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Executives

Mark Rothleitner - VP, IR and Treasurer

Mike Mangan - CFO

Analysts

Nishu Sood - Deutsche Bank

Michael Rehaut - JPMorgan

Ivy Zelman - Zelman and Associates

Sam Darkatsh - Raymond James

Leah Villalobos - Longbow Research

Eric Bosshard - Cleveland Research

Susan Maklari - UBS

Peter Lisnic - Robert W. Baird

Black & Decker Corp. (BDK) Q2 2008 Earnings Call July 25, 2008 10:00 AM ET

Operator

Good morning. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Black & Decker Second Quarter 2008 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session (Operator Instructions)

Thank you. I would now like to turn the call over to Mr. Mark Rothleitner, Vice President, Investor Relations and Treasurer. Please go ahead, sir.

Mark Rothleitner

Thank you, Dennis. Good morning and welcome to Black & Decker's second quarter conference call. On today's call, our Chief Financial Officer, Mike Mangan will discuss our second quarter results and outlook for the remainder of 2008. His comments should take about 15 minutes and then, we will answer your questions.

In keeping with SEC requirements I advise that during this call, we will be making forward-looking statements that involve risks and uncertainties. For a more detailed discussion of the risks and uncertainties that may affect the Black & Decker Corporation, please review the reports we have filed with the SEC including the 8-K filed today.

In addition, we will be referring to non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of the differences between these measures with the most directly comparable financial measures calculated in accordance with GAAP is included on the Corporation's website under the Investor Relations sections.

Now, I will turn it over to Mike.

Mike Mangan

Thanks Mark. This morning, Black & Decker announced earnings per share of $1.58 for the second quarter. We exceeded our guidance of $1.40 to $1.50, as a result of operating performance inline with our estimate and roughly $0.12 of favorability in tax expense. This is a decrease from $1.75 per share in the second quarter of 2007. Given the continuing macroeconomic pressure and commodity inflation, we are pleased with our performance.

Sales decreased 3% to $1.6 billion for the quarter, also inline with our expectation. Our GAAP volume was down 7%, price was negative 1% and foreign exchange contributed 5% to sales.

The US market remains weak for housing related products and deteriorated in the Automotive and Consumer Sectors. Conditions in some Western European markets also weakened this quarter, but our performance in the rest of the world remain strong, especially in Latin America, which had better than 20% growth again in the second quarter.

Operating margin decreased to 8.4% for the quarter. Sequentially, this is slightly better than the first quarter excluding a restructuring charge. Gross margin decreased 190 basis points to 32.7%. The main driver was approximately $35 million of component inflation, which was somewhat better than our forecast. We successfully reduced inventory 4% year-on-year, even with currency adding 4 percentage points. This had a negative effect on our gross margin due to unfavorable fixed cost absorption on lower production volumes.

In addition, we incurred cost for excess inventory which we liquidated or wrote-down during the quarter. SG&A expenses rose 70 basis points, as a percentage of sales, entirely due to negative leverage. SG&A spending decreased despite 4 points of unfavorable currency, as our restructuring and other cost control efforts read through meaningfully.

Free cash flow was $157 million in the quarter versus $163 million last year. We are pleased with this performance, particularly in inventory management, under difficult circumstances. Following negative free cash flow in the first quarter, this brings the year-to-date total to $46 million. We expect solid free cash flow in the second half, and remain on track to convert approximately 100% of net income for the full year.

We repurchased approximately 1 million shares during the quarter, nearly 3 million in the first half, and 7.3 million over the past four quarters. Our approach to share repurchases remains opportunistic and our cost was roughly 7% below the average closing price for the quarter.

As I mentioned, taxes were favorable to our estimate, with an effective rate of 21.1%. This reflects favorable settlements, which occurred in the quarter. As we have discussed, as a result of FIN 48, our quarterly tax rate will be more volatile than in the past. Lower taxes, share count and interest expense all helped reduce the EPS impact of a difficult business environment.

Now I will discuss our individual businesses. Sales in our worldwide Power Tools and Accessories segment decreased 10% year-on-year. This was the same as in the first quarter with similar trends for most key parts of the business.

In the US Industrial Products Group, sales decreased double-digits reflecting lower demand across all key categories and channels. In addition to the weaken construction environment, we continue to face cautious inventory management by our customers.

Sell-through at the home centers was down approximately 7%, which was an improvement from the first quarter and less severe than the decline in orders. Going forward, we expect a net benefit from product listing changes due to gains at key customer.

In the US Consumer Products Group, sales decreased by more than 25% for the quarter. As we discussed last quarter, this business has been effected by reduced pressure washer listings and transition from the Firestorm sub-brand to Porter-Cable These two changes accounted for over half of the Group's sales decline this quarter.

Sales of outdoor products also decreased, following a large load-in during the first quarter, but were nearly flat year-to-date. Excluding pressure washer, sell-through at the home centers decreased mid-single-digits. As in the industrial business, this represents an improvement from the first quarter driven by outdoor products.

