Q2 2020 Stanley Black & Decker Inc Earnings Call
My name is Shannon and I'll be operator for today's call.
At this time all participants are in a multi mode.
Later looking at the question answer session.
Please note that this process now according to.
Well now turn the call over to the Vice President of Investor Relations get a plane miscellany, maybe Dan.
Thank you Shannon good morning, everyone and thanks for joining us for Stanley Black <unk> Decker's, 2022nd quarter Conference call.
On the call. In addition to myself, it's Jim Loree, President and CEO, and Don Alan Executive Vice President and CFO.
Our earnings release, which was issued earlier this morning at 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 too.
2022nd quarter results and various other matters, followed by acumen recession consistent with prior calls we're going to be sticking with just one question for color and as we normally do we will be making some forward looking statements on 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 there for possible that the actual results may materially differ from any forward looking statements that we may 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 over to our President and CEO, Jim Loree. Okay. Thank you Dennis good morning, everyone. It's great to be here with you today and.
Now were about five months in essence carbon 19 began to roll across the globe.
And while this pandemic has created an incredibly challenging time for all of US. It is also cast a new and very positive light on our portfolio.
That's three powerful trends have emerged which worked to our significant benefit.
First there's the sudden acceleration in the shift ecommerce and then there's a reconnection with the home and garden and a trend towards investing and VI y.
And thirdly, a new found societal obsession with health and safety read security.
The combination of these trends has profound and exciting implications for our future growth and strategic positioning, but more on that and just a few moments.
In the meantime, we just completed what I would characterize is one of the most storied and most successful quarters. We've experienced in my 21 years as a C level executive at this company. It was successful based on the sheer magnitude of the challenges we faced and overcame.
And it was also successful in that we've managed to operate effectively and maintain the strength.
All of our enterprise throughout the crisis to date, while further strengthening the company and positioning it pretty even better margin performance and growth as we take stock here in the middle innings, and we look forward.
Let me give you a sense of some of the accomplishments our team has wrapped up since this crisis began.
We were able to operate continuously across the globe would only minor and temporary supply disruptions, while protecting our employees and maintaining the highest health and safety standards.
We managed to handle with remarkable efficiency, the most volatile intra quarter demand swings we've ever experienced.
Beginning in the first four weeks in April.
In which revenues were down approximately 40% followed by an explosive may and June which brought our point of sale in North American retail to stratospheric levels that weve never seen before.
Security revenues also improved dramatically as the quarter progressed.
We took swift and decisive cost actions early in the crisis announcing a 1 billion dollar annual cost reduction initiative in April of which 175 million was realized in the second quarter.
Our margin resiliency initiative now in its second year contributor to this impressive performance.
We substantially raised our second quarter revenue planning assumptions twice during the quarter, while maintaining our cost reductions intact.
This bodes well for the remainder of the year and we were able to upgrade our internal full year revenue and margin scenario analyses accordingly.
Now our current base case for full year 2020 revenue and operating margin exceeds what we thought our best case was for the year back in April.
And as a consequence of the better to Q volume in conjunction with our cost and margin actions. We delivered 3.1 billion of revenue on $1.60 and S.. Our operating margin rate came in at 12.8% just 200 basis points lower then into second quarter, 19, and the tools and storage business logged in and.
Press of 17% segment operating margin rate flat with prior year, which means that that business achieved its previous peak margin performance and what we currently believe will be the trough quarter in the cycle for tools with revenues down 16%.
As we enter July given the uncertain economic outlook ahead, we decided to convert the run rate financial impact of our temporary salaried workforce reductions into permanent savings.
We will implement this in early October by eliminating our temporary salary reductions that is furloughs and modified work weeks.
Returning 9300 employees to a full work schedule, while transferring the remaining thousand or so to permanent reduction status. This action will be a major step in ensuring the sustainability of the bulk of our 1 billion dollar cost reduction actions and we believe it paves the way for us to manage successfully through any reasonable economics.
