Q1 2020 Earnings Call
Welcome to the first quarter 2020 Stanley Black <unk> Decker earnings Conference call. My name is Shannon and they'll be operator for today's call. At this time off participants are in listen only mode. Later, you'll need to question answer session. Please note that this cost us near record it.
I'll now turn the call over there to the Vice President Investor Relations finish line as to why do you may begin.
Thank you Shannon good morning, everyone and thanks for joining us for Stanley Black and doctors 2021st quarter Conference call on the call. In addition to myself as Jim Murray, President and CEO, and Don Allen Executive Vice President and CFO.
Our earnings release, which was issued earlier this morning in a supplemental presentation, which we will refer to during the call are available on the IR section of our website a replay of this morning's call will also be available beginning at 11 am today, the replay number and the access code or in our press release. This morning, Jim and Don will review our 2020.
First quarter results and various other matters followed by acumen eight session consistent with prior calls we're gonna be sticking with just one question for color and as we normally do we will be making some forward looking statements during the call based on our current views.
Such statements are based on assumptions of future events that 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 our 8-K that we filed with our press release and in our most recent 34 Act.
Filings.
Now I'll turn the call over to our President and CEO, Jim Loree, Thanks, Dennis and good morning, everyone.
I'd like to begin with a short passage from her most recent shareholder letter and I quote the new decade is upon us and whether it comes a host of new challenges with the most significant one of them all being something called Luca.
Term, which emanated from a military college in the U.S. in response to the onset of the post Cold War era.
Luca stands for volatility uncertainty complexity, and ambiguity and well back in that period Luca described the backdrop for the formation of a new world order.
At this time I believe it describes what leaders of all institutions will have to consider as we device strategies and tactics to thrive and what can now be called the new world disorder of the 20 Twentys, it's an exciting world full of disruptive risks and opportunities with the accelerating pace of technological change always pushing the limits of what individuals and institute.
Actions can absorb.
2019, we put much thought into what it will take to win in this environment and we were perhaps less by having to deal with the unusually volatile conditions. We faced in 2018 and 29 team [laughter] for structural reasons. Our recent external challenges may have been more pronounced and then countered by most diversified global industrials.
Roughly we feel blessed that we have experienced I'm in adored through them have now emerged with the fitness and mindset to take on the challenges of the 20 Twentys end of quote.
I put the finishing touches on that shareholder letter on February nine several weeks before the devastating impact of covert 19 began to unfold in real time across the globe. It struck suddenly in jarring Lee and well no one could fully understand what to expect next didn't exactly how it would impact public health policy consumer behavior, the global economy.
Our markets et cetera, our management team truly did have the fitness and mindset to tackle the first great challenge of the 20 Twentys Cobot 19.
We'll go World had arrives earlier and more forcefully then could ever have been imagine.
We acted swiftly and decisively to establish key priorities.
Including one ensuring the health and safety of our employees and supply chain partners to maintaining business continuity and financial strength and stability.
Three serving our customers, who provide essential products and services to the world and for doing our part to help mitigate the impact of the virus across the globe.
These priorities create clarity for our people and our stakeholders in the time of crisis through that framework, we empowered our leaders to take the necessary actions to protect our people our company now customers in our communities.
First and most important as the health and safety of our employees and our supply chain partners.
As a provider of a central products and services to the world. We have been permitted to continuously manufacture products since provide services.
Most locations around the globe since the inception of the locked down.
It began in China with our 10 plants, they're operating continuously.
After returning from Chinese new year in early February.
We took extreme measures to protect our 8000 workers, there, including temperature screening mandatory use of masks and other pp social distancing frequent hand, sanitizing, an automatic quarantine.
Quarantining of anyone exposed to international travel or other high risk situations. In addition, all Chinese employees, who are able to work virtually we're required to do so.
These precautions were so effective that today, we have had only one known instant southern employee in China testing positive for covert 19, and she has recovered.
That early learning in China proved critical useful to managing safety and global operations as it enabled us to establish a standardized safety protocols based on applying our China practices as the virus worked its way around the world.
Among approximately 25000 manufacturing and distribution workers globally, we have had fewer than 50 test positive to date.
We track each employee case continuously as it develops we've had only a few locations out of our 100 plus factories in D. sees with any notable spread although we've had one where nine cases were detected within a 12 day period, we immediately and voluntarily affected a temporary shutdown of that facility for sanitizing and sent the majority of employees.
Home for a mandatory for gene decor and team.
For the total company comprising approximately 58000 associates, we've had less than 100 employees test positive for Cobot 19, a testament to our safety culture and the importance we place on protecting our people.
And what we recognize that the situation can change quickly with respect to this virus. Our safety measures are largely working that health and safety commitment and execution has enabled us to maintain a supply chain that as functioned at a high level. Thus far during the crisis, providing business continuity with few and only relatively minor supply disruptions.
This is a day to day management process. However, we can say at this point so far so good.
And as for the company, we were in a strong financial position coming into the crisis and we remain strong today not surprisingly.
We are anticipating that cobot 19, driven just demand disruptions will negatively impact our full year revenue outlook and therefore overall financial results in 2020.
And here's what we've seen relative to demand.
Overall demand in January and February was consistent with our now withdrawn guidance that was issued in January into March as the locked down unfolded in Asia Europe, and then the U.S. selling volume fell into deep negative territory at levels in the aggregate even deeper than Oh wait onein the.
The automotive industry in Europe, and North America, essentially shut down commercial aerospace experienced similar dynamics general industrial orders dried up as plants, not providing essential products and services were closed around the globe and major your European countries, such as Italy, France, and Spain as well as many in emerging markets basically shut down there just.
Crush and area non essential economies.
Most states in the U.S. followed suit after California as March 19th stay at home order.
North American retail was a bright spot as homebound DIY wires flocked to home centers and ecommerce to stock up on tools and other projects supplies driving positive Pos.
Retailers generally took that opportunity to trim inventories, however, creating a large gap between sell out and sell in which has continued into April.
As a result, we recently withdrew our previously announced guidance for the year and today will be detailing a comprehensive cost reduction inefficient efficiency program that will deliver a $500 million of savings in 2020 above and beyond variable cost reductions and $1 billion over the next 12 months. The primary focus is to.
The one adjust our supply chain and manufacturing labor base to match the current demand environment.
Secondly, substantially reduce indirect spending.
