is there still about an $80 million productivity target for offsetting that?
Michael D. Mangan
Exactly. That’s a good number to think about as for 2008 in terms of the amount of productivity we can generate, which will obviously mitigate that.
Analyst for Peter Lisnic - Robert W. Baird
Okay, and I guess my second question is if you just look at the restructuring charge you took, after that should we kind of expect less flexing of SG&A as you go forward? I mean, I assume this is kind of taking out the low-hanging fruit from an SG&A perspective and is SG&A going to be more kind of a fixed cost going forward after you’ve done this?
Michael D. Mangan
I wouldn’t say that and I wouldn’t say this was necessarily low-hanging fruit, either. I mean, obviously with every additional step you have to cut deeper into the organization. We think we have right-sized our SG&A relative to the market opportunities that we see in front of us. So having said that, if there is a step change in the market environment, we will, as we have in the past, be proactive in taking steps to align our cost structure with the market opportunity that is out there. So we are not [inaudible] but we don’t like to on this. Obviously we’ve got some good folks that have contributed a lot to Black & Decker's historical success but in light of the business environment out there that’s taken a step change down, we thought it appropriate to take a step to lower our cost structure. So I don’t think know that you’ll see sort of more or less volatility in SG&A. However, we will take the actions we need to in light of the market environment.
Analyst for Peter Lisnic - Robert W. Baird
Okay. Thank you.
Operator
Your next question comes from David MacGregor.
Sean Ross - Longbow Research
Good morning, gentlemen. This is actually Sean Ross in for David MacGregor. Most of my questions have been answered but right now I have one on new product introductions. You said that you, or it sounds you like are tailing back on the VPX rollouts that you had initially set for 2008 and it sounds like you are now moving more towards the Porter-Cable new rollout at Lowe’s. Can you comment further on that?
Michael D. Mangan
The VPX obviously has limited success, as you probably have always heard us talk about and maybe have heard from some of our customers as well, so we are doing some repositioning around that product, try to improve its success. Having said that, given its success in the marketplace, given its price point, some of its power features, it wasn’t as successful as we would have thought. And in part reflecting the economic environment that we are selling into. We’re not seeing as big a consumer play I think in power tools.
But we will continue to sell that product and sell it through distribution but don’t expect that to be as big a play as what it once hoped.
Porter-Cable, we talked about relative to our Black & Decker Firestorm sub-brand. We’ve got a significant market segment that that we don’t think we are getting our fair share of. It’s like light contractor or the serious do-it-yourselfer that probably has become a little more price sensitive in the marketplace today, so some people may have been stepping down from Dewalt. But even though our Firestorm product was actually outstanding product and very comparable and in most cases a better performing product than the competition out there, the Black & Decker brand would not reach up into that light contractor market.
So as we mentioned, we are going to replace that Firestorm with a great product line under the Porter-Cable brand, which we think is a brand with significant reach and significant stretch, and will do very well for us. And that will include a lithium ion feature as well.
Sean Ross - Longbow Research
Okay, and now this kind of goes back to what you were talking about last quarter then, the big middle segment. It sounds like for North America power tools I guess I would be focusing on, that the mix, maybe that there is not really a diminishing in the mix but that you are trying to get some people from Black & Decker to step up while you are still trying to get people who are stepping down from Dewalt to get them a product offering. Is that correct?
Michael D. Mangan
I think that’s reasonably accurate. I mean, in this environment and you’ve got folks who will be a little bit more price sensitive on the contractor side, and if you are a contractor that doesn’t have a particularly robust application, most contractors have a use for a drill driver. Having said that, there are some applications like a plumber that probably doesn’t use his drill driver as robustly or like remodeling contractors, so that contractor that doesn’t need all the performance that Dewalt offers, you know, probably in some cases here is stepping down and we are going to position our product with a great brand to be able to make sure we capture that. I think some of our competitors have captured some of that volume and we are going to go after it.
