Black & Decker Q4 2009 Earnings Call Transcript

123jump.com Staff
06 Feb, 2010
New York City

Sales fell 7% to $1.3 billion and net income fell 22.4% to $33.9 million or 55 cents per diluted share. Operating margin excluding merger costs fell only 110 basis points, a smaller drop than in 2008. Operating margin for the Hardware and Home Improvement segment was 11.5%.

Black & Decker Corporation ((BDK))
Q4 2009 Earnings Call Transcript
February 3, 2010 10:30 a.m., ET

Executives

Mark M. Rothleitner – Vice President - Investor Relations and Treasurer
Nolan D. Archibald – Chairman, President and Chief Executive Officer
Stephen F. Reeves – Senior Vice President and Chief Financial Officer

Analysts

Kenneth Zener - Macquarie Research
Daniel Oppenheim - Credit Suisse
Matt Landon - Barclays Capital
Susan – UBS
David MacGregor - Longbow Research
Michael Rehaut - J.P. Morgan
Sam Darkatsh - Raymond James
Eric Bosshard - Cleveland Research
Josh Chan - Robert W. Baird

Presentation

Operator

Good morning. My name is Ashlee [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the Black & Decker Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

If you would like to ask a question during this time, simply press star then the number on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn today’s conference over to Mark Rothleitner, Vice President Investor Relations and Treasurer. Sir, you may begin your conference.

Mark M. Rothleitner

Thank you, Ashley. Good morning and welcome to Black & Decker’s fourth quarter conference call. On today’s call, our Chief Executive Officer, Nolan Archibald and our Chief Financial Officer, Steve Reeves will discuss our fourth quarter and full year results and outlook for 2010. Their comments should take about 20 minutes and then we’ll answer your questions. In keeping with SEC requirements, I advise that during this call we will be making forward-looking statements that involve risks and uncertainties. For a more detailed discussion of the risks and uncertainties that may affect the Black & Decker Corporation, please review the reports we filed with the SEC, including the 8-K filed today.

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

Now, I’ll turn it over to Nolan.

Nolan D. Archibald

Thanks, Mark. This morning, Black & Decker announced very positive results for the fourth quarter. While the results are down from our peak, I am proud of what our team achieved in 2009 in very difficult market conditions. A year ago, we were in the midst of a global credit crisis that decimated our key markets.

We took aggressive steps to protect our liquidity, reduce our costs and revitalize key product lines. As a result, we delivered far better earnings and cash flow in 2009 than we anticipated.

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

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

Over half of this outperformance related to sales volume, which was significantly better than we had expected. We’ll talk more about the drivers shortly. For the full year, diluted earnings per share were $2.17 or $3.01 excluding restructuring charges and merger-related expenses. We addressed the economic environment by taking aggressive cost reductions, yet continuing to launch and promote new products. This enabled us to deliver adjusted EPS well above the guidance we gave at the beginning of the year.

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

For the full year, sales declined 22% including 20% lower volume, 1% positive price and 3% unfavorable currency. While all areas of the company were down, the hardest hit businesses were the Fastening segment and our Tools businesses in Europe and North America. Despite this tremendous top line pressure, our operating margin excluding merger costs fell only 110 basis points, a smaller drop than in 2008.

Gross margin actually improved and we cut over $250 million of SG&A. Net cash generation was outstanding this year at $584 million. This was among the highest in company history and dramatically exceeded our goals. Facing the credit crisis early in the year, we challenged our businesses to reduce working capital and limit capital expenditures.

They delivered nearly $300 million of cash flow from working capital, primarily inventory. And we met all of our key new product launch commitments while reducing capital spending by $36 million. This cash generation, with some help from option exercise proceeds, resulted in net debt below $650 million, nearly a 50% reduction. At year-end, we had a cash balance of $1.1 billion.

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

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

During the quarter, we launched our new lithium ion compact system, which was very well received. While it’s early, much of this volume appears to be incremental to our NiCad offering. For the full year, sales in the U.S. Industrial Products group decreased more than 25%. This was clearly driven by the economic environment.