Scenario, which may unfold in the coming months in the back half for the quarter, where the supply chain performing and the cost reductions intact, we decided to identify a series of supercharged growth initiatives, which we will pursue in addition to the ones already in place.
[noise] these initiatives have become even more attractive as a result trends catalyzed by cobot 19 and are being funded as we speak we expect these initiatives which include exercising our option to acquire the remaining 80% of MTD most likely in early 2022 to contribute $3 billion to $4 billion of incremental.
Annual revenue beginning in 2022.
All of that execution occurred while our salaried workforce was working remotely for the most part we accomplished so much so fast during this timeframe that we gained a new appreciation for the art of the possible when the power of people is combined with the power of today's collaboration technologies and finally I wouldn't be remiss as I think of our second call.
And our accomplishments if I didnt referenced the incredible resiliency and dedication of our people. It was the extraordinary people in our factories distribution centers service centers call centers as well as our field tax and the salaried people in their homes that took a leap of faith and trusted that we could operate continuously safely and successfully during this time.
When everyone is dealing with extraordinary personal and other challenges and then just to them that we owe a debt of gratitude and thanks for a job well done under extremely difficult circumstances.
Throughout the crisis, we have men remained focused on our key cobot 19 era priorities, which we shared with you earlier this year first ensuring the health and safety of our employees and supply chain partners second maintaining business continuity and financial strength and stability third serving our customers who provide essential products and services.
And fourth doing our part to help mitigate the impact of the virus across the globe.
Our number one priority has been and continues to be the health and safety of our people and supply chain partners. We continue to take significant measures to protect our 30000 plus employees in our plants and distribution centers and other essential facilities on a tactical level, we established a mandatory mass policy at all locations in April along with the temperature taking in here.
Questionnaires for all people entering facilities.
We have continuously enforced social distancing modifying our facilities and production lines where necessary.
Implemented intensive standardization protocols and all of our operations as well and we formed a corporate safety committee of senior Execs and specialists to review and monitor compliance with our covered 19 safety protocols and higher Chief Medical officer specializing in infectious disease control as part of that committee.
We review every suspected case for root cause trace it to completion, where possible and respond with appropriate actions as we continue to learn more about the virus and its transmission.
Characteristics and as you'd expect.
Geographic Hot spots in California, Texas, the Carolinas, Mexico, Brazil, and others, all areas, where we have significant operations, we've seen our share of confirm cases, which as of today number approximately 300 or about one half of 1% of our total workforce.
Notably, both Europe, and Asia have been very quiet and we've had only one confirm case in China. During the entire crisis remarkable given that we have 10 plants and 8000 people there.
The vast majority of confirmed cases have resulted from contracting the virus while colleagues were out in their local communities or were visiting with friends and or family or were in a hospital for an unrelated matter and as a result, we've been conducting a massive educational campaign for our associates through to global safety time outs and several other approaches.
We seek to ensure their effect based understanding of risks and required safety protocols and to reinforce how our employees our employees can stay safe at work and.
And in the community.
There's a lot of information misinformation out in the public regarding this virus in a common understanding is necessary to keep people is healthy and safe as possible.
So many of our associates homebound, our people are operating remotely and new and efficient ways and we are seeing many unanticipated benefits of this future of work.
It has allowed us to virtually flatten the organization incorporating more diverse perspectives into decision, making and enabling faster and more efficient collaboration.
Going forward remote and hybrid office remote work will facilitate flexible working arrangements for our salary people.
Enabling the reduction of our office real estate footprint opening up new access to talent across the globe.
And as we move forward, we will continue to have offices as activity hubs. However, there will be many associates, who will continue to work remotely by choice and only be in the office when necessary or convenient.
As mentioned one of our key cobot 19 era priorities is to focus on doing our part to help our communities and governments mitigate the spread and impact of the virus.
