Good morning, my name is Carlie and I will be your conference operator today. At this time, I would like to welcome everyone to the Stanley Works Second Quarter Results 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. [Operator Instructions]. Thank you. I would now like to turn the call over to our host, Mr. Gary Waybright, Stanley Interim Vice President, Investor Relations. Sir, you may begin your conference.

Thanks, Carly. It is actually Greg, but I have been called worse, so, good morning to everyone. On the call in addition to myself is John Lundgren, our Chairman and CEO; Jim Loree, our Executive Vice President and CFO; and a special guest Tony Byerly who is the Chief Operating Officer of our North American Convergent Security business. Tony will talk to us about the Sonitrol acquisition during the presentation. There are a few recent press releases that I would like to mention. One relates to our second quarter results, which was issued last night. The others relate to our second-quarter dividend increase which was our 41st consecutive annual increase. The other releases speak to the completion of the Sonitrol and Xmark acquisitions and the announcement naming Bret Bontrager, our Corporate Executive Officer. These releases are available on our website. Today's presentation is also available on our site and we will refer to these charts during the call. John and Jim will review Stanley's second quarter results and Tony as I mentioned will speak to the Sonitrol acquisition, and then we will have a Q&A session. The entire call is expected to last approximately one hour. A replay of the call will be available beginning at 2:00 PM and the replaying number is 800-642-1687 and the access code which is in the press release is 45127121 and please feel free to call me with any questions at 860-827-3544. Just a couple of quick announcements before we proceed. One is a reminder that we issue and update earnings guidance on an annual basis and our press release at the beginning of each quarter and we can not comment on such guidance thereafter. If our guidance changes materially we will issue a press release and conduct a conference call. And secondly another reminder that certain statements made during today's discussion by the various Stanley participants are forward-looking statements. They are based on the assumptions of future events that may not prove to be accurate and as such they involve risks and uncertainties. Actual results may differ materially from those that are expected or implied, so we direct you to the cautionary statements in our Form 8-K, which we filed with yesterday's press release and in our current or our recent 34-F filings. I will now turn the call over to John Lundgren.

Thanks Greg, good morning everybody. First just a couple of highlights from a very busy second quarter at Stanley, earnings of a $1.05 were up 4%, excluding the portfolio charges and related business closures that amounted to about $0.10 that were detailed in the press release and set to walk between continued operations... continuing operations and discontinued operations is also contained within the press release. Revenues grew 5% on the basis of currency and acquisitions. We did experience reasonably good organic growth in Europe and in our security business excluding hardware, and we'll come on to that. That was offset by continued weakness in U.S. markets in general and residential construction markets in particularly... in particular. The gross margin was relatively flat consistent with the prior year. We have got good pricing and productivity to offset the inflation as well as the impact of the lower volume. Jim is going to give you a detailed walk, but right now we are estimating 2008 inflation at approximately $150 million for the year and prior to the year beginning that number was between 60 and 80 was our estimate. So that's the magnitude of the increase. We are doing better than in past years in recovering that inflation with price, we are estimating approximately 90% recovery, but that still does leave the gap that we need to fill with productivity improvements in order to ensure that margins don't suffer. Cash flow slightly ahead of prior years excluding the impact of the receivable securitization, facility termination, that was about $17 million understandably unwinding net debt arrangement. CDIY revenue all in was up 4%, Europe was 7% organically. Profit rate was maintained operating margin at 14.6%, and that's despite the inflation and the volume pressure we are experiencing around the world. And within our…