In total, we expect a less severe sales decline in the second half for the consumer group, as we get past the peak season for pressure washers and begin shipping the new Porter-Cable line.

In Europe, sales declined mid-single-digits for the quarter. Credit tightening and slow residential construction costs, sales pressure in the UK, Southern Europe and Scandinavia. Customers in these countries were also reducing inventories in anticipation of further weakness. This directly affected the industrial market, but the consumer business also slowed during the quarter.

Eastern Europe and Middle East continued to contribute solid growth, but not enough to offset the trend in Western Europe. Our Latin America business continued its impressive sales growth, exceeding 20% again this quarter. All key product lines grew double-digits, of that each key region. In Asia, sales continued to grow, including a double-digit increase in China.

Return on sales for the Power Tools and Accessories business decreased this quarter to 7.9%, roughly three quarters of the decline was in gross margin, due to component inflation, pricing, cost absorption and inventory write-downs. SG&A spending was down a solid 5%, but not enough to match the decrease in sales.

In our Hardware and Home Improvement segment sales decreased 5%. While the housing downturn continued to affect this business, results were significantly better than in the first quarter.

Sales for the Kwikset and Weiser Lock business in the US declined at a mid-single-digit rate. The new construction channel continued to drive the decrease with more than a 25% decline.

At retail, sales increased this quarter, reflecting the continued success of SmartKey and favorable order timing. The Price Pfister faucet business posted a low single-digit sales decrease, in contrast to a decline in the teens last quarter. As with the core lockset business, the new construction channel was down significantly, but we grew at retail as we started to see benefits of recent line reviews. This should continue to offset much of the residential construction weakness in the second half.

Operating margin, for the Hardware and Home Improvement segment decreased year-on-year to 9.3%. Most of the decline, this quarter, was in gross margin against our best quarterly margin in 2007.

HHI has reduced inventory roughly $30 million or 13% since year-end and, therefore, faced negative cost absorption. Other productivity improvements, however, continue to offset commodity inflation.

In the faucet business, cost of store resets pressured margins again this quarter. SG&A percentage increased due to lower sales, but actual spending was down. It's also notable that operating margin in this segment improved sequentially from the first quarter due to better volume.

In the Fastening and Assembly Systems segment, sales were essentially flat. This is our most global segment and we continue to post solid gains in Europe and Asia. We believe our market share is rising as our automotive division sales have gone faster than automotive production in these regions.

In North America, however, sales fell double-digits primarily due to the severe decline in domestic automotive production. Operating margin for the Fastening segment increased 20 basis points to 16% for the quarter, as we continued to manage cost carefully.

Now let me discuss the outlook for the rest of 2008. The macro-environment in the US remains very weak especially for our sectors. This has not changed meaningfully since we gave guidance in April. In Europe, it is becoming clear that a construction downturn in some countries will affect us in the second half and we now anticipate a sales decline for the year.

While some of the pressures in the US consumer business eased somewhat in the second half, we face a tough third quarter comparison for Kwikset due to the SmartKey launch. Our key new product launches for the second half remain on track and should help mitigate the impact of the economy.

The new line of Porter-Cable tools, including a competitively priced Lithium Ion drill will start shipping in the third quarter. We are excited about this new line and expect it will be well-received by light contractors and high-end do-it-yourselfers.

Under the Black & Decker brand, we will expand the SmartSelect and AUTO SELECT lines in the US and Europe. DeWalt will be introducing a number of key corded SKUs in the fourth quarter and has continued to expand the 18-Volt franchise with products such as a Cut-Off tool and heavy-duty work lights. And HHI, Price Pfister is expanding its lavatory offerings with a body spray shower system and a high-efficiency trough faucet.

In total, we continue to expect a mid-to-high single-digit organic sales decline for the third quarter and full year. If exchange rates remain favorable, this would result in a low-to-mid single-digit decrease in reported sales.

On the cost side, steel and resin prices have risen sharply since our call in April. As we have discussed in the past, most of our commodity exposure is in purchased components, which reduces and delays any impact on our margins.

Our forecasts for year-on-year inflation have increased by $10 million to $145 million for the year. Therefore, we now expect full year operating margins of 8% to 8.5%, excluding the first quarter of restructuring charge.

In addition, our full year net interest expense forecast is anticipated to be around $65 million. Our estimate includes an assumption of 26% tax rate for the year, reflecting favorability in the first half.

We expect a diluted share count of approximately 60.5 million shares in the third quarter and 61 million shares for the full year. In total, we expect diluted EPS in the range $1.30 to $1.40 for the third quarter and $5.25 to $5.45 for the full year. This full year range excludes the $0.20 restructuring charge we took in the first quarter.

In summary, Black & Decker continues to weather a very difficult environment. A few points, first our operating performance met our expectations, again this quarter. Second, the Latin America business continued its outstanding growth trend. Further product development remains a key competitive advantage and we are excited about the Porter-Cable line and other products launching this fall.