Earlier this year, we announced plans to contribute 10 plus million dollars to support pandemic response efforts around the world and that spirit, we have already deployed millions of dollars to support nonprofits that are providing critical services, such as hospitals and other healthcare organizations as well as those focused on basic services such as food banks.
We're also donating more than 1 million masks across North America in support of elder care facilities.
Finally, we have initiated a 5 million dollar employee relief fund to help our own associates and their families around the globe who've encountered severe financial hardships in connection with the pandemic.
In addition to cash contributions we have formed a task force that is focused on leveraging our people's time and talents to create innovative solutions aimed at cobot 19 relief. An example of this is our partnership with Ford in three M. to design and produce lithium ion powered respirators.
And lastly, we are teaming up with private sector organizations, such as the U.S. chamber the business round table and the National Association of manufacturers as well as with individual state and local governments in support of their efforts to battle the virus.
Philanthropic work here is never done and we're all in working to do our part and living our purpose and now I would like to comment on our position regarding racial justice on June 3rd in the wake of the brutal slaying of George Floyd issued a statement on behalf of the company I will share some brief excerpts from that statement.
Quote there is no place in society for this type of racism and brutality. We are for those who demand justice take a stand for quality and commit to inclusivity for all we have seen anguish and unrest, resulting from racism, an implicit bias the deep rooted history of these truth is real we stand to do better.
We intend to listen I understand and take action for the African American community within Stanley Black <unk> Decker and at large and to quote we're committed to doing our part to level. The playing field since early June our senior executives, including me as well as our non executive Board members have had extensive dialogues with our black associates to build a.
Shared understanding of their experiences with racism and bias to determine concrete actions, we can take to address the quality equal opportunity career advancement diversity and inclusion as we committed.
We have commission day Task Force, which has recently made substantive recommendations, which we will move forward with in the second half and beyond and many of these actions will have benefits that will spill over to other diverse cohorts as well and we see an opportunity for real positive change going forward. So I hope that summer. It gives you a window into what we've been doing to affect positive change during the boom.
Yes, most productive in most challenging environment, we faced during my tenure.
We feel really positive about what our team has accomplished and how the company is positioned to deal with both the opportunities and the challenges ahead and I'll now turn it over to Don Allen to provide the business details for second quarter as well as a deep dive into our scenario planning for the back half of 2020 Don.
Thank you Jim and good morning, everyone.
We'll now take a deeper dive into our business segments segment results for the second quarter.
Tools and storage revenue declined 16% as volume was down 16% currency contributed an additional one point of pressure, while the impact of price was a positive 1%.
The positive impact of price was driven by the benefits from our actions in response to continue Tara and currency headwinds.
Operating margin rate for this segment was 17% flat to the prior year as the benefits from productivity cost control and price offset the impact from lower volume tariffs and currency.
Segment delivered decremental margins in the teens, which has an outstanding result in a reflection of a strong operational performance by the tools and storage team.
They were quick to execute on the cost actions and productivity opportunities. While also demonstrating excellent agility by responding to the higher North American demand levels that emerged in the middle of the quarter.
So, let's now take a look at the regions for tools and storage and starting with North America, which was down 10%.
US retail was flat organically as channel inventory reductions early in the quarter were offset by the strong underlying demand trends that emerged in mid April.
This demand inflection was primarily driven by a DIY phenomena that started shortly after the lockdowns emerge.
The end users refocused on the home has increased activity levels for our categories, resulting in historically high Pos level.
We experienced multiple weeks that demonstrated Pos growth in the thirtys fortys or even over 50%.
While we do not know the duration of this trend. We can report that the strong Pos has continued into the first four weeks of July.
More details on the July trends a bit later in my presentation.
Additionally, retail customers store inventories are now at historically low levels and therefore, we are well beyond the Q2 inventory corrections wouldn't with our North American retail partners and are currently experiencing shipment growth in line with Pos demand.