Okay, thank you John. First of all inventories were a great story with an 8 day decrease in light of the volume issues; the physical volume reductions that we are encountering which we will talk about in a few minutes. It's really difficult to bring inventories down like that and it can't be done in a haphazard way that's to be done through process and methodical process improvements and that's exactly what's going on with the Stanley fulfillment system as it relates to inventories. So we can look for more progress in inventories as the year goes on and I think that will continue to be a good story. Receivables were up quite a bit and 12% to be specific. We are not terribly concerned about that because the vast majority of that was related to... in the administrative calendar, a calendar issue which had to do with where the month closed and that should take care of itself by the fourth quarter, may continue into the third quarter, but should be out of that by the fourth quarter. So receivables, we have no material delinquency creep that we have analyzed very carefully and haven't... don't have any real issue there, and payables continues to be a very good story. So we are able to improve the turns from 4.5 to 4.8, and we expect to close out the year well over five turn, so good progress there. The cash flow and the company's cash generating capability continues to be an excellent story with good solid cash flow for the quarter. It would have been even better had it not been for the fact that we terminated a $17 million receivable, securitization facility, and no longer need that facility given that we have $800 million in liquidity outlines out there…

Thanks Jim. As Jim mentioned, these are exciting times in electronic security industry. I have been in the security industry for nearly 20 years, and I have seen only a handful of industry defining moments. One such moment began roughly one and a half years ago with the acquisitions of HSM by the Stanley Works and then combining of it with the Stanley System's integration business creating Stanley Convergent Security Solutions. That moment really has fully evolved now with the Sonitrol acquisition. The combining of Stanley CSS with Sonitrol creates the third largest electronics security monitoring company in the U.S. based on total revenue. Now Sonitrol will help both the direct and the franchise network go-to-market approach also about 125,000 customers and Sonitrol is best know for its industry leading audio verification technology; and as a result, reports the industry's highest apprehension rates and lowest dispatch and false alarm rates making it a law enforcement trend. Sonitrol's revenue is broken down by 53% coming from monitoring and service, 34% from installation, 8% from equipment and product sales, and 5% franchise growth. The combining of Staley CSS and Sonitrol not only creates a third largest overall provider as I mentioned, but also solidifies Stanley CSS as the second largest commercial security monitoring provider. Now the company reports $110 million in total revenues and through its audio verification technology reports one of the most stable customer bases in the industry with low attrition rates and an average customer life of 12 years. There are numerous strategic benefits to the Sonitrol acquisition. First it increases the overall CSS global platform to over 700 million and the Stanley Security solutions platform to over 1.6 billion. As previously reported the acquisition will be $0.02 dilutive in 2008 as Jim mentioned, $0.04 accretive in 2009 increasing…

Thank you, Tony. We're pleased to have Tony and his team in-charge of integrating Sonitrol. They did a great job with the reverse integration of HSM. So the same team that led that. Now working the Sonitrol acquisition and we're looking forward to great results there. As we look at the portfolio transition, this is truly remarkable metamorphosis over the last few years, from '02 to '08, where with $2.6 billion company with 65% of our revenues in construction and DIY in 2002, with the largest customer totaling 22% of our revenues. By last year, we had built the security business up to about 31% of the total revenues, construction DIY was down to 40%, and industrial had grown to 29%, and we were $4.5 billion. So close to double in size. And then as we now adjust for the divestiture of CST and the acquisitions of Sonitrol and Xmark, you can see that the various portfolio moves that we announced in the last quarter have had a notable effect on the portfolio composition. So you can see the security business would now account for about 35% of the revenues, rapidly approaching the size of the construction and DIY business, which is 37%; and of course the industrial is roughly the same. So in general, continued progress in the tough environment... tough operating environment, but some of the challenges in this environment are also creating opportunities for us, and we continue to take advantage of those. Just a very, very brief refresher on the growth platforms. We continue to allocate our capital into three... our three major growth platforms industrial and automotive tools, mechanical security, and convergent security. So here you've seen a number of acquisitions that are more focused on the convergent business in the last year or so,…

ey Carlie, at this time, we will turn it back to you for the Q&A session. Question And Answer

[Operator Instructions]. Your first question comes from Peter Lisnic with Robert Baird.

Good morning. It's actually John on for Pete. Can you guys just talk about with M-CSS, the 5% organic growth was recurring revenue kind of growing at that rate also and kind of as a reverse integration that you've done, is that fully impact now?