We continue to execute cost reduction plans and decreased SG&A spending. We generated strong free cash flow of $157 million for the quarter. And remain on track for 100% full-year conversion. We reduced inventory significantly with the year-on-year change inline with sales. We repurchased stock at attractive prices and continued evaluating potential acquisitions with a disciplined approach.

And finally, after nearly $500 million of commodity inflation over the last five years and a severe residential contraction, we remain solidly profitable with the strong balance sheet.

Our management team is the strongest in the industry, and has the experience to get us through this downturn in a strong position. We remain confident that we can execute our strategy effectively to drive growth and shareholder value, when our markets recover.

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

Question-and-Answer Session

Operator

(Operator Instructions)

And your first question will come from the line of Nishu Sood with Deutsche Bank.

Nishu Sood - Deutsche Bank

Thanks, good morning, guys.

Mark Rothleitner

Good morning.

Mike Mangan

Good morning.

Nishu Sood - Deutsche Bank

I wanted to ask you about your margin trajectory. Obviously with the forecast you headed back to, or maybe even below the lows you saw in 2001. Now, obviously, the environment is pretty different, much more severe, sales declines, much more substantial commodity cost inflation.

Last time around, you obviously had a fairly dramatic response with the restructuring and recasting your manufacturing footprint. My question was, is there potential for an encore? I am not saying exactly the same thing. Obviously you can't recast your manufacturing footprint twice, but are you considering dramatic actions of any sort or to respond to what has happened? Or is it the case that you're pleased with your positioning and it’s simply a matter of weathering the storm?

Mike Mangan

I guess somewhere in between the issue, I guess it will be the best way to put it. Certainly, we do not have on tap or considering a major restructuring plan to address our cost structure because can only think our cost structure is second to none in our industry; however, we'll continue to take action.

You saw a relatively modest restructuring plan announced in the fourth quarter with a $20 million charge. We took some actions to consolidate some operations and take out headcount.

Followed that on with some more significant actions in the first quarter, closed two plants, our UK facility as well as the Decatur facility that was manufacturing pressure washers; announced a significant headcount reduction as well as a restructuring of the management structure of Power Tools business.

Those actions will throw-off a $20 million of savings this year and incremental $20 million again next year. That really is just now going to begin to find its way to the P&L back, the savings are very much backend loaded here for 2008.

As we look forward, we will continue to take actions if appropriate, given another selling environment and in the cost environment. Maybe one of the notes for here is since year-end; we have reduced headcount in the corporation by 10%. We came into this year with 25,000 employees. We're now at 22,500. So, we've taken by many measures, significant actions. We'll continue to take actions if necessary, but we don't have on the drawing board, if you will, a one big restructuring plan as you would have saw back in the 2001 timeframe.

Nishu Sood - Deutsche Bank

How about your portfolio of businesses? As you're facing this environment, where we could see depressed demand in a number of end-markets for several years, perhaps, might want to assume that commodity inflation persists at these high levels or even worsens, has your perception of the attractiveness of any of your businesses changed because of this? Or are you pretty happy with the mix of businesses that you have right now?

Mike Mangan

Mix of businesses and the segments that we're in today, we very much like and continue to plan to be in all three segments going forward. We've made significant progress in the last five years and globalizing our businesses. Some of the benefits that we've seen in our Power Tools businesses have gone through this slowdown.

Going forward, with our product roads and our investment in people has really been directed outside the US to be able to continue to capitalize on the opportunities there. So, you'll seethe business change and that will becoming a much more global company. But in terms of the categories and areas where we participate in, we very much like where we are today.

Nishu Sood - Deutsche Bank

Just one other quick question on the Firestorm to Porter-Cable transition. In last quarter, it was just in one retailer, Lowe's I believe. How is that going to be rolling out across the rest of the year? What was the staging of that as you roll that out more fully?

Mike Mangan

Yes, it is rolling out later here in the third quarter. About 17-plus SKUs has been rolled out, portfolio of corded and cordless Nickel Cad as well as Lithium Ion products. From a retail standpoint, the product will only be in Lowe's. We will have broader exposure globally as well at other channels. But in terms of a retail presence, it will be just at Lowe's.

Nishu Sood - Deutsche Bank

Okay. Thanks a lot.

Operator

Your next question will come from the line of Michael Rehaut with JPMorgan.

Michael Rehaut - JPMorgan

Good morning.

Mike Mangan

Good morning, Mike?

Michael Rehaut - JPMorgan

How are you, Mike?

Mike Mangan

Good, thanks.

Michael Rehaut - JPMorgan

The first thing you mentioned in the raw materials, other companies have raised their raw material impact a bit more than you have. Any comment to that, in part it was due to other components reducing and delaying the impact from the higher commodity costs we've seen. Do you have any sense of this 145 for this year, what that might be in terms of a rollover effect into '09?

Mike Mangan

Don't have a number for you at this point, Mike. Once we get closer to yearend, we'll start giving guidance into '09. But given the pressures that we've seen here in 2008, it’s reasonable to expect, we will have some incremental inflation rolling into '09. Orders of magnitude, I think, is less than the 145, but I don't have a number for you at this point.

