Q4 2019 Earnings Call
Welcome to the fourth quarter fiscal year 2019, Stanley Black <unk> Decker earnings Conference call. My name is Shannon and they'll be operator for today's call. At this time all participants are in listen only mode. Later, we've opened up the question answer session. Please note that this conference is being recorded I'll now turn the call over to the Vice president of the vessel.
Nation Stenciling. Mr Line, you may begin.
Thank you Shannon good morning, everyone and thanks for joining us for Stanley Black <unk>, Decker's fourth quarter and full year 2019 conference call.
On the call. In addition to myself as Jim Loree, President and CEO , Don Alan Executive Vice President and CFO , and Jeff Hansell Executive Vice President and President of global tools and storage.
Our earnings release, which was issued earlier this morning, and supplemental presentation, which we refer to during the call are available on the IR section of our website.
Replay of this morning's call will also be available beginning at 11 am today.
A replay number and the access code or in our press release. This morning, Jim Don and Jeff will review, our fourth quarter and full year 2019 results and various other matters followed by kubernetes fashion consistent with prior calls we're gonna be sticking with one question for color and that's we normally do we'll be making some forward looking statements during the call such statements are based.
Done assumptions of future events that may or may not prove to be accurate and as such they involve risks and uncertainty. It's therefore possible that the actual results may materially differ from any forward looking statements that we might make today, we direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent 34 Act filings I'll now turn the call overdue.
President and CEO , Jim Loree.
Thank you Dennis and good morning, everyone.
Did you saw in this mornings press release, we successfully closed out the year with an inline for Q performance quarterly revenue was up 2% to $3.7 billion with organic growth from 2% amidst a mixed global macro or total company adjusted operating margin rate was 13.6% up 30 basis points year over year.
Sure.
Adjusted EBITDA for the quarter was $2.18 up 3%.
Full year revenues were $14.4 billion up 3%, well, they solid 3% organic growth performance.
Our operating margin rate was quite resilient at 13.5% just 10 basis points under last year, despite absorbing $445 million.
Oh, the external pretax headwinds from tariffs.
Facts and alike.
A significant portion of which we're not and could not have been anticipated at the beginning of the year adjusted EPS for the year was $8.40, a 3% increase versus 2018, a notable accomplishment under the circumstances.
And finally, we were thrilled to deliver $1.1 billion of free cash flow for a conversion rate of 113% NSF ROI of 14%.
Working capital turns improved to 9.8.
Turns up a whole turn versus prior year and the strong cash performance helped to support our growing dividend and enabled us to finish up the year with a balance sheet in great shape with a debt to EBITDA of approximately 2.0 times, while absorbing $900 million of capital allocation to M&A and 29 team.
And in this regard we closed on two previously announced transactions and during 2019 first our 20 present minority partnership with MTD provides a path to enter the 20 billion dollar plus outdoor power equipment market with an industry leader in a financially prudent way beginning in July 2021, we have an option to purchase the remaining.
80% of MTD with a potential to add approximately $3 billion of revenue at an all in EBITDA multiple in the range of seven to eight times. This option remains in place for 10 years, giving us maximum flexibility to enter the market at an appropriate time of our choice.
We also closed on the acquisition of E.S. attachments, a leading provider of off highway specialized attachments for prime moving equipment doing business under the Paladin and Pengo brand names. This transaction almost tripled the size of our infrastructure business unit, while further diversifying our presence in the industrial markets.
The business features high profitability good growth and is heavily weighted to the aftermarket which represents approximately 60% revenues.
In addition, today, we announced that we have reached an agreement to acquire consolidated aerospace manufacturing or Cam, which gives us an exciting platform for growth in the aerospace components and fasteners market and I'll provide a bit more color on that and just a moment.
Another highlight from 2019 was the progress made by our security business for Q was a significant step forward in the turnaround as we generated our best security organic growth and recollection at 4% with all major regions and businesses contributing North America electronic security was up 10% a very encouraging.
Indication of the power of our new business model security also demonstrated its ability to accrete its operating margin rate, which was up 20 basis points for the year and so we appear to be at an inflection point with increasing positive momentum in organic growth and a stable operating margin rate poised for accretion in 2020.
And as for the future of security in our portfolio. We look forward to providing you with a midyear update as promised however, we're confident in the value we are creating through this transformation, regardless of whether we choose to retain or to monetize the asset at some point.
So looking back in 2019, a lot of progress was made against a volatile uncertain backdrop of tariffs and other external headwinds. Despite the $445 million of pressures we more than held served with our financial performance. We continue to execute on our growth catalysts, including Flexvolt Craftsman ecommerce.
Yes, well atomic an extreme and acquisitions, we continue to enthusiastically embraced the growing importance of U.S.G. and multi stakeholder capitalism, recognizing the power of purpose driven performance and the importance of diversity and inclusion to the success of the corporation.
Our 60000 employees.
Board members and the many business partners and our ecosystem gave it they're all in we emerged well positioned to tackle the challenges and opportunities of the 2020.