Yeah. John, this is John; I'll take it although. Tony could probably take it even better. The simple answer is yes; the percentage of recurring revenue was actually increasing although that's what we modeled. As you'll recall HSM recurring revenue was dramatically higher than the Legacy Convergent Stanley business. So in total, the weighted average is increasing and in fact the percent of the proportions, excuse me, of reoccurring is increasing a little faster than the rates in general. At this stage, 18 months in, it's a little premature to declare victory, but all I can say is we are pleased beyond our initial expectations and we were cautiously or highly optimistic upon acquiring HSM. The team is still in place, and I think the best indication to that is we've just gone and made another $275 million acquisition in similar space and empowered the HSM team and former HSM team and Brett Bontrager to integrate that business. And without over simplifying, the process worked extraordinarily well with HSM, and Tony and his team along with Todd Leggett from Sonitrol, who is an industry veteran, we hope to apply the exact same type of methodology with Sonitrol and get the same kind of initial success and maintain the momentum as we did with HSM.

Okay and then my follow up; just the free cash flow generation has stayed really strong kind of relative to everything else. What are your uses of kind of that free cash flow looking forward?

Well it... as we have said all along historically two-thirds of our free cash flow has gone to strategic acquisitions, one-third has been returned to the shareholders and equally split between dividends and buy backs. Going forward, you could expect that to continue. I mean we think Stanley stock is a good buy right now. That being said that's a one time opportunity and it doesn't advance our portfolio strategically. The acquisition pipeline is robust with strategic acquisitions within the reach of our own cash flows. You'll recall we did announce a modest increase to our dividend the 41st consecutive year. So I think it is fair to say $500 million in cash flow on an ongoing basis going forward. I think the two thirds of it will be used for strategic acquisitions and a third will be returned to the shareholders primarily via dividend, opportunistic buyback when and if the pipelines are not full or we feel that our stock is so depressed, while it is not strategically advancing our portfolio, it's the best short term use of cash.

Okay. Thank you.

Our next question comes from Jim Lucas with Janney Montgomery.

Thanks, good morning guys.

James good morning.

Impressed with the good color on the conference call today. Two questions. One, on the industrial margins. Could you give us a little bit more color on how much of that is the pricing gap versus mix and any additional color specifically on the mix. And secondly just following up on the last question about the cash flow usage on the robust acquisition pipeline. Can you talk a little bit about what you are seeing in the various growth platforms. What type of... where may be any type of color that you can give on the tools versus security what you are seeing out there and domestic versus international?

Sure, Jim will... Jim will take both of those, Jim and I'll add on it if need be.

We are looking for international acquisitions in the security business there with some success in the pipeline. And as far as the tool industry, the tool industry is supposed to consolidate at some point in time. I have being waiting nine years since I have been here for it to happen. I would suggest that this maybe a fairly opportune time for that, simply because of the stresses and pressures on the cash flow and the earning statements of certain tool companies that are sort of in the middle. Similar to how we were with CST. They're not private label and they're not the world's best brand at hand tool company, they are somewhere in between and they are getting squeezed. So there's some of that going on and I suspect this industry will likely consolidate at some point in time and I don't know whether it will be this year but if it does, we'll be in a good position to be a participant in that. So that's really the growth platforms. As far as the industrial profit margin of 220 basis points, I'd say it's about a third of each. I mean the strategic investments where we did a fairly substantial amount of consulting work in product simplification and complexity reduction to help us with our inventory reduction in a Stanley Fulfillment Systems initiatives, and that was about a third of the issue and then product mix is, we're finding particularly in the automotive repair business in industrial, a little more tendency to avoid the big ticket items and of course the financing state of the financing markets hasn't helped since many of those credits that when they sell tool boxes and so forth to end users are... they tend to be sub prime or close to sub…

And back to your acquisition commentary. Have you seen any changes in the multiples out there or was it still that sellers premium that's out there?