Sean Ross - Longbow Research
Okay, great. And final question -- it seems like Latin America, you are getting about 20% or upper teen growth rates. Is that exceeding the industry? Is the industry still growing at about high single digits?
Michael D. Mangan
I’m not totally sure exactly how quick the market is growing but with our Dewalt presence down there, and we are having a lot of success in our consumer business as well, we are taking share. So we are growing in excess of the market growth rate and we are growing north of 20%. My guess is the market has probably grown double-digits, but I’m not sure -- it’s certainly not growing at a 20% kind of clip.
Sean Ross - Longbow Research
Okay, great. Thank you very much.
Operator
Your next question comes from Eric Bosshard.
Analyst for Eric Bosshard - Cleveland Research
This is Mark stepping in for Eric. A couple of questions; first, can you talk a little bit about the pretty big cut in organic sales but only the $0.20 cut in EPS? Can you help walk us through your assumptions?
Michael D. Mangan
At a somewhat high level, and obviously we can do this one-on-one with you in terms of your modeling, but if you look at -- we’ve gone from low single digit to mid to high single digit declines in organic growth, so that’s -- depending on where you model it and where we’ve modeled it, that’s three or four points of volume that we would not expect. Obviously that is a significant headwind and as well, we have announced some additional inflation this year, so those are the two headwinds, forecast to forecast.
A couple of benefits though as well, certainly with the cost reductions that we’ve taken, as well as the restructuring actions that we’ve taken significantly improve our cost structure versus what would have been included in the original projections. Interest has come in much more favorable. Probably the piece that you are probably not modeling as well is FX. FX has been extremely strong, stronger than we would have predicted. Not only have rates gone our way -- it’s been very, very favorable for us. As an example, in the first quarter here we had benefits of about $0.24 of FX, about $0.14 of translation, about $0.10 of transaction. We would expect some continued strength or continued contribution from FX going forward.
So I guess relative to probably what you were expecting and what we had modeled before, there is probably $0.50 of benefit in the P&L coming through better FX.
Analyst for Eric Bosshard - Cleveland Research
Thank you. And then in terms of inventory growth, when should we be expecting inventory to track closer to sales going forward?
Michael D. Mangan
Included in our guidance is significant reductions in our production, double-digit declines in [inaudible] year-on-year, across our HHI and power tools segments. And absent a significant surprise in sales, you should see inventory begin to decline here in the second quarter and continue to decline through the year. So again, inherent in our guidance is the absorption challenges associated with that and as well, we are taking particularly aggressive actions in our HHI business that year-on-year is where that inventory growth has come from. So their financial results for the second quarter will carry the burden of significantly lower production rates.
Analyst for Eric Bosshard - Cleveland Research
Okay, and then one last quick one -- did you mentioned the XRP recall was a little bit less than expected and a benefit here in the first quarter? And how much of a benefit?
Michael D. Mangan
Yes, we did. It may be one of the things that will be helpful to everyone just to make sure we get apples-to-apples here relative to the numbers. If you take a look at our first quarter, as you know, we posted $1.09 EPS. Take out the restructuring charge, or put that aside, if you will, you come to $1.29. [Three pieces of help] in that, first is our guidance. First off, as I talked a little bit earlier, the tax rate was more favorable, so again excluding restructuring, the tax rate was 25.2 versus 27. That added about $0.03. We have had some favorable experience relative to the XRP recall activities. We had put up a reserve of about $20 million, $21 million. Based on activities, we have lowered that reserve by $4 million, so there is a $4 million reserve release during the quarter, so that aided the quarter by about $0.05. And then lastly, we had with some audit activities, determined that in one of our operations, we had some other additional excess reserves in one of our operating units, and that benefited the quarter by about $0.04.