And I want to personally thank each and every one of them for their contributions our performance. This year was no small accomplishment and I'm very appreciative.
That said I want to move to another developments that we announced today.
As indicated in our release today, we're sharing plans for a leadership succession in our tools and storage business and after 20 years, where the company Jeff Hansel has made the personal decision to step back from his responsibilities as president of tools and storage and take a less intensive role in our organization.
And we're pleased that we're able to share a seamless transition plan today with high May Ramirez currently senior Vice President and Chief operating officer of tools and storage assuming leadership responsibility for the entire unit over the course of the first half 2020.
Jeff has been an incredible collie.
Teammate and leader of tools and storage for 15 years now.
In fact over the last two decades few have contributed more to the growth and success of this company then Jeff He was integral to the historic Stanley Black <unk> Decker integration.
Created enormous growth for the company and during his tenure leading tools that unit grew from a 600 million dollar revenue hand tool business to a 10.1 billion dollar industry leader.
His passion for customers brands products and innovation is truly remarkable.
And even with that track record and all those accomplishments we were supportive.
When Jeff approached us about his interest in making this change.
Grateful for his many years of dedication and high performance.
But also completely respect his desire to spend more time on personal and family endeavors.
Further we appreciate his willingness to remain a major contributor to the company's success in the coming years.
So effective July Onest, two will transition his current operating responsibilities to Jaime and will assume the leadership of a major an exciting organic growth program involving the revitalization of the blackened Ducker brand.
He will continue in this role through the end of 2021 at that point will stay on as a strategic advisor to the company through the end of 20 to 23.
And as I mentioned Jaime will assume full leadership of the business by mid year. He is a 27 year veteran of Stanley Black <unk> Decker cutting his teeth in the emerging markets.
The agility adaptability and drive to when necessary to succeed in those high growth volatile markets will serve them well and in addition to is strong and proven execution skills.
Hi me as a champion of innovation technology, and digital transformation with a socially responsible approach.
We are confident that he is the right leader to take tools and storage into the future and he will bring that transformative focus along with his passion for the business to the role.
And many of you have met Jaime before and we look forward to use spending more time with him in the months ahead and the years to come and so on behalf of the board I mean, our entire management team.
Want to extend our heartfelt appreciation to Jeff for all his contributions and impact and leading our tools business to become the largest most innovative and most trusted tools franchise in the world and now I'll turn it over to Jeff to make few remarks.
Jim Thank you for the kind words.
It is a tremendous pride that after more than a quarter of a century in this company and a decade to half leading the tools business.
Share with you my decision to transition my responsibilities.
15 years ago, I set out to establish our tool business as the biggest and best in the world.
Mission has more than been accomplished at this point I want to share more time with my wife and children as they say willingly shared me. All these years. This transition allows me to do just that and at the same time remain professionally connected to the company that I love through 2023.
A great deal has been accomplished in the past 15 years by the tools and storage team in Maine.
And while I'm in transition the team that remains has delivered incredible results, including increasing the size and profitability of the tools business by more than 17 times, making us the world's largest tool company developing over 10000, new products and growing our flagship brand to their largest sized history, including Stanley Black <unk> Decker.
Irwin Lennox Craftsman and the wall.
I leave the tools business, an excellent care. The management team is the absolute best our industry and I've known and worked alongside Jaime Ramirez from more than a decade.
As long tenured successful track record in this wonderful company have compared him well for this role.
Our strength in every major geography in the world and our unparalleled stable of brands combined with our robust pipeline of innovation as well as pervasive faith and Jim Dawn and our entire management team and still tremendous confidence in me that this organizations best days are ahead.
I will always be indebted to our customers and employees for making all this possible and with this I turn the call back to Jim.
Thank you Jeff.
It's been a great journey and not over yet.
And before I turn it over to Dawn Alan I, just wanted to cover a little more detail on Cam.
Growing and diversifying our industrial business through M&A is a priority for the company and a key element of our strategic capital deployment.
Our vision presented at our 2019 Investor day is to create a three to 4 billion dollar global industrial platform that is made up of highly engineered application based solutions. We are looking for businesses that have the attributes you see on the left side of this slide strong engineering capabilities with technology that has industry leading.
Customer recognized and trusted brands and a recurring revenue component or heavily weighted aftermarket element.
Additionally, we went businesses that are global and scale.
And differentiate through innovation and operate and strong end markets and have the potential for robust growth over the long term.
Consistent with this strategy.
We're very excited about today's announcement of the Cam acquisition Cam is a leading manufacturer of specialty fasteners and components for the aerospace and defense end market. This acquisition is an ideal bolt on to our existing engineered fastening business and further adds to our industrial portfolio in a new high growth high margin market.
The transaction is valued at up to $1.5 billion with 200 million held back and contingent upon the 737, Max receiving timely epay authorization to return to service and Boeing achieving certain production levels.
When adjusted for approximately $185 million net present value of expected cash tax benefits.
The net transaction value is approximately $1.1 billion to $1.3 billion.
Sam has LTM revenues of approximately $375 million and attractive profitability characteristics.
