Greg Waybright - Vice President-Investor & Government Relations John F. Lundgren - Chairman & Chief Executive Officer James M. Loree - President & Chief Operating Officer Donald Allan - Chief Financial Officer & Senior Vice President.

Nigel Coe - Morgan Stanley & Co. LLC Shannon O'Callaghan - UBS Securities LLC Matt A. Bouley - Credit Suisse Securities (USA) LLC (Broker) Timothy R. Wojs - Robert W. Baird & Co., Inc. (Broker) Jeffrey T.

Sprague - Vertical Research Partners LLC Richard Kwas - Wells Fargo Securities LLC Robert Barry - Susquehanna Financial Group LLLP John Coyle - Barclays Capital, Inc. Mike Wood - Macquarie Capital (USA), Inc. Jeremie Capron - CLSA Americas LLC.

Welcome to the Q4 and Full Year 2015 Stanley Black & Decker Earnings Conference Call. My name is Stephanie, and I'll be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to the Vice President of Investor and Government Relations, Greg Waybright. Mr. Waybright, you may begin..

Thank you, Stephanie. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's Fourth Quarter and Full Year 2015 Conference Call. On the call in addition to myself is John Lundgren, our Chairman and CEO; Jim Loree, our President and COO and Don Allan our Senior Vice President and CFO.

Our earnings release which was issued earlier this morning and the supplemental presentation which we will refer to during the call are available on the IR section of our website as well as on our iPhone and iPad apps. A replay of this morning's call will also be available beginning at 2 p.m. today.

The replay number and the access code are in our press release. This morning John, Jim, and Don will review our fourth quarter and full year 2015 results and our 2016 outlook followed by a Q&A session. Consistent with prior calls we are going to be sticking with just one question per caller.

And as we normally do, we will be making some forward-looking statements during the call. Such statements are based on assumptions of future events that may not prove to be accurate, and as such, they involve risk and uncertainty.

It's therefore possible that actual results may materially differ from any forward-looking statements that we might make today and we direct you to the cautionary statements in the 8-K that we filed with our press release and in the most recent 1934 Act filing. I'll now turn the call over to our Chairman and CEO, John Lundgren..

Thanks, Greg, and good morning, everybody. Today we're going to spend just a few minutes reviewing a solid operational fourth quarter that wrapped up a really strong year before we discuss this year's guidance, and then of course take your questions. First for the year, organic growth was up 6% with Tools & Storage leading the way, up 8%.

Security was flat while Industrial delivered 2%. Operating margin expanded 90 basis points to 14.2% which is a post-merger record for the company. EPS of $5.92 was a 10% improvement versus 2014. Jim's going to provide a lot more detail particularly on the margins and growth by segment when he gets into the segment reviews.

Free cash flow came in at $871 million on strong working capital turns of 9.2 times. And in line with our previous commitments, we executed over $1 billion of share repurchase actions in 2015, wrapping up a really strong year in which we overcame numerous challenges not the least of which was foreign currency.

Guidance for 2016 is being established with an EPS range of $6 to $6.20 a share or a midpoint EPS growth of approximately 3% versus 2015. Don's going to take you through this in more detail later in the call.

Moving to the right on the chart for the quarter, revenue expanded 1% organically with total growth down 5% as the top line impact of foreign currency was negative 6% for the quarter.

There was a fiscal calendar phenomenon in the fourth quarter that did have a modest negative impact on organic growth that Don's going to address more in detail when he walks through the quarter, but I think it's an important point.

Operating margin rate for the quarter was 14.2% which was in 100 basis point improvement ahead of the fourth quarter 2014. Our margins increased due to continued sharp focus on price realization and some commodity deflation delivering operating leverage despite $50 million from foreign currency pressure in the quarter.

EPS with $1.78 was up 30% versus fourth quarter 2014 as the solid operational performance combined with lower tax, share count, and some restructuring less than the prior quarter offset the foreign exchange. Turning to slide five and an overview of the sources of growth for the quarter.

As previously mentioned, organic growth remained positive due to the continued strength of Tools & Storage, particularly in the U.S.

and the European residential and nonresidential construction markets, and the Stanley Engineered Fastening automotive business, which offset pressure in the Industrial channel, lower emerging market volumes and customer specific volume declines within the Stanley Engineered Fastening electronics business.