So again, the combination of the reserve actions on XRP and other items, as well as the tax rate benefited the quarter by about $0.12. So if you take the $1.29 less the $0.12 for costs, as we’ve talked about in the press release, non-operating type items in our numbers were about $1.17 for the first quarter. [So as to that] comment in the script that said absent these items, we came in the upper end of our guidance range. Our guidance range, as you may recall, was $1.10 to $1.20 and we performed again at the $1.17 if you were to exclude restructuring as well as those non-operating items.
Analyst for Eric Bosshard - Cleveland Research
Thank you.
Operator
Your next question comes from Sam Darkatsh.
Analyst for Sam Darkatsh - Raymond James
This is Jeff calling in for Sam. I just have two questions for you. First off, your comment that some of your key retailers were pulling in lower orders than you expected. Was that meant to say that they are taking their inventory down just like they have been for the last couple of quarters, or just sort of reflect the slowing environment? Or did you mean maybe that they were surprised by a step-down in this quarter and that maybe there was a one-time reduction in orders also.
Michael D. Mangan
It’s the former. What we saw is that our sell-in was lower than our sell-through. The result of that was that they took their inventory levels down and in some cases in certain channels and certain categories to what I would even call low levels. Overall inventory is in relatively good shape at retail. But they continue, have been and not surprisingly continue to be very cautious given the uncertainty in the economic environment. So certainly part of our challenge in terms of sales in the first quarter again was comparing to an ’07 period where we had sell-through plus inventory build versus this period where we had declines in sell-through in the double-digit range and as well them being cautious and taking inventory out of the system.
Analyst for Sam Darkatsh - Raymond James
And what point do you -- at what point would you expect sell-in and sell-through to start looking more similar?
Michael D. Mangan
I think we are at that point right now. I think if we look at our sell-in and sell-through, I mean, they are reasonably in line. Obviously week to week you get lots of spikes here and there, but I think inventory positions in the channels are in pretty good shape. Obviously the variable there is how does sell-through perform here going forward, which will then impact what our retailer customers do.
Analyst for Sam Darkatsh - Raymond James
Okay, and then my next question is I was hoping you could talk a little bit about where the industry is and where you are specifically in terms of profitability on the lithium ion side, and short of just getting additional volume there, if you’ve been able to improve profitability on that side at all over the last couple of quarters.
Michael D. Mangan
We don’t get into tremendous specifics on product line profitability but we have talked about the past that if you look at our lithium ion products, they are running at lower margins than we are seeing in our historical product. It’s something that I guess in total -- it’s something that potentially shouldn’t be a surprise in that it is obviously a new technology. We’re using a unique chemistry with A123, which we think has some very unique benefits that end users will increasingly come to appreciate. And as a result, we’ve got lower margins.
We are seeing some cost improvements in our batteries. We’ve got a productivity roadmap in conjunction with A123 to be able to drive some additional productivity in those battery economics. So we will see margins in that lithium ion product improve as we go forward here, albeit it’s going to take some time before you see the same kind of economics in a lithium ion battery that you see today in nickel cad, just given the volume differentials.
So generally, it’s moving in the right direction but there is still a significant gap.
Analyst for Sam Darkatsh - Raymond James
And then just last question, I apologize if you talked about this already; share repurchase expectations for the rest of the year?
Michael D. Mangan
We don’t give specific guidance to what we expect. I mean, our guidance, our earnings guidance is based on basically a flat share count going forward at 61.7 million. We will generate significant free cash flow this year and we will put that to work in a combination of share repurchase and acquisitions, specific timing -- don’t have a forecast for you. It’s not included in our earnings guidance.
Analyst for Sam Darkatsh - Raymond James
Okay. Thank you.
Operator
There are no other questions in queue. You may proceed with your closing remarks.
Michael D. Mangan
Thank you very much. Appreciate your interest in Black & Decker. The team here, Mark, Roger and myself will be available through today to answer any additional questions you may have. Thank you very much.
Operator
This concludes today’s conference call. You may now disconnect.
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