Business has strong brands, a proven business model deep customer relationships and an experienced management team, which will create a pathway for profitable growth.
And value creation.
Given the favorable characteristics of the asset the for the year five cash flow returns are within our 12% to 15% target and is expected to add 30 to 40 cents of EPS accretion by year. Three this acquisition of Kim also gives us a platform asset in aerospace to add on future bolt on acquisitions.
A transaction is subject to customary closing conditions and we're excited to welcome Cam and its 1600 employees to the Stanley Black <unk> Decker family as soon as possible and are ready to get work to get to work on the integration and synergy plan once closed.
And as you take a step back to look at what we've accomplished in industrial over the past three years. It is notable that the acquisitions of Nelson, Yes, attachments and Cam align closely with our strategy and have increased our exposure to new end markets, while diversifying our industrial portfolio beyond automotive OEM. These three high quality.
He assets in the aggregate represent approximately $1 billion in revenue and 2.6 billion and strategic capital allocation.
Each carry strong prospects for revenue and profit growth as well as compelling cash flow returns and EPS accretion and now I will turn it over to Don Allen to cover the fourth quarter in our 2020 guidance.
Thank you Jim and good morning, everyone.
I would also like to express my gratitude to Jeff fan, so and let him know how much I enjoyed working with you for over 20 years.
We work together to drive our company forward operationally.
I will miss having you in those moments going forward, but I'm. So excited for you and the next stage of your SPD journey. Thank you, Jeff for being an amazing leader through this wonderful transformation of tools and storage.
Now I'll take a deeper dive into our business segment results for the fourth quarter tools and storage delivered 1% total revenue growth with 2% organic growth and a one point headwind from currency.
Price was modestly positive in the quarter, but slightly below our expectation.
We saw a promotional mix increase in North America, which partially offset the continued pricing benefits, we are receiving across the global business.
The operating margin rate for the segment was 16.5% up 110 basis points versus prior year.
The benefits of significant margin resiliency actions taken volume and price were partially offset by tariff.
And currency headwinds as well as unfavorable product mix and plant under absorption related to significant inventory reductions.
Total tariff in currency headwinds amounted to approximately 85 million.
For the entire company with 95% impacting tools and storage.
The unfavorable product mix was caused by reduced levels of hand tools accessories and storage revenue versus the prior year.
Which of course as higher levels of profitability combined with the increased promotional activities in the power tools SBQ.
We took the opportunity within the quarter to quarter to begin to normalize our inventory levels. Following the completion of the crafts been roll out and other various brand transitions, we have been executing across the marketplace. This effort resulted in a very strong cash flow performance, but the lower production volumes created a nonrecurring PNM headwind that we were able to.
Overcome.
These last two areas of operational pressures combined with lower than expected volumes emerged during the quarter and drove a negative impact on our segment operating margin.
However, we were mostly able to offset that with significant margin resiliency actions.
On a geographic basis, North America was up 3% organically.
Most retail continued to see strong momentum with mid single digit growth in the quarter.
The U.S. commercial channel posted low single digit growth, while the industrial focused product lines in automotive repair channel were both down high single digits.
We believe there was some ongoing customer inventory corrections that occurred during the quarter, which constricted our shipment growth in this particular area.
This is the second consecutive full quarter, we've experienced this negative impact in the channel.
North America's growth continued to be fueled by our brand rollouts, including Craftsman and new product innovations such as the Walt flexible.
Atomic and extreme.
Sell through continued to be robust across north American retail with the fourth quarter once again, delivering double digit Pos resulting in a double digit performance for the full year as well.
It is rewarding to see these growth catalyst generating such a positive response from our end users and delivering such a strong performance once again.
Europe delivered 3% organic growth in the quarter with seven out of the 10 markets growing organically. This performance was led by the UK, France, Central Europe , Greece and Iberia.
Which more than offset weaker markets and Italy and the Nordic.
Once again leveraged our strong portfolio of new products and commercial actions to produce above market organic growth.
Finally, emerging markets declined 3% organically weaker market conditions within Latin America more than offset the benefits from price new product launches and ecommerce expansion.
The Latin American market pressure was most acute in Chile, Mexico, and Central America, which in some cases, you are seeing the political environment or so-so disruption beginning to impact the business confidence and the underlying GDP.
We saw strong performances in Brazil, India, and China, which posted mid single digit growth.
Russia, Turkey, and Korea, all posted strong double digit growth.
Now, let's take a look into tools and storage SP use.
Our tools and equipment delivered 6% organic growth benefiting from strong commercial execution and new product introductions.
User response to our new innovations within Flexvolt atomic and extreme has been very positive and continues to translate into share gains for us and our customers.
And tools accessories, and storage declined 3% as new product introductions are more than offset by the aforementioned customer inventory corrections and a shift to more promotional items such as power tools.
In addition, the craftsmen comps are getting more difficult and this will cause a temporary pressured organic growth for a few quarters.