And given where we are, in the cycle as we get to in-and-around next year, inflation comes through, primarily our component contract. So, feel pretty good that the 145 is a pretty good number for the year. I would not expect that to change markedly absent some huge change in commodity prices.

Michael Rehaut - JPMorgan

Okay. And, I guess just on that in terms of the supply chain management, which you've done a great job. How do you say your thinking is in terms of, maybe moving even out of some of the areas that you're in right now in Asia in terms of the manufacturing into even further lower cross countries be it, Vietnam or Eastern Europe or other opportunities that you might be looking at? Or is it do you see those types of moves as, like you've said before, just singles and doubles instead of home runs in terms of order of magnitude?

Mike Mangan

In large part, our three centers are manufacturing in Asia and China and Mexico and Czech Republic, I think, position us pretty well. We're exploring other areas of the world. I am sure you have heard a lot talk about places like India and Vietnam and we're exploring opportunities there. Do not expect a wholesale change in our manufacturing footprint.

But over time, you could see some movement. When you get into things like infrastructure and quality of workforce and what not, we still see, today, China being the most cost effective place on the globe to manufacture things like Power Tools. That could evolve over time into some of those other markets. We're watching those and exploring those carefully, but at this time, we are not expecting any wholesale change in our manufacturing footprint.

Michael Rehaut - JPMorgan

Okay. One last question, if I could? And I'm sorry if you hit on this earlier. I was late on getting on the call. But could you address what you're seeing right now in Europe and in terms of the quarter and what you've baked since your guidance in terms of back half outlook for European performance?

Mike Mangan

Europe, as I mentioned, in the remarks, has slowed. We mentioned some of that on the first quarter. I think actually, there after question on the last conference call about what I worried about.

And as I mentioned the time I worried about the economic environment in Europe. What we saw were some, double-digit declines in our sales and markets like the UK and Nordic and Iberia, again markets that were very much driven historically by strength in housing and you are seeing some of that pull back.

Eastern European markets, Middle Eastern markets, again very, very strong, double digit positive growth. Central European markets like Germany and France, relatively flat performance. So, depends on where you are, which is driving overall results. As we are about to the year now, where we would have expected potentially some growth in Europe during 2008, we're now expecting our sales for the year will be down.

Given some those weakness we're seeing in some of those markets that I just mentioned. And as we get into the back half, sales will be in and around flattish year-on-year, based on some new product introductions, as well as some promotional activities that we have planned in our European business.

So, again, while we were seeing, obviously, some mid single-digit growth, I believe, last year in a lot of these markets, this year overall, it will be down low single-digits back half, based on comparisons in some products and promotional initiatives, in-and-around flattish.

Michael Rehaut - JPMorgan

Okay, great. Thanks Mike.

Operator

Your next question will come from the line of Ivy Zelman with Zelman and Associates.

Ivy Zelman - Zelman and Associates

Good morning, everybody. Mike, with respect to the business, obviously there is a lot of uncertainty and one of the things I think people really can't get their arms around, is how much of earnings erosion could you have in worst case scenarios and realizing that the back half of the year you are assuming gets better.

If you took the play devil's advocate and assume it didn't get better and the economy just continue to spiral downward. Can you help with us some sensitivities on, maybe, what the down side?

Is there a possibility in your mind that you could see the company in any way not make money? I mean, is that even a feasible possibility and, maybe, if you help frame your bear case in the worst circumstances that you can ever imagine, what that would look like for the company? I think that would really help people, because certainly looking at sharp earnings, where you would be trading right now, would be clearly a very significant upside, just on valuation.

Mike Mangan

I guess from a management speculation here, I feel in many ways, but in going through a worst case scenario, as we look at our performance here in 2008 The one of your questions, do I see any reasonable scenario, where we do not make money and the answer, that is no.

I do not see us not making money in the back half in the third or the fourth quarter, any reasonable scenario to the company. We're not expecting markets to get better in the back half. If you look at the components that we sell into, like housing, we're not expecting to get better, we are not looking for the consumer to strengthen, and we’re not looking for the repair market to get better. In fact, we're expecting all of those markets to continue to be down.

If you look at international, in contrast to discussions earlier this year, we're expecting that market to be flat to down. And when I say flat to down meaning some mix of our overall businesses. Europe is under some pressure but certainly other markets like Latin America and Asia continue to generate very, very solid growth for us.

On the industrial-commercial side, the commercial construction market certainly is not getting any better, its trending negatively, that's factored into our forecast and obviously, with the Fastening business, we're looking at some pretty tough scenarios here relative to automotive production.

So, when we factor all of that together, this quarter versus a quarter ago, actual outlook for the overall end markets it actually weakened a little bit. Having said that, we've got a very strong product growth that's rolling out for the back half. We've got promotional activities slated with a number of customers that we feel good about.

So, we think as we look to the back half, these are obviously very good and reasonable numbers and setting the expectation. Could it be worse? Sure. Could it be better and could be as well.