Third reduced staffing in a manner that ensures we're prepared for a demand recovery at the appropriate time.
And fourth.
Capture the significant raw material deflation opportunity that has emerged as the economy has weakened.
I recognize that this is a difficult time to make reduced work decisions that impact employees, but these actions are necessary given the decline in demand we are seeing and with that said, we are being thoughtful and executing these actions with compassion as well as consideration to position the company to capitalize on a recovery as the crisis subsides.
And so side it will.
We're already seeing green shoots, suggesting that economies in industries around the world are either rebooting.
Or preparing to reboot in the coming weeks home Center Pos in North America is remarkably positive as we speak ecommerce volumes are up in double digits European and U.S. auto is preparing to resume production governments are beginning to print permit non essential manufacturing to resume et cetera.
All of this suggests that as we see it today second quarter will likely be the trough in 2020, albeit a deep one at that.
We believe we have sufficient flexibility to navigate through this volatile period.
And emerge even stronger on the other side.
We have stress test our business for a wide variety of demand scenarios.
And have initiated the necessary actions and contingency plans to maintain a solid financial and operational foundation. During this unpredictable period.
Don will provide more color and detail on these in a few minutes.
Also important in this crisis is our mission to assist our governments and communities and mitigating the spread and impact of the virus around the globe.
In the face of today's challenges we are seeing the best of humankind people businesses governments Ngos are coming together and as an organization. We are taking steps around the globe to do our part.
Now is the time for corporations like ours to demonstrate how we can align our resources to help deliver the innovative solutions and positive suicidal impact the world needs right now.
We are participating in a number of ways using our expertise and innovation and our financial and operational resources to be a force for good and make a difference in our communities to start we are contributing to covert 19 really funds in the U.S. and globally in support of those who have been catastrophic Lee impacted by the virus as part of this probe.
We are matching all employee donations globally to for one to help our colleagues making impact in their local communities. In addition, we are setting up I really fun for our own employees and their families to help those who've been severely impacted by the virus and are in need of temporary financial assistance, we're looking at ways to use our supply chain scale.
To help acquire critical P. P E and other medical equipment that is needed for instance, we purchase threemillion face masks for philanthropic distribution.
So vulnerable adult living facility frontline workers and residents who desperately need protection.
And we have created a cobot 19 response task force comprised of cross functional leaders throughout our organization that are focused on leveraging their expertise to develop solutions to help combat the virus.
Our teams are working on three D printing faced shields for healthcare workers and have partnered with other companies to develop emergency hand, sanitizers supplies as well as they do all powered portable battery respirator.
Our teams are supporting those who make the world, especially the front line care givers and first responders the workers and our customers factories construction workers and many others.
They are each giving it they're all to help keep us safe healthy in functioning well.
Their work contributes to society in so many ways not products and services are helping them to do their jobs every day the people that make the world.
Now I'll turn briefly to first quarter results.
Revenues were 3.1 billion.
Down 6% versus prior year, driven by a 7% organic decline primarily related to the impacts we experienced due to the cobot 19 pandemic.
Adjusted EPS for the quarter was $1.20, which was better than otherwise could be expected considering the demand headwinds that emerged in March.
Our business teams are focused on cost control and supply demand balancing and are realizing the benefits we anticipated with the margin resiliency program.
The strong execution, however was not enough to overcome the impact from the Corona virus related volume declines and approximately $60 million of carryover headwinds related to tariffs and currency and I will now turn it over to Don Allen to provide the business details for one Q and a deeper dive into our scenario planning cost response capital allocation cost.
Sure and liquidity picture.
Gone.
Thank you Jim and good morning, everyone.
I Hope you are all staying safe and healthy.
Before I take a deeper dive into Q1 results I just wanted to share my deep appreciation for all our Stanley Black <unk> Decker employees around the globe, we've been working night and day to keep one another state.
Operator business in this challenging challenging environment and still get back to our community. Thank you very much.
So let's move on to Q1 tools and storage revenue declined 10% with volume down 9% and currently contributing an additional two points of pressure price was a positive one point driven by the benefits from our actions in response to continue tariff and currency headwinds.
The challenging revenue environment as a result of the Kobin crisis emerging in Q1 has impacted all tools and storage region NSP [noise].
The operating margin rate for this segment was 11.5% down from the prior year as the benefits from cost control margin resiliency and price where more than offset by lower volumes due to the virus tariff and unfavorable currency.
As the quarter unfolded, we saw that you can there humanitarian crisis from covert 19 evolve quickly into an economic crisis.
And started to experienced demand impacts in virtually all global markets we serve.
First in Asia, and Europe, and finally in North America, and the emerging markets.
Our planned organic growth for the quarter was relatively flat to a slight decline.
As we detailed in January we anticipated a difficult comp due to the significant loading up craftsman in early 2019.
As well as softer industrial channels and emerging markets in our guidance at the time.
The entirety of the Miss versus our plan can be attributed to the impact from the <unk> from the virus.
However, our proactive cost control and margin resiliency initiatives, we're able to significantly mitigate the net operating margin impact from lower volumes.
On a geographic basis Europe was down 7%, that's France in southern Europe led the decline while the north fared somewhat better with low single digit declines as the locked down started later.
Growth in the European region in the month of February and first two weeks of March was positive.
Illustrating how quickly trends change during the second half of March.
Emerging markets declined 13%.
Asia was hard to sit down 25% with Latin America down 12%.
All countries in these geographies were down for the quarter, except for Russia, Turkey, Colombia and Chile.
Which were all up low double digits.
North America was down 8% with all channels experiencing declines however, Canada was relatively flat for the quarter.
Similar to the overall segment, we expected north American to be relatively flat due to the craftsmen loading dynamic.
So the decline for the quarter was largely driven by the virus impact.
From an underlying demand standpoint, retail Pos extended the strong double digit trends from 2019 through much of the quarter.
We started to see demand deviations versus our plan around the second week of March as more broad based shelter in place orders went into effect.
And the month of March Pos was relatively flat by the ended the ended the month.
Now looking at the Sbcs.
Power tools and equipment declined 3% as early momentum behind commercial execution, and new product introductions were more than offset by that.
Later in quarter impact from the pandemic contrary to what you would think the less cyclical hand tools and accessories and storage SP you declined 14%.
More extreme because this SP you had a larger benefit in 2019 from the grass been rollout.
As we watch the trends in the quarter.