This growth was offset by foreign exchange headwinds of 6% in the quarter, resulting in total revenue down 5% as previously mentioned. Looking at it geographically, Europe led the way, up 3%, as share gains continued in the region and nearly every market contributed positive growth. The U.S.

generated 1% organic growth while solid Construction POS performance has left customer inventories in good shape as we enter 2016. Emerging markets in the rest of the world began to show signs of macro pressure to the top line, contracting 2% and 3% respectively.

There was, as always, significant variation among the countries, but China, Russia, and Venezuela showed the largest year-on-year declines. And quickly for the year, organic growth was 6%, 5% volume, 1% price. This growth was offset by 7% currency, netting down to a 1% decline in total revenue, as shown in the box on the left of the chart.

We were pleased that geographically the organic growth was shared around the world, spread fairly evenly of course with the U.S. leading the way at plus 8%, Europe plus 4%, emerging markets plus 3%, and the rest of the world plus 3%. Let me turn it over to Jim to get into some more operating detail on our three segments..

digital excellence, breakthrough innovation, commercial excellence, functional transformation, and core SFS.

I would encourage serious long-term investors to develop a deep understanding of SFS 2.0 in that this is not an investor relations marketing jargon but rather a carefully constructed and executed framework that enables our organization to extract maximum value out of our world class franchises.

We do this through capital efficient organic growth and continuous margin expansion. You have already seen the manifestation of commercial excellence in the organic growth and margin expansion in Tools & Storage and other parts of the company.

In 2016, you will see a growing impact from breakthrough innovation, digital, as well as the other elements of the initiative which is now in its second year and gaining momentum. I would also say that we are once again open for business when it comes to inorganic growth.

We look forward to supplementing our organic growth with a disciplined approach to M&A that we have deployed during almost 100 hundred acquisitions over the past 15 years, a period of time when we more than quadrupled our revenues and market cap and outperformed the S&P 500's total shareholder return by five times.

With that, I'll turn it over to Don Allan..

maintaining our focus on organic growth through both continued innovation and commercial excellence; ensuring progress within the Security segment to maintain the momentum we saw in 2015; of course, executing on additional cost and pricing actions to help partially offset our FX headwinds; and also being prepared to take further actions as conditions warrant; as always, maintaining our perpetual focus on working capital management and improving that as we move forward; and importantly, leveraging the pillars of SFS 2.0; and to continue driving momentum in 2016 and beyond.

That concludes the presentation portion of the call. Now, we move to Q&A..

Don, thanks. Stephanie, we can now open the call to Q&A please..

Thank you. We will now begin the question-and-answer session. Our first question comes from Nigel Coe with Morgan Stanley. Your line is open..

Thanks. Good morning, guys. Just one question in line with the rules. Obviously, the Tools & Storage performance in 2015 was exceptional. A big part of that was SFS 2.0 and the innovation pipeline.

I'm just wondering how does the NPI look for 2016? And maybe just comment on the share gains in Europe; any categories to call out there?.

Sure. It's Jim. The innovation pipeline for Tools & Storage is as robust as it has been at any time since the merger. And what we've been focusing on, if you rewind to 2010 when we put the companies together, there was a lithium-ion problem, they were losing share, we inherited that.

Fortunately, they had done a fair amount of corrective action that began to manifest itself shortly after the merger and we started regaining share. And then we, after a year or two of that, really came out strong with the DC brushless, a complete redesign of the DC brushless products.

And that became the fastest-growing segment of cordless, and we were growing at about 2x and still are growing at a very rapid rate vis-à-vis competition.

And then at the same time, there was a lot of, call it, incremental innovation going on in Hand Tools & Storage in revitalization of the Black & Decker brand and product lines, the Consumer Products and accessories as well.

So there's been a lot of, I'd call it, broad-based but relatively small-scale innovation in addition to the lithium-ion gains and then the DC brushless gains. So that's all really what's driven the NPI, that's driven some of the growth here in addition to the commercial excellence that you referred to.

Now, what's coming is something more on the order of breakthrough innovation, which is the real SFS 2.0. And without getting into the details of exactly what it is, I think if you stay tuned during 2016, you will start to see some pretty interesting innovation that would be more in the category of breakthrough.