Housing starts and commercial construction were both down more than 30% for the year and home improvement spending declined as well. All key product categories and channels were affected, especially the construction sensitive independent channel. We believe that commercial construction will continue to be soft in 2010.

In the U.S. Consumer Products group, sales decreased double digits for the quarter. Within this group, sales of tools and accessories increased, led by the Porter-Cable line of Tradesman tools. In addition, the Ready Wrench was named Amazon.com’s Best Selling Home Improvement Gift for 2009. Other categories, however, experienced sharp decreases in volume this quarter. There were several contributing factors, including timing of outdoor orders due to the Chinese New Year shutdown schedule.

For the full year, sales in the U.S. Consumer Products group decreased at a high single digit rate. As in the fourth quarter, this was driven by declines in non-tool categories like automotive and electric and home products. In the European Power Tools and Accessories business, sales fell at a high single digit rate. This business was the biggest contributor to the company’s sales outperformance this quarter and represents a solid improvement sequentially.

Professional cordless sales increased year on year, driven by a major promotion at a key retailer. In consumer, the new DustBuster Vac enjoyed widespread success, driving growth for both the household products portfolio. In the consumer business, we have been gaining listings throughout the downturn as a result of good commercial execution.

Product lines more tied to construction, however, remained weak. Most European countries posted narrower declines than in the third quarter against easier comparison. Eastern Europe remained the most challenging region but we have begun to see signs of stabilization there as well with some customers replenishing inventory levels.

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

Fourth quarter sales in Canada decreased at a low teens rate year on year, but improved versus the third quarter. In Latin America and Asia Pacific, sales grew single digits this quarter. It is encouraging to begin to see regions of the world return to a growth mode. In Latin America, we experienced strong growth in the Southern Cone, which offset weakness in Mexico. In Asia Pacific, we continued to capitalize on the investments we have made in the Indian market.

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

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

Due to timing of contracts, component cost deflation was the most favorable of any quarter this year. SG&A spending remained below the prior year, but rose as a percentage of sales due to lower volume. For the full year, return on sales in the Power Tools and Accessories segment was flat at 7.4%, an increase in gross margin, driven by favorable pricing and productivity improvement, was offset by a higher SG&A percentage on lower sales volume.

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

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

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

Operating margin for the Hardware and Home Improvement segment was 11.5% this quarter, a sharp increase versus 2008 and a little below the third quarter level. The year on year increase was driven by gross margin improvement. Component costs remain favorable to last year and productivity continued to improve.

SG&A spending increased slightly and therefore rose as a percentage of sales. For the full year, operating margin for the Hardware and Home Improvement segment increased 170 basis points to 10.2%. Component cost deflation and productivity were positive factors, especially in the second half.

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

Operating margin of 11.3% was better than in the third quarter due to volume leverage and commodity deflation, but was slightly below the prior year level. For the full year, sales decreased 25% in the Fastening segment. The first half collapse of the automotive industry and the rapid pullback in industrial production levels drove declines across the globe.

At 7.4%, this segment’s operating margin was down significantly from the 15.1% in 2008 due to lower volume. As we have noted in the past, this is our most vertically integrated business. Its margin improved steadily through the year as we aggressively took costs out and benefited from higher auto production levels in the second half.

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

Stephen F. Reeves

Thanks, Nolan. Starting with the P&L, sales were down 6% to $1.3 billion for the quarter. This represents a significant sequential improvement as we begin to anniversary economic decline associated with the 2008 credit crisis. The decline was approximately six points better than our guidance; of this, 1% was currency driven.

The balance of the outperformance was roughly equally split among increased demand, inventory restocking and programming adjustments. The demand increase was largely in the non-U.S. parts of the Power Tool business and in the Fastening Automotive business. For the full year, sales decreased 22% to $4.8 billion.

Gross margin was 36.4% for the quarter, well above the 2008 level and our best performance in a number of years, continued to benefit from restructuring savings and component cost deflation. Productivity was strong and price, which had been positive through the third quarter, was neutral in the fourth quarter.