On the opposite end of the spectrum, the U.S. commercial and industrial tool channels experience more significant organic declines down 44, and 25% respectively.
Due to the impact some shutdowns and reduce construction activity. We saw some positive indications in June as Reopenings occurred and activity resumed within our more pro focus end market.
But we expect a slower recovery in these channels compared to the incredibly strong result in retail.
Europe started the quarter very slow as revenues declined by approximately 45% in April.
Proved during may and by June revenues were flat versus prior year, resulting in a decline of 21% for the full quarter.
The UK, France in Southern Europe led the declines while the Nordics with limited shutdowns posted high single digit growth.
All major European markets reopened by June we saw improved demand, which has continued into July.
The emerging markets were down 29% in the quarter.
As these regions were significantly impacted by customer closures and government restrictions implemented to control. The virus all regions were within emerging markets declined Asia improved sequentially from the first quarter, but was still down 20% organically.
There were a few bright spots with South Korea in Vietnam, showing double digit growth.
Latin America saw the most meaningful impacts down 38% driven by significant declines in Brazil, Mexico and Colombia.
Performance during the quarter was very choppy and the environment remains more challenging than the other regions as the virus impacts are still very prevalent in Latin America.
That gives all of you some interesting details on a geographic basis for tools and storage now, let's take a quick look at the second quarter performance by SBQ.
Power tools and equipment declined 9% has continued momentum behind commercial execution and new product introductions for more than offset by the volume impacts from the pandemic.
Hand tools accessories, and storage declined 23% due to steep declines in our industrial tool channels and international markets, which this after you has more exposure to.
Is that do you also dealt with some obviously some difficult comp dynamics associated with last year's fantastic craftsmen rollout.
Both of these SBS benefited from positive global trends and ecommerce and DIY ecommerce continues to grow rapidly and it represented nearly 15% of the global Twoq tools and storage revenue.
With our leading global market position in ecommerce and our strong stable of brands. We are uniquely positioned to capitalize on these two accelerating trends.
As we look ahead, we're making additional targeted investments to further maximize the significant market opportunities as they continue to gain momentum.
For example, we see opportunity to expand our ecommerce initiatives into several key geographies, where current presence is limited and.
And of course, we have the exciting blackened Decker initiative in North America.
Which we just began about a year ago, which will leverage both E commerce and DIY trends.
The tools and storage team did an amazing job managing the business to an incredibly turbulent period of time and demonstrated great flexibility and agility, a fantastic outcome given the environment they needed to navigate.
Let's shift to the industrial segment total growth was negative 20%, which included a 10 point benefit from the Cam acquisition offset by a 29% volume decline in a negative one point from currency.
Operating margin rate was down year over year, 8.8% has the impact from volume declines was partially mitigated by cost actions.
Engineered fastening organic revenues were down 35% driven by lower global light vehicle and general industrial production.
The declines were broad base with all regions impacted as you would expect automotive fasteners and systems experienced a 43% decline as global light vehicle production was down 47% in the quarter.
The general industrial end markets remain weak, but the declines in our industrial fastener business were less severe only down 24%.
As it benefited from serving essential industries as well as the return of manufacturing activity in May and June.
Broadly across our regions and end markets underlying demand improved each month of the quarter. Therefore, we currently believe QQ represented the trough for this business and their coverage will continue to build momentum now the global automotive production and general industrial activity have resumed.
The infrastructure businesses declined 19% in the second quarter due to lower volume in oil and gas, which was down mid single digits and a 25% organic decline in attachment tools.
While this overall segment was particularly hard hit with factory closures and reduced industrial activity. The teams worked hard to manage cost and limit decremental margins at the prepared to participate in a recovery going forward.
I would like to call out the attachment tools business, specifically for their agility, even with the steep market driven declines, which I mentioned, 25% down they were able to maintain a mid teens operating margin rate for the quarter.
Well done.
Finally, I will review the security segment.
Which was another positive within the quarter as they performed better than initial expectations.