Ecommerce globally, and DIY and many developed markets showed signs of acceleration.
As you can imagine with more people spending extended times in their homes.
Maintenance and repair work that may have been put off for some time has taken a new priority in their lives of our and of our end users.
Our global position in E commerce, and the reestablishment of craftsmen the marketplace have benefited us in this particular environment.
Turning to industrial.
The segment delivered 6% revenue growth, which included 15 points from I.E.S. attachments and Cam.
Both of those acquisitions.
Additionally, it had an 8% organic decline and a negative one point from currency.
Operating margin rate was down year over year to 13.2% as margin resiliency and cost controls were more than offset by the impact from lower volume and currency.
Adhered fastening organic revenues were down 9% as you would expect Asia led the declines with auto being more impacted in general industrial customers.
We have seen this dynamic emerged in other geographies, we compete in as well.
The automotive manufacturers were forced to make tough decisions to close their plants.
And began shutting them down in Q1 as humanitarian an economic crisis moved across the globe, leading to North American shutdowns late in March.
On a positive front many of the Chinese auto plants have reopened, albeit at significantly lower volumes and most of the other auto manufacturers are planning to reopen north American and European plants within the next several weeks.
The commercial model in engineered fastening is sound and we continued to partner with our customers on new content, which we believe will provide a pathway for share gains as production levels improve.
We are prepared to ramp up once our automotive customers solidify their new production dates across Europe, and North America.
The infrastructure businesses declined 6%.
As low single digit growth in oil and gas was more than offset by lower attachment tools volume.
Oil and gas benefited from continued growth and inspections, while attachment tools declined in the mid teens.
Relatively similar performance to what we experienced in the fourth quarter [noise].
Through mid March Securities organic growth was close to 3% quarter to date.
By quarter end. However, the security segment had declined 4% as organic growth shifted to a negative 2% for the full quarter.
Hi point swing in two weeks as the world shut down and customers were cautious and allowing technicians on site as they postponed projects.
Embedded in that order <unk> organic growth performance is a two point negative impact from divestitures.
Security Additionally, experienced a 2% decline in revenue from currency.
North American security organic growth was up 2% as higher volumes and automatic doors in health care were partially offset by lower installation and service revenue in the commercial electronic security business.
Obviously, we are seeing customer accessibility limitations impacting our ability to complete installation orders in this environment.
Europe was down 1% organically due to customer restrictions in France, and the UK, which more than offset solid growth in Sweden.
The commercial momentum continued with strong order intake and a backlog that is up 20% versus last year.
As the restrictions lifted in North America, and Europe, where you're in a good position to continue the organic growth momentum in security.
In terms of profitability. The segment operating margin was down 290 basis points to 7.4% as price and cost control were more than offset by lower volume in electronic security.
Investments to support growth and the impact from the Sargent and Greenlit divestiture.
The volume loss in late March for customer installations with significant above line average profitability.
So that is the view of Q1, but now I'd like to share our view on the near term prospects for our businesses. So as we move to slide nine.
Today's environment is changing on a daily basis, and we're doing everything we can to keep our employees safe and healthy and serve our customers. While we continue to evaluate and prepare for a wide variety of demand scenarios that could occur in 2020 and beyond.
Now, let's start with the left side of the page, which depicts how we expect kobin to initially impact demand.
The chart is the range from the most impacted businesses at the top and what we believed to be the least impacted businesses as we moved down to the bottom of the table on this page.
We are seeing that the hardest hit businesses will be automotive and aerospace.
Both have seen Oems shut down production in the case of auto. These end markets were seeing negative trends for much of 18 and 19. So this environment as deepen this decline globally.
Our customers are at various stages of restarting in Europe in the United States.
As a reminder, our auto fastening business is 25% Capex driven with the remainder based on production.
As it relates to our aerospace exposure is close to 90% commercial.
The vast majority of that tied to new built.
Finally, we expect general industrial portion of fasteners to be somewhat less impacted as the customer base is diverse.
And we serve some essential industries that have remained operational during this time.
Turning to tools and storage market demand is most closely correlated with global GDP and consumer confidence in the serve geography.
Approximately 85% of our tools, our construction oriented with the remaining 15% serving industrial customers and automotive aftermarket.
As broad based global shelter in place orders were issued the impact to North American independent construction channels and industrial customers as well as geography is outside of North America has been very significant.
On the contrary, our major North American retail customers were qualified as a central which enabled us to continue to serve demand.
We are seeing demand acceleration in DIY in the region and ecommerce globally.
Supporting these trends in North America retail Pos for the first four weeks of the fiscal month of April.
Which was up low double digits.
However, since about 70% of our products serve the professional declines in construction and repair activity levels and industrial production are expected to impact demand while shutdowns remain in place.
Additionally, we are experiencing some inventory corrections in our north American retail partners as they utilize this crisis to reset store inventory Tory levels by the end of Q2.
Our infrastructure businesses have less.
Had been less impacted today by shutdowns as large construction projects have been able to safely continue.
Attachment tools are seeing an impact as Oems adjust production and customers focused not only the most critical inventory.
Lets impacted today is oil and gas as they complete their plan backlog of projects. However, we are expecting a longer term makes an impact for this business related to the price of oil that would be negative.
Lastly, security generally this business is rather resilient during recession is because of the significant amount of recurring revenue and in downturns, we typically see an increase in the demand for security.
The current crisis. However is challenging this segment in new and different ways.
Regional shutdowns are limiting our ability to enter our customers facilities and complete installation and maintenance waters.
As I referenced earlier, though the team has been seen has seen strong order trends, which gives us confidence that this business will have significant backlog to convert when the environment improves.
Additionally, we believe new market needs in factories offices retail and consumer as well as the healthcare environment should create new revenue opportunities for this business to capitalize upon.
As we emerge from the crisis.
So accounting for all these factors our plans assume a 35% to 45% decline inorganic revenue for the second quarter.
As an added disclosure to provide some more transparency and indication of our April month today revenue trend in each of our businesses is denoted by the colored balls on the left side of this like.
You can see the actual data is very much in line with how I described the businesses earlier.
Aggregate shipments for the company are tracking in line with the midpoint of our planning assumption or about a 40% decline.
One could have the view that the demand impact will be the deepest in the month of April as the government restrictions are currently very broad and restrictive.
If it turns out to be an accurate view then we would appear to be at this to be at or slightly below the 35% end of arranged for Q2.