In summary, a strong quarter, an incredibly successful year for tools and storage generating mid single digit organic growth and an OEM rate expansion. Despite taking on most of the $445 million of externally driven cost headwinds that came our way in 2019.
An incredibly impressive performance by the team, which continues to be resilient and act on agility to position the business for future growth and margin expansion in 2020 and beyond.
Turning to industrial this segment delivered 9% total revenue growth, which included 13 points of growth from the I guess acquisition, partially offset by a four point decline in volume.
Operating margin rate increased 40 basis points year over year to 13.6% as productivity gains and cost control more than offset the impact from lower volume and externally driven cost inflation.
Our engineered fastening revenues were flat organically as higher system.
Shipments and fastener penetration gains were offset by inventory reductions and lower production levels within industrial and automotive customers.
Our industrial end markets remain challenged due to ongoing inventory reductions and slowing trends across these particular areas.
However, despite underlying automotive production declining for six consecutive quarter, our auto fastener business continued to benefit from penetration gains outgrowing global production by 410 basis points.
The infrastructure businesses declined 17% organically as volumes were impacted by challenging oil and gas pipeline and scrap steel markets.
Now, let's turn to security I'm pleased to report, we delivered 4% organic growth, marking the second consecutive quarter of positive organic growth.
North America was up 7% organically driven by increased installations within commercial electronic security.
And higher volumes and health care and automatic doors.
A very impressive performance in North America Europe .
Europe posted 1% organic growth led by France in Sweden, which was partially offset by continued market weakness in the UK.
In terms of profitability the segment operating margin rate was 11.2%.
Down 80 basis points versus the prior year as organic growth and cost containment were more than offset by the impact on the Sargent Greenleaf divestiture.
And investments to support organic growth.
The investments are significant and we'll begin to pay dividends, it's funny funny as the 2019 revenue impact was modest building momentum.
Without the impact of these two items security would have experienced significant margin rate expansion.
There was encouraging to see security organic growth accelerated in the fourth quarter and we expect the topline momentum to continue into 2020.
The business, we'll look to balance organic growth and OEM rate expansion on a consistent basis as we leverage our targeted investments in commercial electronic security.
We feel the business is well positioned for success, which is low single digit organic growth with consistent operating margin dollar and rates expansion.
Let's take a look at our free cash flow performance on the next page.
As you can see our free cash flow for the full year was excellent as we generated approximately 1.1 billion in 2019.
Up $312 million year over year, and a free cash flow conversion of 113% of our net income.
The improvement was due to higher cash from operations driven by our working capital improvements as well as modestly lower capital expenditures.
As it relates to working capital we delivered 9.8 working capital turns up one turn year over year.
As I mentioned earlier, we made the decision in the fourth quarter to reduce inventory levels within our tools and storage business.
As the heavy lifting from our brand transitions are complete.
As we look ahead, we still see opportunities to improve working capital back above 10 turns in the coming years.
We're very pleased with this result, as many of you know we have been very focused on getting our annual free cash flow back above $1 billion.
And now that we've completed the significant brand transitions, we were able to complete.
That objective and 2019.
So let's move to the 2020 guidance on slide eight.
We are expecting an adjusted earnings per share range of $889 up approximately 6% versus prior year at the midpoint.
On a GAAP basis, we expect the earnings per share range Vito five to 835 inclusive of various one time charges related to restructuring M&A costs as well as the security business transformation and key margin resiliency initiatives.
As a reminder, this guidance does not include the impact of the Cam acquisition.
In addition, we expect the free cash flow conversion will approximate 90% to 100% in 2020.
So, let's turn to some of the drivers of core EPS growth as you see on the left hand side of the chart.
We expect approximately 3% organic growth, which will generate 40 to 50 cents EPS accretion.
The actions associated with our cost reduction program announced in October our broadly complete and expected to deliver approximately 95 cents EPS.
These items will be partially offset by 60 to 70 cents, a carryover Tara and currency headwinds.
Finally below.
We expect a net 25 cents EPS headwind year over year. This includes a tax rate of approximately 18%.
This is up two points year over year and certain benefits experienced in 2019 will not repeat at the same levels in 2020.
Additionally, we are seeing about five cents of net headwind, which include share pressure related to previous financing activities, partially offset by favorable interest expense.
Just to clarify our tariff assumption, we are assuming the benefit within our guidance from the recently announced trade deal.
So this means lists for a is that 7.5% beginning in the newest February and list 123 remain in place at 25% rate.
This result resulted in a net benefit of about 10 cents in our guidance.
Which includes a reduction in our tariff expectation as well as lower than expected pricing benefits.
As it relates to pricing, we have benefits built into the plan across all our businesses, but since the tariff environment has escalated from for the time being.
Much of the new 2020 pricing, we achieve will be generated by execs executing margin resiliency actions.
So, let's turn to margin resiliency, we're now in full execution mode and expect to generate 300 to 500 million of cumulative benefits from this program over the next three years.
As a reminder of the margin resiliency program is generating accelerated productivity by applying technology to our manufacturing and procurement process processes as well as our back office.