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

For the full year, gross margin improved modestly to 33.2% as productivity, price and restructuring savings outweighed the unfavorable fixed cost absorption. SG&A of $352 million was nearly flat to 2008 but higher than the third quarter. A number of factors caused the increase from the previous run rate, including the typical higher promotional level in the fourth quarter and compensation related increases. Also we incurred additional legal and environmental charges in the quarter at Corporate due to changing facts on existing litigation.

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

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

We did not record a restructuring charge in the fourth quarter. For the full year, restructuring charges were $12 million versus $55 million in 2008. Our restructuring initiatives generated approximately $20 million of savings in the fourth quarter and $76 million for the full year.

Because we are approaching the anniversary of many of these restructuring actions, we expect significantly lower full year savings in 2010. Interest expense of $23 million was slightly above the third quarter level. It was $5 million higher than the prior year due to bond issuance earlier in the year. For the full year, interest expense rose $21 million to $84 million, again primarily due to the bond issuance.

Our effective tax rate was approximately 17% this quarter or 23% excluding the impact of merger-related expenses. This is lower than our guidance of approximately 30%, partly due to the geographical mix of our earnings outperformance.

In addition, as we noted for the first quarter of 2009, when our tax rate was high, there is a fixed component of tax expense. Therefore we benefited from a leveraging effect on improved earnings. For the full year, our tax rate was 22% or 24% excluding restructuring and merger-related expenses. This was below our expected long term run rate of 30%, primarily due to favorable adjustments in the third quarter, but higher than in 2008 when we benefited from the favorable effect of several discrete adjustments.

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

Turning to cash flow, we had a very strong year in this area. Due to excellent working capital management as well as earnings outperformance of lower CapEx, we delivered $584 million of net cash generation. We reduced inventory 24% during the year, a higher percentage than the sales decline.

Receivables were down 10%, also more than the fourth quarter sales decline as DSO improved. Our businesses did a great job in managing through the downturn and we cleaned up significant past due accounts and pending deductions. We also benefited from a $36 million reduction in capital spending versus 2008 as well as $60 million of positive net cash generation related to hedging.

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

Now, I will discuss the standalone guidance for 2010. Overall, we anticipate a modest improvement this year in a number of our markets. While housing data remains mixed, activity should be up for the year. The automotive sector has a very easy comparison early in the year and should show significant improvement globally.

As Nolan noted, we have seen some positive signs in Europe. However, commercial construction will likely be down significantly. We remain cautious regarding consumer spending and remodeling activity. For the first quarter, we expect mid single-digit sales growth. This reflects continued stabilization of demand as well as an easy comparison to the weak demand environment in inventory reductions in the first quarter of 2009, partially mitigated by our view that retailers will continue to be very conservative on inventory.

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

Our operating margins should improve significantly year on year in the first quarter. Our margin in the first quarter of 2009 was 3.5%, excluding restructuring charges, by far the lowest in many years. Our first quarter sales and margin percentage are typically the lowest in the year and we expect that will be the case in 2010. However, we expect that it will be more than 200 basis points better than in 2009, excluding merger related expenses. For the full year, we expect operating margins will improve 100 to 150 basis points from the 6.7% level 2009 excluding merger related expenses and restructuring charges. We should benefit from slightly higher volume on our fixed cost base.

We anticipate 2010 will be the inverse of 2009, with component deflation through the front half and inflationary pressure on the back half based on current commodity prices. Our expectation on price is flat to slightly negative. As a result of the pending merger and subsequent elimination of our standalone capital and tax structures, we are not providing EPS guidance. From a cash flow perspective, we will likely add to inventory in the first quarter to replenish safety stock consumed by the sales overdrive. But in general, nothing about our business model has changed relative to our ability to convert 90% of earnings into cash.

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

Nolan D. Archibald

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

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

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

As Stanley mentioned last week, we remain on track to complete the merger late in the first quarter or early in the second quarter. We still await certain regulatory approvals outside the U.S. and shareholder votes by both companies. Integration planning is well underway and the business leadership teams were announced on Friday.