And in addition to that, we will continue on with the incremental type innovation and the DC brushless and the continuing progress in lithium-ion. So, it really is a step function increase in innovation that is occurring in the Tools business, and you'll start to see the manifestation of that I think in the second half of the year.

As far as Europe, there's a number of things going on in Europe relative to the Black & Decker products, the Consumer business, the brushless, which is a big deal over there, and a number of other things.

But I'd say Europe is a combination to the NPI plus just the tremendous thrust into commercial excellence, which, as we've described it or as we describe it, involves a multi-pronged attack into the seven pillars, if you will, of customer-facing processes, which include gaining customer insights, driving innovation, driving brand awareness, being excellent at pricing and promotion, deploying the sales force properly, doing channel and partner programs that are very aggressive and successful, and then finally providing outstanding customer sales and post-sales support.

And it's a focus on all those various processes. When you put them all together, that's what's really driving the growth in Europe.

And I'd say on top of that, you have what I'd call second order revenue synergies from the Black & Decker merger that are even today manifesting themselves in further growth, customer white space, distribution channel white space, those types of things, brand white space are all helping drive the European growth..

Our next question comes from Shannon O'Callaghan with UBS. Your line is open..

Good morning. Hey, in terms of Tools & Storage, the outlook for U.S. construction still positive.

Maybe there and just for the broader company that we're getting this offset now from Industrial, can you sort of frame and provide a little more color on the magnitude of the drop-off you saw there in 4Q and what are your expectations for the drag from Industrial in 2016?.

Yeah. Shannon, this is John. Industrial markets are slowing down. That's the bad news. The good news is, it represents about 20% of our total business, 25% I guess with Industrial Hand Tools within Tools & Storage.

But if I can kind of address, I'll say, the elephant in the room, you're very polite or diplomatic about it, but I think I can answer your question quite helpfully. We strive to grow at two times the rate of the market in our Tools & Storage business over the long term.

And we've met or exceeded that objective over the past two years, as Jim just described, as the SFS 2.0 growth initiative started to gain traction. And this being said, I don't think it's realistic to plan such outsized growth each and every quarter from any global diversified industrial.

So in the fourth quarter, organic growth was lower than we planned, but the shortfall was in areas you'd expect, and a lot of information from Jim and Don, but to try to summarize it, we did have lower industrial channel volumes in Tools & Storage and Stanley Engineered Fastening.

That was a full point of organic growth relative to our expectations, and that's globally across the company. Another full point was lower customer-specific volumes and it's been well in the public domain from a large Consumer electronics customer for our Stanley Engineered Fastening business again within the Industrial segment.

But that contributed almost a full point of slower organic growth than our expectations. Something that's not directly related to Industrial channels, emerging markets' softness, if you will, contributed about a point. So, relative to the 1% reported, that's about 300 more basis points.

And then lastly, Don talked about the fiscal calendar phenomenon, which was another 100 basis points to 200 basis points. So, looking at it all that way, I think it's fairly straightforward. Without question, the biggest headwind being industrial markets in general and those markets in the U.S., in particular, because they've been so strong.

Conversely, as Jim just talked about, Tools & Storage in the U.S., up mid- single digits; Europe, up 6%. But that's driven by construction in retail, even e-commerce, which was way up. Automotive is still strong. We grew 6% in the fourth quarter, which is well above the rate of light vehicle production.

And Security Europe, our investments are paying off. It was up 3%. So, I think your question is spot on. Our biggest headwind on organic growth, obviously, that has nothing to do with FX, are the industrial markets. They represent 20% to 30% of our business.

And if they're flat, we think – the markets are flat, we think that's probably as well as they're going to do. And I think you can do the math from there. So, I hope that helps..

And if I could just offer a little additional insight on the Industrial. It's an interesting situation, because you have very much a sector-specific series of issues with agriculture, mining, and oil and gas or energy. So there's a capital – a CapEx kind of contraction going on in those industries.

And it's sort of spilled over to affect the overall MRO market as well. And then you have industrial markets such as automotive that are more driven by Consumer demand, and those are relatively healthy. So, within Industrial, you have a dichotomy of markets that are flat out on their back, and then you have other healthy markets.