Revenue declined 11% as volume was down 9%. They also had a one point negative impact from divestitures, a two point decline from currency and price was a positive 1%.
North America organic growth declined 7% in Europe was down 10% as all businesses were impacted by government and customer restrictions.
Which were more pronounced clearly earlier in the quarter. We saw this dynamic improve in may and June, allowing us to perform more installation and maintenance activity.
Backlog remains in a healthy position it is up 16% positioning us well for continued improvement in the back half 2020.
In terms of profitability. The segment operating margin was down 160 basis points to 9.6% as price and cost control were more than offset by lower volume.
This is a strong performance for security as they implemented Swift cost control actions and were able to pivot to increased demand as things shifted in May and June. We also believe that's the security business can now energized as commercial activities around new transformational revenue opportunities related to safety, such as proximity entry and identity management soft.
For solutions.
We believe these growth opportunities will help us take the business transformation to the next level in the coming year too.
So in Germany in summary, the second quarter was a challenging environment as we navigated the pandemic, but thankfully less extreme that feared.
Outperformance to our initial expectations was the result of our teams resiliency and strong operational execution Navy, enabling us to deliver approximately 175 million in cost actions and protik top productivity opportunities, which helped to minimize our decremental margins to 25%.
Which were close to 10 points better than initial perspective.
Let's now briefly look at our free cash flow performance and a refresher on liquidity on the next page.
On a year to date basis, our use of cash is 224 million, which is 107 million behind the prior year.
The primary drivers are lower earnings as well as the working capital decisions that we made to ensure we are prepared for potential second half improvements in demand primarily related to strong tools and storage us retail trends.
Lower capital expenditures, partially offset these impacts reflecting our focus on capital conservation and maintaining a robust liquidity position as we navigate the current environment.
In terms of our liquidity and balance sheet, we ended the quarter with approximately $860 million of cash on hand.
Our strong investment grade credit rating continues to provide us for the uninterrupted access to commercial paper.
Following the successful remarketing of our preferred equity units in May we used to 750 million of proceeds to pay down the short term debt. We now currently have approximately 2.3 billion of capacity on our 3 billion CP program.
As you can see we have maintained enough flexibility from a liquidity standpoint, with a total potential a 3.2 billion available as of quarter end.
As a reminder, we do not have any long term debt maturities coming due until the fourth quarter 2021.
Our capital deployment priorities remain focused on debt repayment and achieving our leverage targets to support. These priorities. We have kept in place. Our planned 2020 capital expenditure reductions and are continuing to suspend M&A and share repurchase activity for the timing.
Also as a reminder of the company withdrew its full year guidance in April as a result of the uncertain macro environment and we'll continue to refrain from providing such guidance at this time.
Similar to April I would now like to provide some insights on our second half scenario planning as well as recent trend in revenue.
While we have.
While we have a much better appreciation for the depth.
And duration of the trough across our businesses.
The trajectory of the economic recovery remains uncertain.
As such we are preparing for a variety of demand scenarios that may occur and we will remain flexible and our approach.
So lets side of this page provides a segment view of our second half organic growth planning assumptions and our June and July forecasted shipment trends as well as our color.
As color on the region or sub business performance is relative to the recent trends.
We also show some other recent key trends on the right side of the page, which are providing us additional insights into our potential second half revenue performance.
For tools and storage, our planning assumption for second half organic growth ranges from negative 3% to a positive 4%.
Factor in this range as the sustainability of the very strong growth in us retail demand, that's largely driven by the surge in DIY and ecommerce.
As mentioned earlier, we have seen record Pos and it continues into July.
POS was up 33% versus the prior year in the first four weeks of Q3.
If these trends continue you can clearly see a line of sight to positive growth for the segment in the back half.
So we are watching the U.S. consumer trends very closely.
We're also watching the potential for the extending of the stimulus packages here in the United States.
And finally looking at to continue to turn of our pro focused activity, which all of these could help support or sustain these recent trends.