No Jim since... glad you asked. I was going to add on time permitting. The good assets, obviously there is very little private equity competition for those assets. That being said, there has been very little price capitulation on the good assets. I think it would be a tough time to sell poorly performing assets or assets without a great growth profile or opportunity for growth with some synergies, but if you look at businesses that we've just sold as well as businesses that we've acquired, the numbers aren't crazy, but the good businesses continue to sell at a rich premium reflecting their growth and income potential, and I think as long as those are the types of businesses being sold that's our expectation for the next 6 to 12 months. Full and fair prices for the good assets.

Okay. Thanks again for the color today.

Your next question comes from Michael Rehaut with JP Morgan.

Hi, good morning.

Good morning, Mike.

The first question just on the raw material and offsetting actions; if the raw materials were to sort of stabilize here, which unfortunately doesn't look likely, but what would that 150 be in terms of carry over into '09. And am I to assume also that the actions that you've taken, you are expecting an incremental 40 million benefit on the cost savings?

Yeah. Want to try? What was the second part of the question?

The 40--

Is this the offsetting... what would flow through on the raw material side?

Yeah, we've been playing catch up; when you are chasing inflation, you are playing catch up. So if inflation stops, price exceeds inflation when it stops. So we are not the... the cost actions are not for price recovery. And you are right, it's a hypothetical question, because in reality, we are not expecting the inflation to stop, and we are not expecting our price actions to stop as inflation increases. So it's very hypothetical. What we are girding against with these cost actions is a continuation of an economic slow down. And we don't know whether that's going to happen just like we didn't know whether the second half was going to be as bad as it is, but we are prepared with a $40 million carryover and $30 million of restructuring in the 2007 base, which we may or may not use next year depending on circumstances. We are prepared to weather whatever kind of storm comes our way with quick solid earrings and cash flow performance.

Okay. And just I guess secondly, where would you expect over the next two, three years to see your product mix continue to go? I mean would you see security getting up into the... in the 40s? How would you think about consumer DIY? Are you comfortable at the size it is today or do you think you can see that shrink a little further?

Yeah, I guess it depends on whether it's an absolute terms, Mike or as percent of total. As Jim showed, when we call--

Percent of total.

Yeah, I understood. As we closed '07, we're going to be close to a third of third of third. That was our interim objective. We said for a long time we'd like security to be 50% of the total in five years. That's probably slowed down a little bit. We said that three years ago and we continue to grow. Our objective with CDIY, with the sales of CST, there are two good businesses within CDIY and they are big. We think we can grow them organically at a rate slightly above the market, keep them at about the 1.7 billion, where they are currently growing at low to mid single digits, which means they will decline as a percent of total. We don't have a problem with CDIY businesses in general, it's the home center dependency we are trying to stay away from. So if I had to speculate, they... you said two to three years, they probably could go down to as low as 25% of the business while the combination of security and industrial would be 75 with security growing at a little faster rate than industrial borrowing any of the major consolidations that Jim talked about.

Okay, great.

We don't want to shrink any of our businesses in absolute terms however. Jeff Ansell's team is doing a great job growing a CDIY businesses with innovation, mix, and pricing in a market that's down high single or low double digits.

Okay, great.

And your next question comes from Eric Bosshard with Cleveland Research. Eric, your line is open. If your line is on mute please unmute your line. There is no response from Eric's line. We'll continue with the next question from Nigel --

We will try someone else, we'll go back to him later.

Okay. Your next question comes from Nigel Coe with Deutsche Bank.

I have some questions on Nigel's behalf. Within CDIY, I was hoping you could give some color on Bostitch and the consumer tool business.

What you are looking for related to Bostitch and consumer tools?

Just some additional color on how those business are performing.