However, we think it's too soon to draw definitive conclusions until we better understand the length of the shutdowns and what demand looks like once restrictions ease.
As we look ahead for the full year, we have modeled scenarios that result in a 15, 30% organic decline in revenue.
The key variables driving the ranges the depth and the duration of the revenue decline as well as the timing in the magnitude of the bounce back in 2020.
The high end of the decline would look more like an l. shaped recovery and the shallow end would be representative of a V.
Our base case plans for a U shaped recovery with a few bumps likely along the way, which currently expects to two to carry the deepest decline with the revenue contraction moderating across both Q3 and Q4.
We have size unstructured our cost program to address the scenario and is and it is relatively similar to the midpoint of these revenue ranges.
However, we've structured our cost program to provide us flexibility depending on the shape of the recovery should.
Should we see a quicker V shaped recovery, we can reverse some of these decisions as necessary to support the demand environment as it returns.
However, should we see further deterioration or more elongated l. shaped recovery, we can choose to make some of the temporary actions permanent re sizing our cost base to reflect the new environment.
Now turning to more detail on our cost response.
As Jim mentioned in his opening comments, we are targeting four areas of opportunity within our costs program.
Indirect spend compensation in head count benefits modification and raw material deflation.
This new program expands and incorporates the 100 to 150.002 million 20 margin resiliency opportunity I discussed on the January earnings call.
However.
These reductions are incremental to the head count reduction program that we implemented in Q4 2019 and included in our guidance in January.
[laughter], we see that said the 1 billion dollar savings opportunity over the next 12 months with approximately 500 million benefiting this year.
Now I will dive deeper into each one of these opportunities.
First we are targeting to significantly reduce our $1.7 billion, an indirect spend as we focus on professional services and MRO to Uni marketing et cetera.
We are taking a clean sheet bottoms up approach to assessing these spend categories have established indirect spend control towers with cost category owners, who will be focused on reviewing all proposed spend.
The mindset in this environment is the only approve expenditures that are essential to running our business.
Next based on where commodity prices are in today's environment combined with the initiatives. We are executing within margin resiliency. We believe there is a significant opportunity to capture incremental raw material deflation across our roughly $6 billion of annual spend in finished goods components commodities and transportation.
This can help offset some of the remaining tariff in currency pressure that we will face and 2020.
Together these two categories represent about 60% of the $1 billion savings target.
Which means about 40% as compensation and benefits.
Our approach in this area.
To ensure that we are preserving our ability to reduce labor costs in a manner that allows us to treat our employees with compassion and these incredibly difficult time and to prepare us for a demand recovery at the appropriate time by making these actions as temporary as possible.
The savings include salary reductions for senior leaders.
Temporary benefit reductions such suspending for one k. matching in the United States.
Hey, voluntary retirement program.
Furloughs modified Workweeks and finally, some reductions in force.
Today about 70% of the actions are temporary specifically the furloughs pauses in benefits salary reductions and alike.
As you think about modeling this $1 billion plan, we should start if we should start to see some benefit in Q2 related these action.
Proximately 375 million of the 500 million will benefit the second half.
One other assumption related to this we believe approximately 60% of the 1 billion in cost savings is classified as does that DNA with the remainder in cost of sale.
So that is our plan to address the semi fixed cost base in this environment.
We also have addressed variable spending by adjusting our manufacturing and supply chain to align with the current demand environment.
We are taking a similar cost reduction approach in this approach in this area, ensuring that we treat our employees with compassion and in partnering and partnering with our suppliers to provide the right flexibility.
We also are protecting inventory of our highest volume skews until we get a sense of the demand progression across the coming months in quarters.
We will be leveraging the operations excellence principles in the SPD operating model to ensure we remain agile inefficient.
Carrying only the levels of working capital required.
As we think about scenario planning and various model as a reminder, we historically have seen decremental margins around 40% prior to any cost cutting actions across our businesses.
This is a good starting assumption as you plan various demand scenarios.
As I said earlier, we're planning for U shaped recovery with a few bumps likely.
And with our cost actions, we believe we can limit the decremental margins to low to mid Twentys, this year and better than that across the 12 month period.
We currently believe Q2 will likely be the deepest decremental margin as we face deep revenue declines and the cost cutting actions will not see a full quarter impact.
So given you quite a bit of detailing how we are tackling the next 12 months.
Beyond that timeframe by design, there will be a snap back in some of these costs. If we are in a better demand environment. In fact, if we find out that we earned a V shaped recovery in the coming quarters, we may choose to put some of this spending back in place.
However, if we find ourselves in an l. shaped recovery or volume stays depressed for a longer period of time, we will make these actions permanent.
We believe we are taking the appropriate actions given the current environment and trying to prepare ourselves for a range of outcomes that gives us the right level of flexibility to react to the recovery in whichever manner. It comes.
So now I will move to slide 11, and talk about our past performance in previous recession.
In an effort to provide some additional contacts to our scenario planning we want to share some information about how we performed in past recessions I say, we as Jim myself in many members of the management team.
Were part of the senior leadership of the company during those time period.
Since we had a major acquisition coming out of the O. eight or nine recession.
We have included both SW K and BDK and these metrics.
I will focus my comments, primarily on 2008 2009.
So from a topline perspective peak to trough pro forma organic sales declined 23%.
Throughout the duration of the recessionary period, the average quarterly organic sales decline was 13%.
Well, the deepest quarterly decline being 24%.
To get a sense of how the business rebounded coming out of the housing led recession, we looked at organic growth two quarters. After the end of the recession, which returned with 12% growth.
Turning to profit.
In both recessions presented on this page.
Entering the down cycle decremental margins approximated, 40% before cost cutting.
Which is consistent with what I laid out earlier. However, we did our best to proactively cut costs during both periods and limited peak to trough decrementals to low double digit set as WK in 2001.
And to the high teens for the combined company in 2008 in 2009.
At this point, we have limited visibility to the potential lengthen the depth of the current environment. However, we are approaching this situation drawing on the experience from the past.
And trying to replicate the track record of performance during downturns.
We feel our approach has served us well.
To make sure we do what we can to remain agile and resilient as we manage the uncertainty and come out of this crisis stronger prepared to find more organic and inorganic growth opportunities.
Let's now move to slide 12, and give an update on liquidity.