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

We launched a number of well received new products, strengthening our position in the important cordless category. We remained on track to deliver a robust new product lineup in 2010. We significantly improved working capital, driving $584 million of net cash generation for the year. Our strong cash flow generation drove nearly a 50% decrease in net debt for the year and have $1.1 billion of cash on our balance sheet. And we announced a transformational merger with Stanley that will be highly beneficial to our shareholders.

Black & Decker has delivered innovative solutions for 100 years. We are excited about the prospects with our merger with Stanley, a company with a similar tradition of excellence and iconic brands. We bring to the combination outstanding products, strong distribution, low cost operations and a very healthy financial position. We believe the combination will build on Black & Decker’s legacy and provide growth opportunities for our employees, our customers and our shareholders.

That concludes our prepared remarks and now I’ll turn it back to the operator and we’ll answer your questions. Ashlee [ph]?

Question-and-Answer Session

Operator

At this time, ladies and gentlemen, if you would like to ask a question, please press star then the number one on your telephone keypad. Again, if you would like to ask a question at this time, please press star then the number one on your telephone keypad. Our first question comes from the line of Ken Zener with Macquarie Capital. Please go ahead with your question.

Kenneth Zener - Macquarie Research

Good morning.

Stephen F. Reeves
Good morning.

Nolan D. Archibald

Hey, Ken.

Kenneth Zener - Macquarie Research

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

Stephen F. Reeves

Sure. We had -- our outperformance was largely outside the U.S., including especially Europe. The U.K. was very favorable this quarter, some of which was generated from listing gains that we have picked up over the course of the year as well as some promotional activity that drove the professional business. And outside of Europe, we had, as Nolan mentioned in his prepared remarks, we saw growth in Latin America, especially in the Southern Cone -- and in Europe and in Asia except for Japan.

Kenneth Zener - Macquarie Research

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

Stephen F. Reeves

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

Kenneth Zener - Macquarie Research

Great. Well, thank you very much. Bye-bye.

Operator

And our next question comes from the line of Dan Oppenheim with Credit Suisse.

Nolan D. Archibald

Hi, Dan.

Daniel Oppenheim - Credit Suisse

Thanks very much. Was wondering, given your experience every time, that you talked about end markets stabilizing, you’re expecting return on models to be weak for sometime, so thinking back to prior cycles, how do you think this is going to play out? What would be your expectations?

Nolan D. Archibald

You mean through the year?

Daniel Oppenheim - Credit Suisse

Well, it’s through the year, just generally what is the, talking about, cautious on the – for the return model, what does that mean in terms of -- when would you think, it would come back, obviously, knowing there won’t be stand-alone company?

Nolan D. Archibald

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

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

Daniel Oppenheim - Credit Suisse

That’s great. Second question if you could just elaborate, you talked about stabilizing tool share. What do you think is driving that new products, marketing what do you think the key is?

Nolan D. Archibald

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

Stephen F. Reeves

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

Nolan D. Archibald

Also the Porter-Cable line of tradesman tools continues to do well and take share.

Daniel Oppenheim - Credit Suisse

Great. Thanks very much.

Operator

And the next question comes from the line of Megan McGrath with Barclays Capital. Please go ahead with your question.

Matt Landon - Barclays Capital

Actually Matt Landon on for Megan. I wanted to dig deeper on the operating margins. I’m trying to get a sense either COGS or SG&A benefited in any way from lower R&D or lower marketing as a result of the proposed merger?

Stephen F. Reeves

No. We have not adjusted our R&D spending and we kept our investments up even through the downturn and have not adjusted them even in relation to the transaction. We are still running the company as a standalone business, so we are really not adjusting our strategies….

Matt Landon - Barclays Capital

Okay.

Stephen F. Reeves

…to address the merger combination.

Matt Landon - Barclays Capital

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

Stephen F. Reeves

For Black & Decker specifically?

Matt Landon - Barclays Capital

Yeah.

Stephen F. Reeves

There will continue to be some legal and advisory costs that come through here in the first quarter.