This was developed as a response to the dynamic nature of the external operating environment, which we now view as our new reality.
As such we are leveraging the program as additional contingency to offset any incremental headwinds or market dislocations that may come our way throughout the year.
Should the external environment stabilize or in the event, we start to see some tailwinds, we will leverage this program at an opportunity to outperform our guidance or reinvest into our businesses.
I would now like to review our expectation for the next quarter.
We expect first quarter's earnings to be approximately 14% of the full year performance, which is about 300 basis points lower than last year.
The first factor driving this lower percentage of full year delivery is that we expect a little more than half of the 115 million a full year external headwinds to impact the first quarter.
Next we'll anticipate organic growth to be relatively flat.
In the first quarter.
We are planning for the global industrial environment to continue to be choppy and we're facing more difficult comps in tools due to the craftsman rollout.
While we expect crashed into still deliver about two points of growth within the tools and storage segment in 2020.
The first quarter discreetly is one of the toughest comparisons for the loaded which started to intensify in the first quarter of 2019.
These two factors represent approximately two thirds of the reduced first quarter contribution, resulting in a relatively consistent operating margin rate and dollars versus last year.
The remaining one third of the first quarter differences related to higher than expected tax rate.
And the impact from consolidating MTD useful winter season.
Now, we're going to turn to the segment outlook on the right side of the page.
Organic growth and tools and storage is expected to be at mid single digits in 2020.
There are multiple catalyst supporting growth, including core innovation benefits from our breakthrough such as flexible atomic and extreme ecommerce and the continued contribution from the brand transition with Grassman Stanley and Stanley Fatmax.
Margin rates are expected to be positive year over year as we realize the benefits from volume our cost actions and productivity, which will more than offset the carryover impacts from the external headwinds.
In the industrial segment, we expect to relatively flat to modestly negative organic performance.
This outlook reflects the current slow market conditions within the automotive and industrial end markets as well as the oil and gas pipeline and attachment tool markets.
Our expectation is that the front half will continue to carry similar market pressures as what we saw in the back half of 2019.
Once we get to the second half, we do see the opportunity for better performance and potentially much growth as the calm seas.
Operating margins in the segment are expected to be positive year over year as productivity and cost actions are partially offset by modest tariffs and currency headwinds.
Finally in the security segment, we are expecting organic growth to be up low single digits in 2000 funding.
With the investments we've made over the past year. The team has positioned the business for more consistent top line performance.
This is expected to translate into improved operating margins year over year, as we leveraged volume and deliver on our focus initiatives to lower our cost to serve.
One last matter as it relates to guidance with the recent virus outbreak in China, we are anticipating some questions as it relates to our manufacturing footprint.
First our major facilities and suppliers are not located in the effect in area.
Our largest tools and engineering fastening facilities are located in the broader Shanghai area.
We also have plants that are in mainland China adjacent to Hong Kong in Macau as well as the plant along the eastern coast.
We are staying close to the situation and the team is working through contingencies for manufacturing and for our supply base.
With what we know this far about the one one week extended shut down for Chinese new year. We feel this has an impact that as contemplated in our guidance.
Of course, this is a very dynamic situation and our teams will react and respond as conditions change and we will update you as we know more throughout the quarter.
So in summary for our total company, we expected 3% organic growth.
5% to 7% adjusted EPS expansion inclusive of a two point tax headwind.
A solid result in a balanced view that focuses on delivering margin expansion by realizing the benefits of our cost actions and generating volume leverage to successfully overcome the carryover impacts from tariffs and currency.
We believe we are taking the appropriate actions to position the company for success in 2020.
The organization is focused on leveraging our organic growth catalyst executing margin resilience in resiliency generating strong free cash flow and successfully integrating the cam and I guess acquisitions.
With that I would like to turn the call back over to Jim to close out with a summary of our prepared remarks. Thanks done one less look at 2019. It was a successful year considering the environment. The performance was possible due to the agility passion and dedication of our workforce and I think our people for their commitment. If there are extraordinary dedication passion teamwork and share will to win.
That makes this company so special.
Our teams active with speed and determination, while facing into $445 million currency commodity in tariff headwinds as well as very dynamic end markets, we delivered 3% total revenue growth, including 3% organic growth and our own them rate remains strong at 13.5% and adjusted EPS expanded by 3%.
And it really positive free cash flow was $1.1 billion with very strong conversion and suffer a consistent with our long term financial objectives and as we turn to 2020, our leadership team will act with agility, leveraging our proven ever evolving operating system to successfully navigate the underlying extra.
It'll environment.
And Additionally, we're continuing to execute on our margin resiliency initiative 300 $500 million over the over several years.
To get our margins back on an upward trajectory despite whatever headwinds might appear on the horizon. We're looking forward to another successful year in 2020, continuing to achieve our vision to deliver strong financial performance become known as one of the world's great innovative companies and elevate our commitment to corporate social responsibility, we are ready for the 20 Twentys and now.
We are ready for culinary Dennis.
Great. Thanks, Jim Shannon, we can now open the call acuity. Please.