And fortunately for us, a good portion of our Industrial exposure happens to be in the automotive. And if that holds up, that will be a very good thing. And we'll just see what – how long it takes for this ag, mining, and energy, those segments to kind of play out and trough out.

And then, at that point, I think we'll be back in good stead with Industrial..

Our next question comes from Mike Dahl with Credit Suisse. Your line is open..

Hi. This is Matt, on for Mike. Thank you for taking the question. I just wanted to ask on the Engineered Fastening business. Wanted to get your thoughts on the customer challenges you mentioned just on the electronics side, specifically.

So, how you may be addressing that, how you think that dynamic plays out in 2016, and how that is embedded in your organic guidance..

Don will give you exactly how it's embedded in organic guidance, because it's pretty much arithmetic. But as you would expect, it's a large customer. We don't – we just have a policy not to mention customers names on our call. But I think it's quite clear who it is, and that's their choosing, not ours.

That being said, strategically, it's to diversify our customer base just as we've done over the years in global Tools & Storage, where there was a point in time where the two largest North American big box retailers represented 40% of our business. Today, they're huge customers but they represent about half that amount.

The same thing with Engineered Fastening, and then will turn it over to Don. Less than three years ago, OEM automotive was more than 70% of the business. So, it was a conscious decision to diversify the verticals we serve, particularly with a focus on electronics, to a lesser extent, aerospace. And we've done that and it's been pretty successful.

So, we've had tremendous growth and then a step back relative to one customer's end market product sales being down. Simply said, within Consumer electronics, we need to diversify our customer base. We think we have as good a product offering as anyone to accomplish that. Of course, it doesn't happen overnight.

And then continue the strategic push, as Jim and the business leaders talked about in May, to serve more verticals. But Don can talk to you about the specifics of the one issue in Consumer electronics as it relates to our guide..

Yeah. So, our electronics business within Engineered Fastening, as John mentioned, was down substantially in the fourth quarter. They had about an impact of a full point across the entire company, which equates to about $25 million of revenue.

And that was a percentage decline versus prior year of close to 30%, 40% with that particular piece of the Engineered Fastening business. We expect that type of pressure to continue into 2016, and we formulated that into our guidance.

And that's clearly one of the pressure points that we are anticipating and it's a headwind against the organic growth of 3%. And so, it's one the reasons why the organic growth is at that number versus maybe original expectation, closer to 4%.

Our next question comes from Tim Wojs with Baird. Your line is open..

Yeah. Hey, guys. Good morning. I guess my question is just on construction. Curious what you're seeing in the market and kind of what you're embedding around non-res and residential construction in 2016..

I'll take that one. So, we obviously have a view that's positive related to construction overall and we think that is an appropriate perspective for 2016 at this stage.

And when you look at point of sale information from some of our major customers, we're seeing rates that – we ended the year with very strong growth rates and what we're seeing and expect that to continue here in 2016. As far as the break between resi and non-res, I think the non-res market continues to show a little bit of life.

We watch that closely in a portion of our Security business, in particular, our mechanical lock business is a good indicator of that. That business is demonstrating kind of mid- to high single-digit organic growth over the last year. We expect that type of trend to continue.

So, we're not looking for a dramatic increase in that space, but it's a relatively small part of our company, roughly $250 million, 300 million of revenue annualized but it's a good indicator of the non-resi market..

Our next question comes from Jeffrey Sprague with Vertical Research Partners. Your line is open..

Thank you. Good morning, gentlemen. Hey, I want to come back to currency more from a strategic standpoint if you can kind of address kind of the question. Looking at what's going on, obviously, there could be a debate on whether this is now just a cyclical phenomenon or a secular phenomenon. And I just wonder where you stand on that.

And really the essence of my question is if you believe it's more secular, what does the investment look like to further reposition the footprint of the company geographically to respond to that on a longer-term basis?.

Yeah. I'll start, Jeff. You used the caveat, if you believe it's secular, and I'm not sure we do. We could have a long debate about it. But even if it – we're going to do the same thing irrespective of cyclical. On cyclical, Jim, Don and I have been doing this a long time. You want to talk about the euro; everybody worries about it being on parity.