Matt Landon - Barclays Capital

Okay. Anyway, can you quantify that?

Stephen F. Reeves

It’s off the top of my head now.

Matt Landon - Barclays Capital

Okay. All right. Thanks very much.

Stephen F. Reeves

Hello. Operator.

Operator

Our next question comes from the line of David Goldberg of UBS. Please go ahead with your question.

Susan – UBS

Good morning. It’s actually Susan for David. I wonder if could you talk about -- given the impressive results in hardware and home improvement, do you think that you’re seeing benefit from some of the rehabbing of foreclosures, especially since a lot of that work is do-it-yourself or small local contractor type of work?

Nolan D. Archibald

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

Stephen F. Reeves

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

Susan – UBS

Okay. And are you seeing regional trends that maybe would suggest anything, like is it stronger out in the west or the south or anything that you can speak to?

Stephen F. Reeves

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

Susan – UBS

Okay. Thank you.

Operator

And our next question comes from the line of David MacGregor with Longbow Research. Please go ahead with your question.

David MacGregor - Longbow Research

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

Stephen F. Reeves

Sure. I think just our outlook on pricing is actually flat to negative, not positive next year on our own pricing. But relative to commodities, as we carried into inflation in 2009, we’re carrying into 2010 deflation. During 2009, we had a net deflationary year for us, obviously split between the halves of the year. We would expect 2010 to be deflationary as well on balance but not a material amount.

David MacGregor - Longbow Research

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

Stephen F. Reeves

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

David MacGregor - Longbow Research

Okay. And we’ve never talked much in the past about royalty payments off small appliances, but was there a meaningful change that would have moved the needle in some respect this quarter?

Stephen F. Reeves

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

David MacGregor - Longbow Research

Okay. Thank you very much.

Operator

And our next question comes from the line of Michael Rehaut with J.P. Morgan. Please go ahead with your question.

Michael Rehaut - J.P. Morgan

Thanks. Good morning everyone.

Nolan D. Archibald

Good morning.

Michael Rehaut - J.P. Morgan

Just wanted to drill down a little bit in the -- I had to jump off the call briefly, so I apologize if it’s something you covered. But just wanted to drill down a little bit in terms of where you are with new products and Nolan, you’ve mentioned the Tradesman line getting some traction out there. But as you look at 2010, I was wondering if number one, you could kind of review which new product efforts you expect to be the most impactful, number one. And number two, if you could even quantify overall contribution from some of these new products i.e. Tradesman or some of the other lithium ion cordless. And finally, if you could talk about actual share gains in percentage terms, if you have any sense of that?

Nolan D. Archibald

All right. First of all, new products. As I mentioned, we do have a robust product plan this year, with lots of we think significant introductions. We’re going to be bit careful of what we say later on in the year because we don’t want the competition to be any more prepared than they are. We are going to have some impressive hammer drills coming out in the DeWalt line of products that we think will have a significant impact in the margin place and we’ve concentrated on hammers. We’ve already introduced a number of them and they’re doing extremely well in the marketplace. And we believe the ones that are yet to be introduced will also do extremely well.

We also you’ll see continued introductions in our lithium ion cordless in the future and I won’t be any more specific about that. But we believe that the introductions that we’ll be making will be getting market share that we might have lost in that lower end professional higher end do-it-yourself market. We have a very impressive lineup coming down in the future in that area. In consumer, we -- cordless is very, very strong in outdoor. You’ll see more and more products introduced, an outdoor line of cordless, a 24 volt hedge trimmer, string trimmers, mowers will be very strong. Our outdoor offering this year will be excellent. In consumer tools, you’ll continue to see us introduce power tools in cordless, in lightweight drill drivers, jigsaw. There’ll be a new Porter-Cable drill and impact driver. We’re already up in the mid-30s on SKUs in the Tradesman line and Porter-Cable will continue to add to that very successful line.