So, we're copying off of, as you may recall some pretty weak numbers back to 2007. In particular the fourth quarter of 2007 it was a worst case scenario it may just (inaudible) for book with some challenges in markets as well as we had a recall built into our number there as well.

Again look at the 525 to 545, I mean I think that’s a very realistic range based on a very cautious outlook for the back half of the year.

Ivy Zelman - Zelman and Associates

I guess to follow-up on Mike's comment or Nishu I think who asked about margins that being below where they were in the last downturn. One of the concerns would be if I told you that housing starts to go down another 20% to 25% and the consumer would weaken significantly further.

Can you see a floor in margins because of your efficiencies and productivity and all the efforts that you had to keep around on the cost side, if demand were to substantially fall further from here? And I think, you had talked about at one point that you thought margins were at worst case would be around these levels you're at today, under any circumstances.

I'm just trying to get a sense from you, if you take it down another leg, which is definitely our outlook, we think we're going to have another leg down, not status quo, but significantly lower, can you frame for us what kind of margin pressure and bear any scenario you might experience?

Mike Mangan

I can't give you a number there. I mean obviously it will be a function of what that environment looks like if they gets weaker, will put pressure on our margins. It's realistic to assume that pricing, obviously, would be a key component of that as well as what happens with commodities. I'm sure you can develop a better scenario where and we go into depression or something very deep recession, where housing continues to weaken and commodities go to the moon and we never get price. That would impact our margins.

Having said that, any kind of realistic scenario for an outlook, I think operating in and around this, low8 margins is a realistic expectation for you, where you should expect us to perform. Could we drop the rate or that certainly is possible? I would not at this point call that probable.

Ivy Zelman - Zelman and Associates

Great, thanks, Mike. Appreciate it.

Operator

Your next question will come from the line of Sam Darkatsh with Raymond James.

Sam Darkatsh - Raymond James

Good morning, Mike. Good morning, Mark. How are you?

Mark Rothleitner

Fine, thank you.

Mike Mangan

Good morning, Sam

Sam Darkatsh - Raymond James

Couple quick questions, first off, this maybe my own error in terms of my notes, but on your corporate adjustments eliminations line in the segment reporting, I thought, perhaps, that your original expectations were for that line to be about $80 million or $85 million dollars outside of translation adjustments for the year and it looks like for the first half, you are running fairly well below that. Is there something structurally different or some way we should be looking at that line on a go-forward basis? Or is there a catch-up in the second half?

Mike Mangan

I think we had guided you in the first quarter Sam, around $70 million, I would tell you today $65 million to $70 million is the right number to think about. That's slightly better than what we talked about in the first quarter, but not dramatically different. That 80 number is, I'm not sure where that came from.

If you look to the first half here, about $70 million in both of the quarters, I mean that's a pretty good run rate to think about The one structural change year-on-year and why that number is lower than 2007 is we have lower pension expense.

So, that's a $20 million-plus favorability year-on-year, absence some other increases. Again then, including some productivity, lower cost that we've generated in corporate with headcount reductions and other cost control initiatives places in the $65 million to $70 million range for 2008.

And I would again think about it, $70 million per quarter. So, I look for 17 third quarter, 17 fourth quarter. Now that’s fourth quarter number will be, I guess, down from the number because it included a one-time environmental charge, if you take that environmental charge out, then it would be up from that fourth quarter number.

Sam Darkatsh - Raymond James

Got you. Second question, this is more strategic, I guess. What your thoughts, Mike, about where you are with Lithium Ion? Both with the Nano and the overall assortment vis-à-vis NiCad and are you looking to, perhaps, back off LI until maybe a next-gen comes around next year?

I know you had that drill it’s going to be released in the third quarter. But generally speaking, what are your thoughts competitively, about LI and Black & Decker's competitive positioning thereabouts?

Mike Mangan

Continue to see Lithium Ion being a part of the market, certainly probably outside the US, a bigger part than inside the US I guess maybe just to clear a few points there. First off, if you look at Lithium Ion overall, if you look at our positioning in premium drills overall, including Nickel Cad and Lithium Ion, we actually have done very well and certainly have maintained our position.

I guess the one thing that gets noticed by folks, and again you need to segment Lithium Ion like you need to segment all Power Tool and cordless markets. In the compact Lithium Ion market, one of our competitors, as I am sure now Makita has had a drill that has been pretty successful.

That's the one place in the Lithium Ion range where we've not been as successful as we'd like. Near-term, that will be addressed with some marketing and promotional activities over the longer-term, near-term it will be addressed with a product offering.

So, going forward, Lithium Ion continues to be a critical part of our portfolio, a critical part of our overall strategy to address the cordless market. We continue to have very strong market shares when you look at the premium drills, including both Nickel Cad and Lithium Ion. We would expect that to continue. You'll continue to see product rollouts, particularly as we get into 2009 to further strengthen that overall portfolio. And it will continue to be a meaningful part of your business.