I've done business when it was at $0.85 and we've seen it approach $1.50. That's fairly cyclical. Irrespective whether it's cyclical or secular, what we can do the most, I think two things. We're not going to double down where the risks are high, but we're also not going to walk away from our investments.

We're going to stay positioned particularly in emerging markets and 50% of our revenue is outside the U.S. in those markets which will continue to grow albeit slower from a lower base to be in a position to leverage our share and leverage our volume when and if it turns around.

But the biggest thing affecting us and I think Don touched on it, we always talk about both translational and transactional. And as the transactional aspect grows to more than 50% of our foreign exchange headwind, what we're working very hard to do is move production and sourcing locally.

We have a goal to produce 50% or more of what we do in countries where we sell it. And if you take that to the next step, obviously, everyone knows you can't build a plant overnight nor would you want to nor would you want to put bricks and mortar down if you believe it's secular.

But what we can do is a much better job and we're working hard at it, qualifying local both raw materials and more important critical component suppliers. And if you're working in an emerging market, as I think you're aware, many of our components that are critical to quality are either U.S.-based or U.S.-produced or dollar-denominated.

To the extent we can qualify local suppliers, protect our IP but produce those critical components locally to be processed locally, that's going to be a tremendous offset or hedge. Don may want to add something to that..

Yeah. I think that particular point, what John said is exactly correct. However, the reality is that at this stage in certain parts of the world, Canada and Brazil being the best example, there's not a great deal of suppliers that are available that we can do that with.

So, that's something that we have to think about, is there an Asian company that we're currently working with that would – they could create a plant within Brazil and allow us to have a supplier locally, that is transacting locally. Those are all things that take time. These are not necessarily things that happen overnight.

In the meantime, we're doing things as much as we can that make economic sense over the short-term and the long-term. But I think we do view this as very much a cyclical shift, and if that view changes over time, then obviously, our view of where we manufacture will have to shift as well.

Because if you look at the history of Stanley and of course the history of Black & Decker separately, they're both known for pursuing the lowest cost possible and also maintaining the highest quality. And that's not going to change.

So as dynamics shift in the markets around the world and costs shift with it, we have to be flexible and agile and make sure that we're doing the right thing from a supply chain perspective..

Our next question comes from Rich Kwas with Wells Fargo Securities. Your line is open..

Hi. Good morning, everyone.

Two quick questions; one, John, what are your thoughts about asset prices now for potential acquisitions in terms of what you're seeing out there given some of the broader weakness in the global economies? And then second question, on Industrial margin, I think calling for relatively flat, Don, does that assume – how much of a decline does that assume in electronics? It sounds like you're assuming a pretty steep decline year-over-year within the guide.

But I just want to get the puts and takes and the risks to upside or downside to the Industrial outlook for margin. Thanks..

I'll take the asset price. They're becoming more reasonable just as is Stanley Black & Decker.

As I think Jim could not have been more clear in his pitch, Rich, that we are open for business in terms of growing this company by a thoughtful strategic acquisition that meets both our strategic goals and our financial hurdles as well as fits within our organizational capacity.

And I'll simply say, as multiples come down, I think, and valuations come down, there's more out there that could be attractive to us both domestically and outside the U.S. I don't think – there's so many bargains out there as we speak that we need to rush to buy something because it's never going to be at a lower price.

But our view is always to buy good companies at a fair price.

We've had a hard time meeting or exceeding valuation expectations in the last six months, but we see that – we see it, I think, as you might expect coming more into line, which is that and the fact that we think we have our Security business on the right track, which is why Jim made the point in his piece of the presentation.

We are open for business, looking at assets in the three strategic areas that we've previously identified..

And, Rich, on the Industrial question related to margins, certainly the impact from the electronics business within Engineered Fastening is pressuring margins as we expect significant top line pressure there.

We also, within that business, within Engineered Fastening, we have a kind of a general industrial sector that's about at $0.5 billion in revenue on an annualized basis that has been feeling pressure as well similar to the Industrial Tool business within Tools & Storage. For example, in the fourth quarter, that business was down approximately 10%.

And we expect that to continue at least into the first half. So those two things are definitely putting pressure on the top line and the margins. Now, offsetting that and going in the opposite direction is what Jim and both John had mentioned about the automotive production business within Engineered Fastening is offsetting that.