So a quick update on our liquidity and balance sheet at the end of Q1, we had approximately $1.7 billion of outstanding commercial paper.
This is aligned with normal seasonality, we typically see this time of year.
We don't have any long term maturities coming due until December of 2021, which is $400 million.
The next maturity is $754 million in 2022 with the remainder of our long term maturities in 2026 and beyond.
Available available liquidity starts with approximately $1 billion of cash on hand as of quarter end.
Leveraging our strong investment grade credit rating, we have had and continue to have uninterrupted access to the commercial paper market since the crisis began.
We have about 1.3 billion of available capacity on our 3 billion CP program.
Finally, with the successful remarketing of the 2017 preferred equity units in May we have the opportunity for an additional 750 million of liquidity.
As you can see we have significant flexibility from a liquidity standpoint, but the total potential of 3.1 billion all in as of the ended the quarter.
Backing up our robust commercial paper program is 3 billion of revolving credit facilities.
But you are backed by well capitalized by a well capitalized diversified banking group.
You may have seen in our 8-K that we issued last night announcing that we have modified the covenant on these facilities to now carry an EBITDA to interest ratio of greater than 2.5 times.
With certain one time expense is excluded from the ratio through 2021.
This proactive and prudent action preserves access to liquidity and gives us the flexibility in a period that will carry higher charges related to our cost program [noise].
From a capital deployment perspective, the priority as debt repayment and in turn achieving our leverage targets.
To ensure we maintain our strong liquidity position and deliver on our capital allocation priorities. We've initiated additional capital conservation actions, which includes significant reductions in 2020 capital expenditures and a temporary suspension of M&A and share repurchase activity.
So as we move to slide 13 to summarize all this information we just covered a lot of ground here. So I'll spend a moment to summarize it a few key point for 2020.
We are continuing to spend our suspend our guidance for now and are experiencing substantial revenue declines early in the second quarter as I mentioned, which we currently expect will represent the trough quarter for the year.
From a revenue perspective, our planning models assume the potential for a 35% to 45% second quarter revenue decline with the month to date April results tracking in that neighborhood.
The future is dependent on countries getting control of the health crisis has all of US now we have modeled multiple scenarios and currently assumes sequential improvement as we move through the year with a full year range of 15% to 30% revenue decline, depending on the shape and the timing of the recovery as I discussed.
Decremental margins pretty cost cutting should be 40% and our cost reductions will attempt a minute minimize that impact down to the low to mid twentys.
From a cost structure perspective, we had 180 million of savings included in our Q4 19 cost reduction and are adding an additional 500 million to that in 2020.
Tariffs and FX are currently expected to be 150 million dollar headwind was 60 million of that behind us in the first quarter.
From a cash perspective, our focus this capital conservation and de leveraging as I mentioned.
With that comes capital expenditure reductions and temporary suspension of M&A and share purchase.
Repurchase activity finally expect us to target expanding working capital turns versus the prior year.
The demand environment, well to dictate if we see a cash flow positive from working capital liquidation, but as of now we want to.
Preserved sufficient working capital levels to capitalize on recovery when it presents itself.
As you can see it's a complex situation we've never seen this type of humanitarian crisis in our lifetime.
But we can draw and our vast experience is where we have successfully navigated. This company through 177 years of ups and downs.
Our team is actively engaged in managing everything within our control.
While also contributing where we can to helping mitigate the spread of this terrible pandemic.
Thank you and I will now turn it back to Jim.
Thanks, Don.
It would be easy to lose sight of the opportunities that arise.
During moments like this.
Given all the the detail and.
Difficult actions that.
We're taking.
We continue to take but I also want to emphasize that we continue to execute on a number of outstanding growth catalyst we believe.
We will position us to perform in this difficult market environment and beyond.
The iconic Craftsman brand rollout continues to have a strong customer response excellent growth and we remain well in our path towards the $1 billion marker.
This brand is well positioned to capture the DIY and value oriented professional.
Growing market in North America.
Our innovation machine is a strategic differentiator and enables us to generate share gain with a steady stream of innovation that we bring to the marketplace across our businesses more specifically, our recent series of to Walt product breakthroughs, including Flexibles, the topic and extreme have been well received by end users and now account for more than half.
$1 billion of revenue with a healthy growth rate.
At least a pre Covance 19, and then lastly, we are the tools industry leader in E Commerce with 2019 online revenues of 1.3 billion.
And this global opportunity has outstanding potential for rapid growth in today's environment and in the years to come and during the last couple of years, we very methodically expanded this program from a north American focused ecommerce platform to a globally focused platform with strength in many many of markets around the world.
Going to be a huge.
Advantage for us going forward.
And then of course during 2019, we closed on that 20% stake in an MTD, leading outdoor power equipment manufacturer based in Ohio. This is an exciting opportunity.
For us to increase our presence in both the gas and electric outdoor power equipment market. So there's a lot to be excited about and our growth teams are not sitting still and we know that when this crisis. This crisis has the potential to create sweeping changes in consumer behavior end user needs and business model requirements multiple new growth opportunities will.
Arise from this and we are prioritizing resources to ensure that we're in a position to capitalize on them.
So in closing Cobot 19 has presented us with the first grade challenge of the 2000 Twentys and within this uncertain environment, we've aligned our organization around key priorities health and safety of our employees and supply chain partners being number one business continuity and financial strength, serving our customers and doing our part to help mitigate the impact.
To the virus.
We were in a strong position going into the crisis and are taking the necessary actions to stay strong during the crisis and to emerge from it even stronger.
Our commitment to safety is rock solid our businesses have operated continuously since the inception of the crisis, our financial strength and liquidity is in great shape and our billion dollar cost reduction and efficiency program has been carefully designed to support financial stability and performance and whatever demand scenario you merges the vast majority of our.
Customers are either open for business, we're planning to reopen in the coming weeks.
Our growth catalysts are alive, and well and we're doing what we can to support our people.
And our communities around the globe.
So it is with both realism about the present and cautious optimism about the future that we have the resources the experienced the strength and the mindset to take on the first grade challenge of the 2000, Twentys and we're now ready for Q when they Dennis.
Great. Thanks, Jim Shannon, we can now open the call to QNX. Please.
<unk>.
I'm going to ask a question you will need to press star one or your telephone what are your question principal scheme.
Thank you please limit yourself to one question. Please standby composite you any roster.
My first question comes from Nigel Coe Wolfe Research your line.