In our hardware and our home improvement group, we’re going to be introducing a key control dead bolt as well as a smart code lever, again adding to our Smart series. Those are just a few of the new products that we have coming on early in the year. On market share, as we said in the past, we probably lost some share in the lower end professional market and the higher end do-it-yourself market. The Tradesman area that I think the market share we’ve lost there, we’ve taken great strides to improve that and the product offerings that we have coming down in 2010 and early 2011, we think will address any market share declines we’ve had there. In the premium market of DeWalt, we’ve held our own pretty well. We probably gained some share in Europe with new listings that we’ve gotten recently and those are just some examples.

Michael Rehaut - J.P. Morgan

Thank you, Nolan. That’s a great rundown and just to clarify, you said that when you hit on the lithium ion cordless, will you expect to regain some share in the low end pro or higher end consumer. Is that kind of expected to roll out second half this year, first half next year?

Nolan D. Archibald

Well, we did some last year. You’ll see some in the first half this year and you’ll see more in the second half and early next year.

Michael Rehaut - J.P. Morgan

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

Nolan D. Archibald

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

Michael Rehaut - J.P. Morgan

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

Nolan D. Archibald

With our margins going up, yes.

Michael Rehaut - J.P. Morgan

Okay. Thanks.

Operator

And our next question comes from the line of Sam Darkatsh with Raymond James. Please go ahead with your question.

Sam Darkatsh - Raymond James

Good morning, Nolan, Steve, Mark, how are you?

Nolan D. Archibald

Good.

Sam Darkatsh - Raymond James

Most of my questions have been asked and answered. The two that I would have, Steve, what do you peg as the normal sequential seasonality of sales from Q4 to Q1 and then how would you compare -- it looks like your guidance suggests sales down 13%. How does that compare with what a ""normal"" seasonal trend might look like?

Stephen F. Reeves

Well, I think a normal seasonal, again I think we typically tried to guide around 25% to 30% incremental or decremental margins. And it doesn’t hold up in every given quarterly instance. I think what we are trying to convey was the fourth quarter just benefited unusually from the way that our volumes changed during 2009. So we had an unusual amount of absorption benefit in the fourth quarter that is not part of the ongoing -- would not be ongoing or able to be extrapolated.

Sam Darkatsh - Raymond James

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

Stephen F. Reeves

I think, I’m not positive this will get exactly at your question, but I think what’s perhaps the underlying economy is getting better in certain markets around the world. I think we called those out. I think consumer spending is very gradually improving, whereas commercial is pressured. I think what’s unusual about the first quarter of 2010 would be as you look at it on a comp basis, not a sequential basis, is the amount of inventory reduction that we saw last year that we are not expecting to recur this year. I think inventory levels largely. We saw little add back in the fourth quarter. We’re not really calling for a lot of add back in the first quarter of 2010.

Sam Darkatsh - Raymond James

Okay. And my second question would be -- and you’ve talked around it a little bit, but talk about what you’re seeing in PTA and HHI in terms of market share trends as specific as you feel comfortable I suppose. And what do you anticipate share trends looking like as we progress through 2010, assuming a standalone business?

Nolan D. Archibald

You said HHI, what were the other initials?

Sam Darkatsh - Raymond James

Power Tools and Accessories, PTA, I’m sorry.

Nolan D. Archibald

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

Sam Darkatsh - Raymond James

Thank you much.

Operator

And our next question comes from the line of Eric Bosshard with Cleveland Research. Please go ahead with your question.

Eric Bosshard - Cleveland Research

A couple questions. Good morning. Couple of questions, first of all, can you talk at all about sell-through or POS trends in the U.S. power tools business to give us some clarity in terms of the trend there?

Stephen F. Reeves

Sure. I think in the fourth quarter, we saw low double digit declines for the quarter and that improved sequentially as the quarter went along. As you probably recall from last year, we hung in okay through Thanksgiving and fell off thereafter and the comps certainly helped drive that sequential improvement.

Eric Bosshard - Cleveland Research

And does the 1Q projection assume a continuation of that improvement?

Stephen F. Reeves

Yes.

Eric Bosshard - Cleveland Research

Okay. Secondly, you talked a couple times about the concerns on the commercial end market. Can you just remind us of how much of your business is influenced by commercial?