They are both performing consistent with expectations. In fact consumer tools and storage is performing maybe better than we would expect given the market. And Bostitch is about where we hoped it would be. It's a little bit frustrating, but not discouraging. Specifically we've taken $50 million worth of cost out of the Bostitch business. We've inherited... we've absorbed a lot of inflation. We've got almost $50 million of prize with the Bostitch business to do and in doing all that margins have remained about where they were in the last two quarters. We need little bit of help from the market place on Bostitch to get margins back up to the high single low double digits, where it's been historically and where is our target. But if there is a perception that Bostitch is losing money, it's simply not the case. It's making money, its making money in the low single digit operating income for couple of quarters in a row. Doing a great job internally with price, manufacturing restructuring, and tremendous SG&A constraint weathering a market that's down. About 50% of the Bostitch business is CDIY and 50% is industrial. Neither of which are terribly strong and about 25% of the Bostitch business is outside the U.S., that business is very healthy. So Bostitch is running really-really hard to stay in place and with a little bit more pricing which the market, I think is ready for and a little bit of help through the market, I think we will get it back to where we want it to be and where it rightfully should be at this stage of the process.

Okay and then going to the restructuring, where specifically are you guys looking to restructure?

Well restructuring is broad based. It means marginal facilities, SG&A cuts people not as opposed to spending for which we reserve. It's pervasive across the company. Obviously we would across all businesses across the company. Obviously we do less restructuring and our highest potential growth there is for fear of cutting that growth. So basically what it is, is getting certain businesses that are facing marketplace headwinds downsized so their infrastructure is more in line with the reduced size of the business and that applies to every business in Stanley whose volumes and revenues aren't up.

Okay great. And then one last quick one if you don't mind, are you guys currently paying full spot prices for steel?

No. We'd like to think with our global sourcing capabilities we're at or below market but it depends on what one does call... what one is establishing and agreeing to be the spot price. We'd like to think we're doing a good job leveraging our global sourcing capabilities. What we do know is our prices are going up as fast as everyone else's, its just from which base we are talking. So the magnitude of the increase from the base is unprecedented. We would like to think we are paying a little bit below full spot prices because we are buying ahead to the extent we can and that has given us a bit of benefit.

Great, thank you.

Our next question comes from Anna Stromberg with NAV Capital. I am sorry; the next question comes from Ted Hover [ph] with Stanopoint [ph].

Good morning. Just going back to the cost recovery question. I guess I wanted to, I don't know if you would actually kind of break this out but what percent of your cost inflation is primarily attributable to steel. Just trying to get a sense so we can kind of see what's going on with steel price.

Yeah.

And how much is actually driving that and my second kind of... second... my follow up question would be what type of price recovery do you need to get across your product line to be able to get your targeted 9% price recovery?

Well, the second one is going to be very difficult to answer, the first one is easy; I talked to it earlier. Roughly, two-thirds of all of our inflation is steel, the rest in order of descending priority is resin, nonferrous metals, and of course there is no... there is little bit more stability in non-ferrous metals right now and steel, last year nonferrous metals in fact were greater, cause of inflation and steel. So roughly two thirds of our cost inflation is steel, followed by resin, nonferrous metals and then various other inputs. What kind of price we have to get, I mean it's simply arithmetic, it's 90% of our $150 million is about $135 million, you need 135 million on a $4 billion revenue base. So globally across Stanley that's 3% to 4% on an annualized basis for the year. That's going to vary dramatically by business where some are up 20 and some are flat. But simply said, we need $135 million on $4.5 billion, which is 3% to 4% on an annual basis with tremendous discrepancies or variations across the Stanley businesses. I hope that answers your question; if not, for more granularity, Greg can walk you through that offline.

Okay, thanks.

And this concludes the Q&A session for today's call. John, do you have any closing remarks?

This obviously was a very busy quarter. And we feel good about the results given the environment that's out there. We've got a lot of work to do on pricing. We think we have the right people in place to do it. And borrowing any major news, we will talk to you again on October. Thanks for your interest this morning.

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