Hi, good morning Jen.
Good morning, yes.
Thanks, Phil detail. This is a that's really helpful. In the context around where you expect the two to you in the full years, it's very helpful. Not will come into doing that so much appreciate it.
Taking all the deals offline that Dennis but any sense of the cost savings can you just confirm I think I think the answer is yes, but this is additive to the cost savings in train right. Now. So this is 500 plus 200.
So it's more like $700 cost reduction this year and then the second caused the question is giving us a bit in dollars analyze savings 500 for the full year. That's really this is second half and not much of this falls into twoq like very much.
Yes, I'll provide a little clarity on that so the 500 million in 2020 related to the billion dollar program is in addition to the actions that we took in Q4 of 19, so thats correct.
As it relates to the timing.
What I said in a very long script was that 500 million for the year, We think 375 million of that will be in the back half and so that obviously gets you about 125 in the second quarter and so that's kind of how it lays out.
Thank you. Our next question comes from Jeff Sprague with vertical research.
Thank you good morning.
I guess a multipart one from me also.
Do you provide a little color on how the a manufacturing footprint realignment.
Plays into this specifically thinking the shift.
Out of China.
The U.S. and if I could squeeze a second pardon.
Sell out so strong.
How long do you think the.
The home centers can actually fall down inventory before they actually have to kind of hit the reset but start ordering on the other side. Thank you. Okay I'll take the second part of your question first.
Because I think a lot depends on.
Yes, I mean, we're seeing some.
Hi, popping numbers and on a weekly basis in a couple of the places.
And if that continues there there there will be some replenishment that would be advisable.
No later than the third month of this quarter June so.
It's really their decisions they make those decisions and and how they want to play their inventory I can completely understand you know the the challenge they have trying to balance the opportunity that might be out there, but not but they don't know for sure.
Versus the risk of getting stuck with a a significant inventory problem. If the if the all the sudden those trends change. So it's just a balancing act and it's a tight wire ones at that.
As far as the manufacturing footprint, it's an interesting question because with virtually no 98% of our salary population.
Stuck in their homes working virtually it's hard to it's hard to really execute on these types of projects.
In addition to the fact that they can't travel so theres a true travel ban in places like most companies, we haven't completed fan entre travel it.
And it has very few if any exception so.
There will be some delays and the in the of the footprint program until we're able to travel and that sort of thing, but I think we're talking probably you know months in terms of delays, but they're also be an acceleration.
Because the.
The.
The importance the of the making the footprint happened even faster.
Is amplified by by the nature of the crisis. So you end up with a a lot of planning going on right now virtually and then when we get into the execution, we're going to try to accelerate the long story short I think we're going to be looking at roughly the same kind of two to three year timeframe you know for the moves to be complete.
Thank you. Our next question comes from Tim Robbins with Baird. Your line is okay.
Yeah, Hey, Hey, guys. Good morning glide quite every morning, putting.
I appreciate appreciate all the details you know that you've provided.
I also have kind of it's a two part question just how can I guess first how are you balancing just just R&D and innovation and growth investments I guess, specifically is that something that's been preserved and protected as you. If you kind of made these these cost reductions and then.
The second how should we think about balancing just both production and working capital I guess at this point would you expect working capital to be were released than you thought prior prior to this or would you expect it to carry that working capital just just given the uncertainty around we feel stocking levels I'll take the first part of your question I'll give done so.
And even though I know the answer to it but I know the first [laughter] fair enough [laughter].
We have largely protected the yet any applied.
Innovation, so there maybe some theoretical and innovation, we that we've cut back a little bit on but not much not much. Some of the you know the programs that are still looking at you know five years out six years 789, 10 years out you know in terms of how some of these looked like the construction industry will change and you know what.
The impact and on our tool business would be in how we're going to manage through all that I mean that program for example is alive and well.
And so we really you know when you think about the nature of the.
Comp and Ben reduction so many of them are in this or temporary 70% are temporary so weve instead of maybe working for five days on a project we're working for.
And for a period of time, I think thats the way to think about them.
Yeah, and the operation side I mean, we've actually gave a lot of thought to how we ramped down.
The labor force and manufacturing and distribution and in particular in two of them in an engineered fastening. It was fairly straight forward because you had Oems shutting down and we basically would shut our plant down.
Similar to correlation and then we'll ramp up a little bit in advance of them ramping up so it's a fairly straight forward from that perspective, but on the tool side, it's a little more complex, especially in North America and that you know we have two major several major customers in retail that are continuing to perform and as we talked about earlier.
The Pos is very strong through the first four weeks of April So we did it planning assumption around our second quarter.
Revenue decline, but we didnt, we didnt reduce production to that level, we actually reduce production too.
You know a more modified view of that so.
It was you know if you look at the maybe tools being down some or 35% to 45% in Q2 like the company.
Yeah, we were probably somewhere between zero and 35% to 40% is where we cut back production and so we recognize the importance of continuing to serve those customers, but also.
Making sure we're prepared as things start to accelerate maybe in June or in the third quarter or whatever the timing is we're prepared for that and given our supply chain with some of the the lead times. We have we have to make sure. The we strike that write downs, which we will carry a little higher level of inventory probably through Q2 into Q3 and maybe longer.
But I think we're striking the right balance to ensure that we meet our customers' needs.
Now and going forward, but also.
Sure that we get the right you know dollar value out of working capital performance in 2020.
Thank you. Our next question comes from Michael Rehaut with JP Morgan.
Thanks, Good morning, everyone and congrats on all your efforts.
So far managing that the challenging backdrop.
First question or I guess, my only question, but I do have a clarification question as well if I could but the core question is just also around.
Some granularity on cost reduction program.
Just trying to understand that relative to the prior margin resiliency efforts. You had noted that is inclusive of the on its a 150 million that you were expecting to realize this year I was curious if you know the next two years that would you know.
Overall encompass the.
The total number three to 500 million if that remaining portions are also.
Included in this $1 billion program or that's still you know kind of years out.
And then in terms of the clarification I was hoping that either a few different numbers in terms of the cell in the in the sell out on North American retail I was hoping if you could just kind of review for April in March March and April so far what you've seen.
And you know either <unk>, roughly what you had in terms of selling and sell out.
So for.
Fell and Oh for March the Pos as I mentioned in my script was was flat relatively flat.
The Pos in April is up low double digits. So it's very strong and.
So the sell in that we're seeing and.