Sam Darkatsh - Raymond James

Last question, expected pricing in the second half down 1% in the second quarter on the one hand you had competitive pressures, on the other hand you have raw material inflation. Do you anticipate in the third and fourth quarter pricing to continue to be down that 1% to 2% range? Or how would that deviate from current levels?

Mike Mangan

I have two comments. First off, inherent in our guidance is that our pricing for the year will be flat. So, that would imply there is still a little bit of positive price in the back half. At that point, in the back half, across both our HHI and Power Tool businesses and across the segments within that, we're rolling out. Some have already been rolled out across portfolios and across channels.

Price increases in the back half. Some of those have been done. Some of those are yet to come. And we're in the middle of negotiations with a number of our customers regarding the timing and scope of those price increases. So, we're expecting positive price for the back half. We have modeled that relatively conservatively. Again, we're in discussions.

So, I'm not going to get into specifics about by channel, by product line and specific amounts. But we are getting and going after price.

Sam Darkatsh - Raymond James

Do you consider mix part of price or part of volume?

Mike Mangan

I guess mix is mix. Mix would be different than price.

Sam Darkatsh - Raymond James

Okay. So, mix will be included within, when you are citing volume versus price versus FX, mix is included within the volume of category?

Mike Mangan

I mean, if we go down to break down to categories, sometimes we actually isolate mix. But generally, if it's not isolated, yes, it would in volume. It would not be in a discussion around price. We do not benefit our price calculations for mixing up. Our price calculation is like-for-like product year-on-year.

So, product X sold for $10 last year and $11 this year. That's $1 positive price. If we change that product, we discontinue the product from last year, with a new product this year, and even if those prices go up, that is not included in the price calculations. So, it’s like-for-like, year-on-year.

Sam Darkatsh - Raymond James

Very helpful, thank you, gentlemen.

Operator

Your next question will come from the line of David MacGregor with Longbow Research.

Mike Mangan

Hi. Good morning, David.

Leah Villalobos - Longbow Research

Good morning. This is Leah Villalobos in for David. Just a quick question about your promotional spending. How is that comparing year-over-year?

Mike Mangan

Overall promotional spending during the second quarter in Power Tools business, an example, was down, year-on-year, down significantly, and our consumer business, up a touch, and our industrial business. So, the combination of those two was down year-on-year

Leah Villalobos - Longbow Research

Okay. And what are your expectations for the remainder of the year?

Mike Mangan

Promotional probably in-and-around flat, I don't have those specific numbers in terms of the breakout of our forecast. But we do have some increased promotions plans for back half. So, flat to maybe a bit down year-on-year.

Leah Villalobos - Longbow Research

Terrific, thank you.

Operator

Your next question will come from the line of Eric Bosshard with Cleveland Research.

Mike Mangan

Good morning, Eric.

Eric Bosshard - Cleveland Research

Good morning. A couple of things. First of all, the pricing efforts, how is that going in an environment where we have seen some deflation? How are the competitors behaving and the retailers responding to your efforts to put through price?

Mike Mangan

Some have been completed; now retailer likes to accept the price an increase, given what's going on in the cost environment, understand the need for that. We have some specific evidence of our competitors increasing price, when you get into certain channels, a lot of that communication goes via letter and we've actually seen some of those letters go out from some of our competitors increasing price, when you get into big-box environment those are one-on-one discussions with the client.

So, while we had some anecdotal evidence, noise, that the price increases are being requested, across our competitors, don't have specific evidence of that happening. And again, a number of these are in various stages with across all channels. There have been discussions in across all channels. There have been certain product categories acceptances. So, we're getting in across against portfolios and channels.

Eric Bosshard - Cleveland Research

Secondly, can you talk a little bit about the share situation in Power Tools? It sounds like at least on the industrial side and perhaps on the consumer side there are some expectations of share progress in the second half of the year.

It sounds like from a Nano or Lithium standpoint that the traction has been okay to this point from your offering and you've got some, perhaps some exciting corded tools coming out. Can you talk about why you think the share gets better in the back half of the year, if that indeed is the assumption?

Mike Mangan

This year, I think we have mentioned before, we add a key customer here; we did pick up some significant listings. I speak to it, because I think everyone knows, it’s Lowe's obviously with the Makita and Milwaukee exclusives with Home Depot, they have exited Lowe's and we've picked up a number of SKUs on the DeWalt side in response of that.

We saw a bit of that benefit in the second quarter of that will be further as we go into the third and fourth quarter. And we do have a number of other new products. I mentioned a couple in the script, but a number of new products coming out. So, when you say share, tend to think about that a little bit differently but certainly we have listing increases going on that will benefit our back half as far as comparability and favorability as well. That will aid the second half as well..

Eric Bosshard - Cleveland Research

And then lastly, you talked about growth in Latin America. How big is the Latin American business?

Mike Mangan

That business is orders of magnitude. I am trying to grab a number here, one second. Okay. So, Why let me just [sort for] that number? I'm looking through a stack of paper here and rather than hold everyone up here. We'll circle back with you in terms of order of magnitude.