Ladies and gentlemen to ask a question at this time. Please press Star then one or your telephone.
Your question press the pound.
We ask that you. Please limit yourself to one question. Please stand by what we somehow the county roster.
Our first question comes from Jeff Sprague with vertical research partners. Your line is open.
Hi, Good morning. This is Brett linzey in for Jeff Hey, just wanted to come back to the incremental revenue opportunity. I think you said two points contribution from crafts and but if we include some of the other key programs flexible a comic extreme with with Craftsman. What are you contemplating in the guide in terms of incremental growth from those programs.
Thanks.
Yes, I would say that the two points for Craftsman, obviously as stated in my prepared remarks, we expect mid single digit performance for the overall business on a global basis.
You'll have that the other share gains that we will achieve above.
Market GDP, which is probably in the high ones. If you look at our global mix.
Anywhere from one 8% to 2% and so.
Any other share gains that we gain along there will.
Add to that and then we do have some pressures as I mentioned in emerging markets that we expect to continue in the first half and in some of the industrial tool channels as well in the first half that will be a bit of a drag on that that.
No. Those those are the main categories I would expect regain some of those innovations craftsmen.
Market growth of close to two and then you're going to have some drag in the areas that I mentioned that kind of gets you to that mid single digit number.
Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is open.
Hi, This is Jason Mckee shield for Julien just a question around the first quarter guidance, let particularly around the margin rate I think last year. There was about a $40 million to $50 million inventory charge taken as a result of commodity cycles in the tools business is there a reason why despite that theoretically being in.
Non repeat in Q1 20 more operating margin rate is going to stay sort of flat year on year can we get a little bit more color as to what the offsets are and then maybe just any guidance around what the total commodity headwinds flash tailwind is for the full year.
Yes, so the first quarter I mean, as I mentioned in my comments, we do have.
An incremental tariff and currency headwind of the annual number is about 150 million and I said about half of that is going to hit in the first quarter. So thats clearly of the magnitude of.
I'm very similar to the number you mentioned related to the item in the first quarter of.
2018, so that's that's a significant drag that we're seeing.
So you had a onetime now that last year that goes away, but then you have this particular issue.
That comes in the and if you look at the split for the full year at $750 million headwinds the tariff numbers you know.
80 to 90 million and then the rest as currency commodities at this point, we expect to be neutral but of course, that's an opportunity as we go throughout the year to see if we get a little bit of deflation as the year goes on.
Thank you. Our next question comes from Tim lows with Baird. Your line is open.
Yes, Hey, Hey, guys. Good morning, good morning, good morning.
I had two part question if I could so I guess the first six.
The guide for Q1 implies acceleration through the year in tools and some more meaningful margin improvement through the year. So I guess, what's your line of sight to both of those within the tools segment and then the other side of this is Jim you talked about Black <unk> Decker revitalization I was hoping to give us just a little color on what exactly that means.
And you take the first part.
Yes, so we really respect and appreciate you so much where it actually going to take your two part question, even though it's really two questions.
Todd.
I think it's very very cool how are you addressed that though two part question. So it's really one question.
Yeah, so the cadence for tools is that.
We expect.
The first quarter kind of relatively flat, maybe down slightly for organic growth but.
I feel like it will be close the relatively flat.
And as you go throughout the year this comp issue that we're dealing within.
In the first quarter for Craftsman is quite significant it's almost three points in the quarter and so.
When you factor that in and you factor in some of these slower markets I mentioned in emerging markets and industrial that's kind of how you get to that number.
Thats going to start to regulate in Q2 Q2.
And then obviously you only get to the back half you don't have those pressures you're dealing with year over year and.
We expect nice growth from the program of craftsmen for full year as I mentioned two points and.
I will remind everybody. The Pos continues to be very strong for craftsman and its double digits that has been double digits throughout 2019, and we expect to continue to be strong as we go through 2020 and the success of this rollouts will help us drive that type of performance and then what we expect some of these markets to get a little better in the back half.
And that's probably the right way to think about the cadence and on the revitalization of the black conductor Brendan This is an opportunity.
That has been in front of us for a long time minutes.
Taking a lot of thought and preparation and we've had so many other priorities and revitalizing brands that.
It was a little bit lower on the list, but it truly is a remarkable brand one of the great consumer brands in the in the world.
And it's it's an opportunity to unlocks with great value from this asset.
Jeff.
As you know was.
Mastermind behind the Craftsman.
Revitalization.
And execution of that and.
Now he tackles, this black and Ducker project and and he is actually work done a fair amount of work on this already has a fair amount of definition for what it is but how much of that he and we want to share right now is.
It is not very much because there's always the element of.
Confidentiality and and to some extent surprise when it comes to the sort of things.
But I will.
Turn it over to Jeff you can tell them whatever you'd like to disclose at this point in time, recognizing that it won't be too much.
Okay, So well data under what Jim said I get the Genesis of this.
Was that blackened deck or in any survey any steady you do as Zach iconic remains iconic from an aided and unaided awareness perspective, and we looked at the and the progress across our tremendous stable of brands. These past 10 years and I'll give you a rough ranges but.