In the month of April is consistent with that showed and that chart, which for tools and storage. You know is is in that ballpark of the deep Twoq you range I mentioned, probably trending towards the lower into that range.
That gives you a sense of those those aspects as far as the cost reduction goes I mean.
If we reflect back to the January earnings call, we talked about having 100 150 million at margin Resiliency initiative.
That weren't in our guidance they were just.
There is a contingency things were going to execute on as new headwinds came our way.
So clearly some big headwinds or come our way much bigger than anyone anticipated.
For us to many in the rest of the world, but when you think about what those opportunities were in margin resiliency there were things around.
Higher levels of procurement savings due to utilizing technology in certain tools to drive that value.
Using industry for not owed technologies around automation and data analytics artificial intelligence that will drive more value to our manufacturing footprint and eventually into our supply supply base as well.
Those things are not driving a lot of value in a billion dollar. So those two buckets in particular, where a large part of our margin resiliency program. There were other aspects around indirect and a few other things.
Like functional transformation functional transformation will continue to move forward and that'll be part of that will be a value driver for the next two to four years, depending on the function.
Indirect yeah, we're probably pushing a lot of that right now in the next 12 months, but what we need margin resiliency for us to help us this pain that savings going forward because right now what we're doing is really brute force. So that's a long winded answer to your your question, but I still think there's a very big opportunity for margin resiliency out there.
When you think about those different categories and then there's a sustaining aspect around indirect that really helps us keep that significant number that we're getting into billion dollar program.
Our piano so it doesn't pop up in a very large way in the coming here too and as you can imagine we really haven't had the opportunity to get into dramatic a tremendous amount of detail ourselves as we've worked through this crisis sense on that particular question.
Really just trying to find every cost savings opportunity, we could find and we'll do the will go back and do the detailed analysis over the next couple of weeks and.
Probably the next earnings call, we'll give you a little more granularity around the answer to that question, but you know as as you can see from what Don said, it's a it's.
Marshall No basically partially in the partially not and more to come later.
Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Learning, maybe hey morning, My first question, just really around the free cash flow.
Time discussing the the sales and earnings trends and slide 10 was very helpful. In that regard historical context, I'm just wondering what the historical context was around.
The free cash flow in downturns, and how you think it might be similar or difference in this current downside.
And then my clarification would just be around you talked about Decrementals. All in this time of I think low to mid Twentys. This year, that's a bit heavy as the.
It also see downturns on slide 10 is that simply because of the tariffs and currency costs or is it more about just the sort of starting point I'd. The notion that this downturn could carry on into next year.
Thank you good yeah sure Julien, it's really timing and but I know I know I said a lot of things in my script, but as I went through that you know low twentys for 2020, I said you know what I also said is when we when we look at the full 12 months going into 2021, and we actually think we'll get you know better than that so hopefully we.
Get very close that high teens number that we saw into 2008 in 2009 period.
What was the first question he had free cash flow and free cash flow yeah. So free cash flow in recession has actually from a conversion point of view performed very well.
It can you know it can obviously you know gets impacted by the charges that you put through your net income.
You tend to get a good working capital benefit in a recessionary period now this this might be a little different you know we're trying to manage that as I mentioned in my presentation.
With the right balance because we want to ensure we have enough inventory. If the recovery is very quick and we didnt face that type of challenges. We went through the recession, because we didn't expect quick recovery as we expected very slow recovery is this is a different scenario, where you could see you could see a V or in our case, we model that you and that might be a.
A scenario where stronger growth comes later versus in the short term and so I think we have to strike that right balance to ensure that we don't go overboard and working capital.
But but overall I would expect conversion to be strong given the historical dynamics we've seen.
Thank you. Our next question comes from Josh Pokrzywinski with Morgan Stanley. Your line is open.
Hi, good morning, guys.
Hey, good morning learning.
I'll try to keep it to a mere 17 part question for remind.
[laughter].
Just going back Jim to the point, you made or I think it might be Don about not just to sell in versus sell out but more that the pros aren't working right now.
What do you think those job site closures are are costing you because I guess, yeah, New York City in Northern California, I think our opening in real time right now for construction side. So maybe some light at the end of the tunnel. There if you wouldn't mind sizing that and that's all I have.
Yes, well you know it's interesting to think about it because the you know the pros do a fair amount of shopping at home centers.
And so I think you know the we're probably seeing is this DIY phenomenon is probably a lot bigger than than we suspect because there is a big negative I suspect coming from the pros who know they're just not stopping in the contractors desk as much as they used to right now because the projects aren't active and so.
It's hard to pinpoint you know exactly what that difference could be because we don't really know how big the DIY impact is.
But I think to to ballpark. It it's probably you know it's probably in the.
Single digits for sure.
But probably mid and low single digits would be my.
Negative impact would be my guess, but it's I guess.
[laughter].
Thank you. Our next question comes from markets minimal.
Yes. Your line is open.
Hi, Good morning, not you all as well and morning warnings and I realize it's very helpful. One question could you on your base case.
You talked a lot about decremental I'm, what I'm wondering is on the other side given that you I think mentioned in your prepared remarks indirect cost deflation is about 60% off the call style.
How to stop compared to the Pos and what that means incremental because if you stop.
Sandals total cost out incremental this would be quite interesting stuff sort of like a you know you say base case recovery that online.
Yeah, I think it's yeah, you're right. It obviously depends on what type of recovery, we see if we see a very rapid de recovery into back half for this year than you know the Incrementals will will change because we will be adding that costs, we have 70% of our comp.
And benefits costs that we've kinda called temporary at this point, which is 40% of our $1 billion.
And you know, we probably wouldn't add it all back the will add some of that back and because we have modified workweeks furloughs and things like that that are happening with the salaried.
Part of our our company and so that we clearly have a governing impact on incrementals as we grow that being said you know there's a lot of things. We can do to continue to drive productivity, we touched on margin resiliency earlier in <unk> in a question we had from Michael and you know those or types of initiatives that had been.
On a little bit on hold for a period of time, but they are beginning to reenergize themselves going forward to create the value that we think is there and so I actually think the the incrementals, we'll see a bit of a governing impact in that recovery, but I think it's something we can manage too. So it's not too significant in a longer period of recovery where its a.
You are even an l., yeah, we will be working to make that billion dollars.