Eric Bosshard - Cleveland Research

Okay, perfect. Thank you.

Operator

Your next question will come from the line of Susan Maklari with UBS.

Susan Maklari - UBS

Good morning.

Mike Mangan

Good morning.

Susan Maklari - UBS

Despite the pullback in the stock this quarter and the stronger cash flow that you saw, your share repurchase slowed relative to the first quarter level. Can you just comment on how you're thinking about that? And maybe how we should be thinking about future share repurchase?

Mike Mangan

Our policy is opportunistic so if we take look at our market and make judgments about when to buy. Again we bought 3 million shares year-to-date, so orders of magnitude gets that was about 5% of our outstanding. So, we think we've been very active.

We will continue to consider that as a use of our cash here in the back half, along with acquisitions. So, in terms of specific guidance, I can't tell you or predict very exactly what we'll do other than we do have some constraints, which is to make sure we maintain a solid balance sheet.

From a policy standpoint we want to remain solid investment grade and maintain our current ratings which would put some limitations on our ability to buy back stock. But within the investment grade rating, meaning if we were to get downgraded, we'd have significant capacity. In any event it's a opportunistic play and we will make decisions as we go through the quarter.

Susan Maklari - UBS

Okay. And then you noted that you continued to look at acquisition opportunities that come up. Can you give us any updates there is in terms of are you seeing any increased activity? Or any changes in the overall deal flows that you're seeing?

Mike Mangan

Certainly, the competitive environment for acquisitions has changed with what's going on with financing availability. So, as a strategic buyer, we're in a much better position. Prices, I wouldn't say, have changed dramatically. Even the multiples come in a bit in some of the businesses that we're looking at are in sectors that have actually continued to perform pretty well.

So, got a handful of deals that we are looking at. A couple that are well-along the way. Always predicting if they get to the finish line is difficult. But we do have a couple of small, smaller, bolt-on type acquisitions that we're excited about and are well-along in the process so, hopefully, we will bring those to the finish line yet in 2008.

Susan Maklari - UBS

Okay. And then, just one follow-up there. You had always recently guided us to more smaller bolt-on kind of deals. As the deal environment changes, though, is there any thoughts or maybe you would do something that’s a bit larger again?

Mike Mangan

Certainly a possibility. I mean, ideally, if we could do acquisitions in the $200 million to $500 million side we would consider that ideal. Realistically, in terms of near-term, don't have much of a long list of deals that would fit that category. So, I think you should continue to primarily think of us as a bolt-on player doing deals from lets call 20 to 250 it’s probably the more likelihood, then, say 250 to 500.

Susan Maklari - UBS

Okay. Thank you.

Operator

Your next question will come from the line of Peter Lisnic with Robert W. Baird.

Peter Lisnic - Robert W. Baird

Good morning, everyone. Mike, I thought I heard you right. Were there inventory write-downs in the Power Tool segment in the quarter?

Mike Mangan

Yes, there were. We talked about it in the prepared remarks. One of the impacts on our second quarter margin were some actions that we took to write-down our inventory.

Peter Lisnic - Robert W. Baird

All right, I'm sorry, I missed those. Was there a number provided?

Mike Mangan

No, I didn't. But it impacted the quarter, orders of magnitude, about plus $12 million. Some of that being of excess write-downs and as well we took some actions on some [DPX] inventories that impacted the quarter as well.

Peter Lisnic - Robert W. Baird

Okay. And then, if you just look at the intangibles on the balance sheet, any concerns that we might have to suffer through some write-downs given how the end-markets are at this point on the intangible side?

Mike Mangan

Obviously, we test that or consider that every quarter and go through a very formal testing process every year. And we think from a goodwill stand point, our intangibles are in right shape.

Peter Lisnic - Robert W. Baird

Alright. And if I look at the inflation hit that you took in the quarter, its $35 million, if I remember right, the number in the first quarter was $55 million. So, it looks like it’s ramped down and maybe back half implication is some ramping down? I assume that just you being able to offset the increased cost with price. Is that the right way of think about things?

Mike Mangan

That inflation number is incremental inflation and incremental cost side. So, again it gets into timing of contract roles and how much you're carrying. And so, to your point, we have 55 in the first quarter; announced 35 here; 145 for the year.

The third quarter will probably be not unlike the second quarter in terms of amount. And then anniversary a lot of these historical increases the fourth quarter, from an incremental standpoint should be as best, let's call, in and around the $20 million to $25 million dollar range.

Peter Lisnic - Robert W. Baird

Okay, great. That’s it from me. Thank you very much.

Operator

Your next question will come from the line of Michael [Sheridan] with Cobalt.

Michael Sheridan - Cobalt

Good morning. Thanks for taking my call, gentlemen. I have two questions. I listened to one of your domestic competitors with kind of the same footprint that you guys have regionally. And I think that what you guys are saying strikes me is much more of what I would expect to hear from companies.