We had growth like 70% in the Stanley brand.
Nine and 10% would Lenox and Irwin since we acquired it.
Over 250% in the wall and 500% Kras and we love those numbers were really excited.
Fueled that growth blackened Decker is also had the biggest the largest size in history, but it's certainly been up about 3% in that timeframe. So we look at it as they really opportunity cost we could do so much with that brand. We havent had the time to do it.
I now have the opportunity to do just that and now we're excited about what can happen in next few years here.
So you can see we're not disclosing a whole lot right now other than as a big opportunity.
But more to come on the you'll you'll see it over the coming quarters should have some impact by next year and really material impact beyond that.
Thank you. Our next question comes from Nicole Deblase with Deutsche Bank. Your line is open.
Good morning, guys good morning learning.
My questions around free cash conversion, if you guys could talk a little bit about the differences between the low and high end of the guidance for 2020, and I guess, what's the scope to get to 100% plus conversion sustainably from here.
Sure, Yes, I would say that for 2020 that range of 10% of 90% to 100% is really dependent on probably primarily two factors one would be.
Working capital and Yeah, we did end the year add I'll close to 10 turns and so we will we will continue to drive improvement in that number but to get a positive impact on your free cash flow related to working capital you need at least the half to.
Seven tenths of a turn improvement for the whole company to make that happen. So we might get close to that but.
It might actually be closer to neutral than a positive impact from working capital and then Capex will will be.
Something that continues to be between 3% to 3.5% of our revenue.
But we also know that probably at the higher end to that range and funding funny as we start to work through some of these China supply chain mitigation strategies as we move production to other countries in certain cases as well as we will we will be building our.
Our craftsman plant in Fort worth, Texas, as well and they'll be a fair amount of costs in 2020 related to that so those are really to two factors that kind of results in that variation. Our goal is clearly to get to a 100% or more and always is but we occasionally on an annual basis, we'll manage that to achieve these other strategic objectives.
Thank you. Our next question comes from Michael Rehaut with Jpmorgan. Your line is open.
Thanks, Good morning, everyone.
First question I, I guess first and only question I have is on just kind of parsing out from 20 to 20 guidance a little bit more.
Specifically just wanted to revisit the margin resiliency initiatives you referred to it in the prepared remarks is something that you expect to continue to materialize and just wanted to get a sense of how you're thinking about that flowing through in the time.
I mean that benefit flowing through in 2020, if you're still thinking about the.
100 to 150 million dollar type of benefit for the year and how it would.
Hit the PM now and then just as a slight.
Clarification.
The 200 million cost reduction I'm coming to that being about a dollar five.
EPS benefit I just didn't know if my math is often there was something different between that and the 95 cents.
Yes. The last part of your question is really just kind of timing of.
At that particular.
As certain things certain parts of the World you can't do it as quickly as you'd like so you'll have a little bit of impact of that that's why it's about 10 cents different than what you're calculating for your math.
But that obviously will carry over into 2021 margin resiliency I'm glad you asked that question. The if you remember from the October earnings call. When we gave you. Some initial thoughts about 20, it's funny glue, which we were really had the objective of trying to position the company with an EPS growth that was reasonable given.
In the headwinds that we we were going to experience or as a carryover into 2020 and I think we've done that with the guidance today at 6% midpoint, but we also wanted to margin resiliency to get about 100 250 million a value in 2020, but we wanted that to be more of a contingency and I mentioned that in my comments.
Earlier, and that's really the plan so.
It's not baked into our guidance right now its therefore, if other headwinds come our way that we have to deal with.
Like this virus in China as an example might be a little bit of a headwind over a period of time currency might be a headwind that emerges or.
It Doesnt emerge these headwinds don't happen and it's an opportunity for us to outperform and as I mentioned reinvest in the business the cadence by quarter is relatively consistent.
Snack and to be backend loaded in a big way so.
I would expect you could be pretty close to evenly split maybe 40% in the first half 60% in the back half.
Hi, Good just had.
When we look we look at the environment that we're in.
Over the last.
Three years the.
External headwinds have averaged about $300 million year.
And if you look at the five years preceding.
The 17 to 19, which is would be the last three years, we look the previous five years.
They averaged $135 million a year. So we had a step function change in and headwinds in most of those headwinds at the beginning of the year.
A significant proportion of them were.
It was impossible to plan for them.
So I think we're sitting here at at this juncture with.
The potential that we could have headwinds of hundreds of millions of dollars like we've had over the past few years.
And obviously, we have some of that in the plan or or not or something less than so.
It's only prudent to reserve a pretty significant.
Contingency for the potential that we could have really really significant headwind similar we've had over the last three years.
And so thats kind of where we're thinking about it and if they don't come then we have a fantastic opportunity to outperform our earnings as well as reinvest in the in the company in the company's growth.
Thank you. Our next question comes from Deepa Raghavan with Wells Fargo Securities. Your line is open.
Hey, good morning, Thanks, and good morning learning.