It's permanent as possible, which means you know we could take some of the temporary things that make them permanent or we could take alternative actions to replace some of those temporary things overtime, because if we see that type of recovery, where we have a bumpy you know performance for multiple quarters going into next year. Then you know we're going to probably.
We take the approach of how do we really make the vast majority of that permanent.
We're not in impact Incrementals once we got into a growth.
Thank you. Our next question comes from Nicole Deblase with Deutsche Bank. Your line is open.
Yeah. Thanks, good morning, guys.
Morning Marni.
So I just wanted to ask on pricing how pricing trended through the end of the quarter.
April and if you're seeing more promotional activity from carriers and whether or not you guys are getting my promotional activity to drive pls and they're not going back retail channel.
And in this environment, you know promotional activity does not make a tremendous amount of sense. So all the price that you're seeing is pretty much coming from programmatic price pretty much largely from the margin resiliency program.
Because we're not we're not in their implementing across the board price increases in a deflationary environment.
And so we're also getting some carryover from pricing that we did from the.
Earlier price increases on the tariff and and other related.
Inflation, but no no new pricing actions other than maybe more surgical ones that are based on.
Analytics and things like that that are being utilized in the margin resiliency program.
Thank you. Our next question comes from Joe Ritchie with Goldman Sachs. Your line is open.
Thanks, Good morning, Gossip girl, well and echo everybody else's comments, great great detail on the call today.
Thank you.
Yes, just just one question I, just going back to slide eight.
And you know the trends that you're expecting in Q2, So I think the way to think through the auto in Aero, probably already down more than that number for two Q and then the commentary around tools and storage. It. It is really interesting to hear point of sales that's double digits.
Saleen, if I heard dons comments correctly at the selling already at that Q2, two number with an expectation that it'll remain there on last point of sale. He comes.
Phase space as strong as it is that is that the right way to think about it that's pretty much the right way to think about anything about it.
Selling is right in that range of Q2, right now for tools North America.
Thank you. Our next question comes from Rob why don't I wouldn't really instances line is open.
Good morning, everyone.
Rob.
If I could just ask a real related question to laugh when I know, you've given a tremendous amount of detail both on how you're managing and on the short term.
There's disruption and Flushing globally. If there is a call for more sell then go into the home centers is there a chance that that's just disrupted and therefore you Miss out on some sales or do you feel really keypad handle on that and then they just don't know again, you give more detail normal which is which is very helpful. What's the normal fell in process I don't know whether the.
Yes doubled in the down as you know, it's just there's some seasonality for this obviously or whether.
You know all else equal you'd be expecting a much stronger selling towards the end of the quarter.
Yeah, I mean, we have a keen appreciation for the.
The opportunity cost of not being prepared for a spike in orders from the home centers in particular.
And you know there I would say, there's the supply chain approaches are somewhat different but the the general.
You know the general.
Rhythm would be kind of monthly we've gone to Oh weekly rhythm in some cases, a daily rhythm monitoring the.
You know the in the out and [noise].
It is a very very significant opportunity for us and so it actually as it turns out we have and Don alluded to this but we have actually.
Program, the inventory side, our inventory build if you will too.
Deal with the possibility that there could be an increase in sell in a in in terms of orders later in the in the quarter on it normally the the.
Well there is probably substantially more orders in the in the second we second month of the quarter for shipping in the third month. However, you know what it remains to be seen if that's going to occur. This this time around.
But I think it's a it's one of these things that were just managing on a real time basis and.
We're in contact with the you know the customers and we're monitoring the sell out and you know at some point those those two things have to kind of equal each other.
Thank you our next question Okay.
Your line is open.
Good morning, everybody.
Hey, good morning.
The two Q thoughts and sure even working on the weekends here I think you laid out to Q pretty clear by your base case growth rates.
For the second half.
I mean, there's the second half base case, having does that imply are you calling for Q is up there and I asked relative to your comments around the 40% leverage.
Okay, and then B, how that 375 split and does it the majority of that fall into Threeq, you because if it's up.
That I guess, that's what I'm I'm looking at your base is that Fourq you sales up and is that three 775 million savings split equally threeq or Fourq you. Thank you.
Yeah. So the base case assumes as you start with the cost he has 375 million, which would actually be a significant impact the moderating those decrementals and 40% and that's how we get ourselves to the below 20 is is we see that impact in the back half the year as far as the revenue performance goes by the time, we get to Q.
Before in our base case.
We're kind of you know anywhere from flat to slightly down and that's really where we are and then you can do the math for what Q3 would be based on that we're not assuming growth right now and our base case in the fourth quarter.
Because it is the U shape, but well see there's still a lot to occur going forward and we'll have certainly a lot more color as we get to July for our next earnings call, where we are but we kind of plan a scenario that would be difficult, which is why we went after the billion dollars of cost, but we did it in a way that gave us.
The flexibility both human I've described over the last power so.
Thank you. Our next question comes from Justin.
HM.
Thanks, guys. Good morning, just a coordinated on.
Good morning, Raw materials, I think he says 6 billion of materials inputs as well.
Slide with buff roughly 70% of your cost of goods sold or raw materials and inputs and yes, just trying to understand what percentage decline you're planning in that costs basket for this year.
Simply based on the collapse in commodity and your broader plan and is there anything beyond that that deflation that's done that cost savings bucket and then secondly, how should we think about pricing integrity across the business for the year in this type of environment, just looking beyond the near term pricing dynamics.
Yeah, I think getting the commodity front you know we.
We have a really nice opportunity to pursue as a result to the much slower global demand.
In the boy the prices of commodities have adjusted in the last month or so.
And that opportunity is now and and we were really trying to make that happen in the next 30 to 60 days with all our respective suppliers in those categories.
And I think about 1 billion dollar opportunity and 60% of it is a combination of indirect.
And commodity deflation you know probably good way to think about that is.
It's gonna be anywhere from you know two thirds indirect to maybe you know, 55% indirect and kind of in that range in the difference will be commodity deflation that that kind of sizes. It for you I'm for this year and then we'll see how we progress throughout the remainder of the year.
[noise] [noise]. Thank you. This includes the question answer session I would now like turn the call back over to Dennis Lang for closing remarks.
Thank you Shannon, we'd like to thank everyone for calling in this morning and for your participation on the call. Obviously, please contact me if you have any further questions. Thank you.
[noise], ladies and gentlemen, this concludes today's call that's close.
Any you may now disconnect.
[music].