We expect growth probably in the mid-single digits again within that business in 2016. And we also have cost actions and various other productivity actions we're taking across Engineered Fastening to make sure that the margins are flat and hopefully a little bit better than that as the year goes on.

And then the two smaller pieces of Industrial, which is the oil and gas business and the hydraulic tool business, the combination that we call Infrastructure, we expect those to be relatively flat on the top line, maybe down slightly, and then margins flat as well as those markets are pretty slow at this stage.

But we think we've gotten through the difficult comps as we go into 2016..

Our next question comes from Robert Barry with Susquehanna. Your line is open..

Hi, guys. Good morning..

Good morning..

Good morning..

I was wondering if you could just talk a little bit about what's assumed for price in the outlook? And specifically, perhaps if you could unpack some of the moving pieces say price to offset currency, price to get paid for all the innovation versus maybe having to share some of the commodity deflation with the bigger customers. Thanks..

Sure. Fair question. Fairly complex to say the least..

Yeah. I'm not sure I can give all that level of granularity for a variety of reasons, but I will give you a little bit of color on this area. We do expect a modest positive in price in 2016, and there's really a makeup within that number. We do see more positive price in emerging market actions.

So as we deal with this currency pressure, in particular in Brazil and some of the other Latin countries, but then also in Canada as well, which is obviously not an emerging market, we expect some price increase there. So those are positives.

Some of the negatives, we will see a little bit of price pressure in different parts of the mature markets, because we have dealt with some significant commodity deflation; that's been a benefit to us.

We don't expect that to be significant, but those are very kind of surgical strategic decisions that our Tools & Storage team is very savvy at managing and working through as part of the overall offering to our customers..

I guess I'll just add to that. I think it is important because the very end of your question was more than fair in terms of getting paid for the innovation. We have a history of, if you will, protecting price or being paid by innovation just for that reason.

Specifically, to bring the same product or a minor modest incremental improvement to a customer, even in a flat commodity situation and expect the price increases unrealistic to say the least. Real prices have been declining 2% to 3% a year or 1% to 2% a year for the last 10 years, real prices.

So the way to protect price, I think it's probably more important in understanding why Don has confidence that overall we'll see some modest price, is to bring in some cases meaningful incremental but meaningful and in other cases, to Jim's point, breakthrough innovation to the customers.

If no one else has it, you can charge whatever – you can value price and charge what you believe is appropriate for it.

So it's far easier to bring a product improvement at a 5% or 6% higher price point, that way you cover your inflation, your labor inflation, or anything else that there happens to be there, the incremental cost of that improvement and you and the customer both win.

Because the customer can take his retail price up, you can take your wholesale price up, and thereby protecting margins, and everybody wins and it's a fair trade..

Our next question comes from Stephen Kim with Barclays. Your line is open..

Hi, guys. It's John Coyle filling in for Steve.

Can you maybe talk about the pace of activity over the course of the quarter? Did you see a deceleration as we got later into the year? And then maybe any thoughts on what you see now thus far in January?.

Yeah, this is Don. I would say that we didn't see anything that was really indicative of significant market trends. When it comes to our retail business in Tools & Storage, there's a lot of ebbs and flows in the quarter that are really dependent on when customers want products, refilling orders after the holiday season.

So from a general market trend, we didn't see anything dramatic within the kind of consumer side of Tools & Storage. On the Industrial side, it was pretty much a consistent trend throughout the quarter, other than electronics.

Obviously, electronics shifted to the negative dramatically in the month of November, and that held into December and is holding into the first quarter.

So we're not necessarily taking anything as far as market trends in the fourth quarter as a big indicator to the first quarter and beyond, beyond some of the things that we've already discussed such as electronics and general industrial.

But you know, I think the only thing that really shifted within the quarter would have been the electronics business with Engineered Fastening..

Yeah and the other thing I'll add to that that I think most of us are aware of, as it relates to our retail customers and the retail business in general, one of the reasons Don said that between 18% and 19% of our earnings take place in the first quarter. January is always a very slow month.

As I know you understand, and most people on the call do, our largest customers' fiscal years end in January. It's post-holiday season. They have a very appropriate objective of reducing or minimizing inventories as the year closes.