And I wonder, is there some difference between, I’d think that the markets in Europe that you're working in are fairly driver by the same monetary economic trends, demand trends, broadly speaking. Do you have any thoughts on the widely-diverse views on Europe, both residential and commercial construction, going forward? And activity and demand?

Mike Mangan

I'm not sure how widely-diverted the views are. I guess the only thing I could, maybe, potentially offer and not knowing exactly what you're talking about? I mean Europe is…

Michael Sheridan - Cobalt

Well, I could tell you, Stanley Works sounded more upbeat and maybe I don't understand the businesses because I'm new to the Group, to covering the Group.

Mike Mangan

And again to define Europe, the very, very broad term.

Michael Sheridan - Cobalt

Right of course.

Mike Mangan

And folks…

Michael Sheridan - Cobalt

But it all has tight money in my mind.

Mike Mangan

Well, the UK, some people consider that to be Europe; some people do not consider that to be Europe.

Michael Sheridan - Cobalt

Well, yes.

Mike Mangan

The UK and I am not trying to be all the technical.

Michael Sheridan - Cobalt

No. I understand.

Mike Mangan

UK market has been a market that had some very robust growth. It was driven by housing and housing it taken a hit there. So, that is pulled back, places like Iberia, again very much affected by housing growth that pulled back.

Other driven more Central Europe markets like, Germany, Benelux, France, actually we have seen reasonable performance in those businesses. Stanley is an example I know did an acquisition a couple years ago, which is centered in France.

So, again, I don't know, how diverse their product and sales are, but France has been a market at least from our position as well has been doing okay.

Michael Sheridan - Cobalt

Okay.

Mike Mangan

It hasn't seen a pull back up. There are more centered around a French and Central European sales environment, they maybe seeing some better dynamics, than you'd see in the UK or Southern Europe. Because the places like Eastern Europe continued to grow very, very strongly.

Michael Sheridan - Cobalt

Unless you look at hungry, which is not really growing, but thank you, your answer was helpful. And one another question just in the region if you talk about, I believe you talked about European retailers as well bringing inventories down and would that be at the distributor level as well?

Mike Mangan

Well, I guess the comment that we made is that given some of the slowdown that we've seen in some of those markets. We don't think our results were impacted per se by people often talk about inventory corrections, where we saw retailers take massive actions here to reduce inventory.

Obviously given the economic environment and the slowing that they're seeing, obviously, we are seeing, some retailers take action to bring down and tighten up the inventory positions given the current state as well as some of the projections for weaker environment.

Michael Sheridan - Cobalt

So on a sequentially basis quarter-over-quarter it wouldn't be normal to think at receivables should have grown, should they Q1 to Q2? Like for you guys from that particular type of end market?

I mean I think receivables should have come down; right? If inventories are coming down and sales are going through?

Mike Mangan

We got a couple of dynamics going on there. One is we've got seasonality in our business, where sales are significantly higher in the second quarter than the first quarter.

Michael Sheridan - Cobalt

Okay.

Mike Mangan

Year-on-year they're down. So, you got to watch your comparisons there.

Michael Sheridan - Cobalt

Yes.

Mike Mangan

Like that we have got some depending on where those sales are, in general, outside, it's a general statement outside of North America, you will see longer terms than you would see within North America.

So, on average in terms in Europe and Latin America are a higher number of days and you see generally in North America.

And then thirdly, if you gets into the nuts and bolts, with the timing of sales within the quarter. So, sales don't always slow evenly within the quarter. So, year-on-year or quarter-on-quarter, depending on the sales are more front loaded in the quarter or back loaded in the quarter can impact receivables as well. I mean our day sales outstanding went up a few days year-on-year.

Michael Sheridan - Cobalt

Okay.

Mike Mangan

It can be significant part of that has to do with mix. Again the day sales thing is because of the relative strength of outside of North America versus inside of North America and as well there is a technical issue relative to a number of our European customers pay on the last day of the month.

This year our quarter for the second quarter ended on June 29th. So, our quarter-ended before the calendar quarter ended. So, I'm sure we saw some significant cash inflows on June 30th, but that have no part on this quarter.

Michael Sheridan - Cobalt

For you guys do you happen to know what that cash delta would have been, as you rolled forward to June 30th? Just in dollars, just for my own verification?

Mike Mangan

That’s not in my company and so.

Michael Sheridan - Cobalt

Okay. I'm sorry, one last question. And then, I’m sorry it’s escaped my mind. Your answers have been very helpful. I'll bother you with the question that I've forgotten another time. Thanks for your help.

Operator

And at this time, there are no further questions. You may continue with any closing marks.

Mike Mangan

Thank you very much, Mark, Roger and myself, the team will be available this afternoon to follow-up on any additional questions. Again we appreciate your interest and support in Black & Decker.

Operator

Ladies and gentlemen, this does conclude the Black & Decker second quarter 2008 Earnings Call. You may now disconnect.

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Source: Black & Decker Corp. Q2 2008 Earnings Call Transcript
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