Yes.
Jason is on capital deployment, it's a good start, especially purchasing some defense exposure with Kim.
But.
On what's how should we think about the plumbing piece the pace of deployment going forward given the 1.5 billion cash deal takes out how much of the excess cash availability over the year, even as you are de leveraging.
Any thoughts there.
Thank you.
I'm going to tackle that question because.
Because.
Does that so many questions about guidance I want to give them a break.
But also great and then we both think about capital deployment quite a bit and we happen to agree on our approach and so.
As most of you know.
Long term capital deployment strategy is to allocate 50% of our excess capital to M&A and 50% to.
Giving back to the shareholders in the form of dividends and repurchases.
And over the last 20 years, you will if you calculate that you will find that it actually turns out to be 50%.
50, 50, and so we've been true to that.
We will continue to be treated because we think that for this company that is the best value creation strategy for the long term.
And so we shouldn't look at these things necessarily in isolation.
But from a tactical point of view.
We were a 2.0 debt to EBITDA.
At the end of the year this will take us up to 2.6.
For a period of time until we until we work it down again.
So there won't be a lot of M&A activity of significant M&A activity this year.
Yes, something really significant comes along and then we look at what are the options and going forward. We have we have the security business, which is a potential asset to monetize if something really down the fairway came along our way. We also have the MTD.
Options in front of us, but we have 10 years to execute that so theres no pressing needs to have the.
Probably about $2 billion of.
When we finally implement execute that option would be about 2 billion. If we did it in the 20 122 timeframe.
So.
I think we're in a great position from a tactical point of view to we have the opportunity to.
Create excess capital if we if we see something really great that we want to.
Secured on in terms of M&A, we also have.
The opportunity to kind of take.
2020 is sort of a rebuild the balance sheet year back to where we want it to be for the for the dry powder and we'll go from there.
Thank you. Our next question comes from Justin steer with Zelman and Associates. Your line is open.
Thanks, guys just wanted to just follow up on the comments on the promotional cadence and channel inventories you mentioned that being full for at least a portion of the tool storage business, you mentioned promotions being a little bit more elevated in parts of the powerful business just wanted to get a sense for what's going on there and thinking about the incremental tariffs incremental pricing.
If if these elements are going to make it really difficult to get incremental pricing to at least partially offset the carryover tariffs and currency.
Yes so.
I'll take that the promotional activity I would kind of summarize additives and intense holiday season, there were lot of things going out in the power tools space and.
We ran probably higher level promotions than originally expected as we went into the quarter, which you know that can happen sometimes in a holiday season like the fourth quarter, even in the second quarter occasionally and as we go into the US late spring and summer. So I would just say that's things that happen and nothing really unusual about that.
I would also say that the you know we did have a little bit of production in the inventory in the channels by our customers and so not a massive reduction and weeks on stock, but there was a little bit of a reduction in some of our major customers which is good.
Because thats, a just managing their inventories appropriately and as you know if in the case of one of our customers in particular.
They build a higher level of inventory or do those significant launch.
Craftsmen.
Thats going have to continue to be something we monitor, but we're going to manage that throughout the year.
As.
We go through 2020, and still achieve two points of growth as I mentioned for kras been as we manage that dynamic and if the POS continues to be strong the way. It has been in double digits that amount that we have to manage inventory will become smaller and smaller.
As far as tariffs go the 85 million carryover a lot of that as tariffs that were put in place in the back half with some pricing put in place in that.
Period as well so there is little bit of carryover price, but.
We're going to manage price more through the margin resiliency initiative versus specific pricing actions for tear sobi, a little bit of that associated with for a.
Yes.
That's not that's not a large number.
Thank you. Our next question comes from Ross Gilardi with Bank of America. Your line is open.
Hey, good morning.
Good morning.
I'm just wondering can you give a little more details on on Cam like how profitable.
The business.
When one of the transaction Agnew actually close.
As the wise the accretion so.
Far out.
I realize you're hearing the same question.
A number of questions, but just really some more color on cam aftermarket versus though we.
At Boeing exposure and whatnot.
Sure I mean, we're.
We're not disclosing the actual profitability profitability level at the request of the.
Of the Cam folks.
However.
Suffice to say that it's a high growth high margin business.
And.
The substantial EBITDA and EBITDA growth potential ahead of it the.
The aftermarket is a pretty significant part of the revenue base.
It has grown approximately 6%.
Organically over over the long term.
So a very nice asset high growth high profitability good aftermarket content.
And a lot of engineering content, which.
Lot of these components are critical.
In critical functions on the on airplanes. So.
We're very very happy too.
Made this acquisition is it's a strategic platform there are.
Multiple multitude of bolt on opportunities as well as some larger opportunities that.
May or may not become available over time, so it just gives us a.
Great runway for future growth.
Thank you. This concludes the question answer session I would now like turn call back over to Dennis Lang for closing remarks.
And then thanks, we'd like to thank everyone again for calling and this morning in for your participation on the call. Obviously, please contact me if you have any further questions. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.