So simply said, whatever happens in January, we don't ever think of it as a good predictor or indicator of how the year is going to start. We need pretty much a full first quarter, particularly on the retail side for that reason to get a flavor for where we are and where we're going. Importantly, Jim pointed out, I think, most important.

POS was good in the fourth quarter, so inventories are in a good place. So nothing to suggest dire straits, but it's very early days..

Our next question comes from Mike Wood with Macquarie Securities Group. Your line is open..

Hi. Good morning. Can you talk about the progress you made in North America Security margins related to the vertical markets' learning curve? And where are you maybe just give us an update on the evaluation of the overall Security portfolio within Stanley? Thanks..

Okay. I'll answer the second question first, and nothing's changed since we communicated in May of last year at our investor meeting that we would be doing an evaluation that would take about a year.

And that we would during that period of time we were going to evaluate the operational performance as well as the strategic issues and opportunities related to the Security business and then we would come out with some sort of a position in the middle of 2016. And that continues to hold.

As far as the North American Security business, I mean, I think we're finding that in the verticals, the healthcare vertical is doing absolutely fabulously. It's achieved mid-double digit margins, mid-teens. And the issue with that now is how to grow it faster.

So we'll be making some investments to grow it faster, and it could be a substantial contributor to organic growth. The retail vertical I think is still kind of in the early days in terms of trying to figure out exactly where the value proposition could be and how big we can make that, how profitable it can be.

And so I'd say we're probably in about the third or fourth inning with the retail. But I would expect by mid to late 2016, we would make a lot of progress on that front as well.

I think the other verticals – and those are the two verticals that we're going to be emphasizing this year, and really get them right, get the healthcare one growing, get the retail strategy fully engaged. And then at that point, we'll decide do we want to add another vertical to our main area of focus..

Our final question comes from Jeremie Capron with CLSA. Your line is open..

Thanks. Good morning. And congrats on a very solid year. I wanted to ask you, Don, about the free cash flow. I mean, it's coming somewhat below initial expectations a year ago. And I wanted to understand what exactly drove the shortfall here.

I suspect that forex trends were a significant contributing factor here, and so I'm wondering if we should expect even more of a headwind on cash flow in 2016 given the transactional effects that you called out earlier. Thanks..

Sure. Yeah, I mean, as I mentioned in my comments, the free cash flow for 2015 came in a little bit lighter than we anticipated. And it was primarily due to less working capital liquidation as a result of the lower organic growth that we saw in the fourth quarter.

And it's interesting, the timing of how it played out is usually what happens in our Tools & Storage business in particular is that we have high levels of revenue in October and November preparing for the holiday season as well as doing kind of refill orders after Black Friday. And then we collect a lot of that by the end of December.

Because we saw a different trend occur in that particular business and obviously a lower organic growth number than our expectation, the result was that we didn't get the working capital turn that we were anticipating. We were anticipating turns of 9.5 times to 9.7 times. It came in at 9.2 times which are actually fantastic.

And at this stage, working capital turn improvement becomes harder and harder. The other dynamic is as we grow organically and you saw the significant organic growth we had in 2015, you have to improve your working capital turns even more to get a cash flow benefit.

So even with if we had achieved an improvement to 9.5 times to 9.7 times, we still would have had a slight negative within our cash flow statement for working capital. We would have had to get it much closer to 10 times to see a positive.

And that's just the reality of what we're going to deal with going forward that we won't see large working capital benefits in the cash flow statement, and we want to continue to improve working capital and get it over 10 turns over the next few years. And hopefully when we – as we do that, the amount of impact to cash flow will be modest.

It likely will be modestly negative. As a result, our cash flow on a go forward basis will still be very strong. As I said for 2016, I expect the conversion rate to be about 100% which would mean it's going to be somewhere between $900 million to $925 million for 2016.

We always look to improve our working capital more than beyond our goals and expectations, so obviously we'll be driving to try to outperform that.

But right now based on where we are with our working capital turns, we can't expect large cash flow benefits from that area and really the cash flow is going to come from the earnings performance and operational performance..

Stephanie?.

That concludes the Q&A session. I will now turn the call back over to Greg Waybright for closing remarks..

Great. Thanks, Stephanie. We'd like to thank everyone again for calling in this morning and for your participation on the call and obviously please contact me if you have any further questions. Thank you very much..

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..