Nolan D. Archibald

We in the U.S., we peg that at 10% to 15% of the business. There is a component of it outside the U.S. as well that we haven’t really split out separately.

Stephen F. Reeves

And that’s commercial and industrial, so it includes some of the Fastening. So it’s not all commercial construction.

Nolan D. Archibald

Fair enough.

Eric Bosshard - Cleveland Research

Of the input costs, I know that you commented or you appeared to at least comment that the input cost saving in 2010 would be in the net savings, I think you implied was in the tens of millions of dollars. Can you tell us what that number or give us some range of what that number might have been in 2009?

Stephen F. Reeves

It was a little less than that.

Eric Bosshard - Cleveland Research

So marginal benefit in 2009 and marginal benefit in 2010?

Stephen F. Reeves

Yes. Correct.

Eric Bosshard - Cleveland Research

Okay. And then from a housekeeping perspective, there was a $30 million other line in the quarter in the segment data which was a big step up from a year ago in the prior trend.

Stephen F. Reeves

Yes.

Eric Bosshard - Cleveland Research

Can you give us a little bit of sense of what was in there?

Stephen F. Reeves

Sure. I alluded to some litigation accruals we took on the fourth quarter around environmental matters as well as product liability is a sizable chunk of that. We have been running with pension expense higher quarter-over-quarter throughout the year and we had a loss, a small loss on the sales from assets as well.

Eric Bosshard - Cleveland Research

When you look at that line or that number as we go into 2010, is that going to -- and again I know that it’s a strange time for projections with what’s going on with the business, but is that going to recur in 2010 or should we assume that that line returns back to the 50 to 55 million number that ran out in 2008 versus the 65 number in 2009?

Stephen F. Reeves

On a standalone basis, what you saw in the fourth quarter wouldn’t recur. But as you look forward, based on how you’re constructing your models, pension expense would increase in 2010. On a standalone company, I think it might be different under a combined entity. But on a standalone basis we would see $20 million to $25 million of incremental pension expense in 2010.

Eric Bosshard - Cleveland Research

Okay. Very good. Thank you.

Operator

And our next question comes from the line of Peter Lisnic with Robert W. Baird. Please go ahead with your question.

Josh Chan - Robert W. Baird

Good morning. This is actually Josh Chan on for Pete. You talked about the trajectory of component costs deflation. Do you expect the fourth quarter to be the quarter where you benefited the most from that?

Stephen F. Reeves

In 2009, yes it was.

Josh Chan - Robert W. Baird

What about into 2010?

Nolan D. Archibald

No. It will be more front half loaded in 2010.

Josh Chan - Robert W. Baird

Right. But would it be more beneficial than even what you saw this quarter?

Nolan D. Archibald

Probably lower volumes.

Stephen F. Reeves

Well, it’s lower volumes so it -- probably roughly the same I would guess, actually.

Josh Chan - Robert W. Baird

Okay. And then going to your inventory restocking comment, could you comment a little bit about how broad based it was or wasn’t and then maybe what channels and markets that you’re seeing that in?

Stephen F. Reeves

Sure. We did see, it was sporadic. It really was not broad based at all and I would like to leave you with the impression that I think we’re very cautious about retailers taking in more inventory. I don’t really see a restocking event on a broad based basis any time in the near term. So it was a little spotty, a little bit in the hardware business, I think Nolan referred to it and outside just in various pockets.

Nolan D. Archibald

Just to piggyback that a little bit. I think our retailers are going to be very cautious as we get along, but our inventories are in pretty good shape right now.

Josh Chan - Robert W. Baird

Great. Thank you for your time.

Operator

And there are no further questions in queue at this time. I’ll turn the call back over to Mr. Rothleitner.

Mark M. Rothleitner

Well, thank you, everyone. We appreciate you being on the call today and myself and Nolan and Steve will be around to answer your questions if you have any throughout the day. Thank you very much.

Operator

And this does conclude today’s Black & Decker fourth quarter earnings conference call. You may now disconnect.