The remaining portions of the tool business, such as our us commercial and industrial channels as well as international operations, all carry deeper troughs within Q2.
Many are on a recovery trajectory in the slope of that improvement will also influenced the high in the low end of this range.
Europe tools and storage has seen strong performance over the past eight weeks with organic growth and high single digits.
Asia clearly is further along than Latin America and this recovery.
However, Latin America, which is now much better than the depth of the downturn continues to be very slow.
As far as its improvement trajectory as the region addresses that spread over the virus and has difficulty and containing it.
Our midpoint for the tools and storage second half organic growth.
Assumes one Pos continues to moderate from current levels, but still strong for the entire second half from 2022, Europe continues to see growth, but slightly moderated versus the last eight weeks.
Three us commercial and industrial as well as emerging markets are slow to recover.
The recent revenue performance in the segment revealed a strong organic growth rate globally of 8% for the last eight weeks, which likely supports a view that tools is trending towards the high end of the planning assumption range.
For industrial or planning assumption is inorganic growth range that is down 25% to 15% in the second half 2020.
This business is facing some of the company's most difficult end markets.
The last eight weeks, a shipment trends were down 23% organically.
Our midpoint of the above mentioned range, but assume continued improvement across Q3 in Q4 from what we believed to be the trough in the second quarter.
As you look at the business trend over the last eight weeks, we see that engineered fastening is tracking in the low twentys as both auto and industrial focused markets continue to gradually improve.
Another trend to look at in assessing our view on the auto portion of engineered fastening is that light vehicle production is down approximately 17% for the last eight week.
The attachment tool trends are negative high teens, while oil and gas in aerospace fasteners on a pro forma basis are weaker than the planning band of a negative 25% to 15% for the whole segment.
Given all these facts in the industrial area. It appears this segment is currently trending to the midpoint of the planning range.
For security, we expect this business to be relatively stable and continuous improvement trajectory, where the second half range of down 8% to flat.
This business is demonstrating a 4% decline in the last eight weeks so continues to show improving trends.
Although the recovery is mixed by country backlog remained strong which supports an opportunity for sequential improvement with installation and maintenance activity.
Additionally, as I mentioned earlier, new security and safety needs in factories offices, and health care environments emerging from the virus should create exciting new revenue opportunities for the business to capitalize upon starting in the back half of the year.
As you aggregate these planning range assumptions for the total company, we see three scenarios first on the low end, we see the potential for a 7.5% organic revenue decline in the back half.
This would represent a choppy recovery for our end markets for this to occur we would have to see significant moderation in Pos trends for North American tools and slower recovery trajectories and all the different areas of the of the company.
Base case, which is the midpoint is down organically just below 4%. This represents a broad continuation of recovery trends across the businesses and continued strength in tools North America, particularly in the third quarter as it relates to the third quarter. This scenario and beds low to mid single digit growth within global tools.
Sequential improvement versus Twoq within security and industrial growth that declines in the low twentys.
Finally, our high scenario or improving case is relatively flat organic revenue performance in the back half for the company.
Broadly this would assume slightly more accelerated recovery scenarios within the businesses and North American retail Pos trends continuing at very strong levels through the fourth quarter.
Our company organic revenue trend the last eight weeks is modestly positive.
So this is one factor that makes us feel at this optimistic scenario is possible however, not quite probable at this stage.
While this is a broad range versus our normal environment for revenue, we feel it's prudent to prepare for all of these scenarios.
Both to ensure that we have sized our cost base appropriately for the pessimistic end of the range and to ensure we are prepared and our supply chain if the markets are better.
Moving to the cost reduction program slide first I want to remind you how we're approaching this initiative.
We have targeted four areas of opportunity within our cost reduction program indirect spend compensation in head count employee benefit modifications and raw material deflation.
We see this at a 1 billion dollar savings opportunity over the next 12 months with 500 million benefiting this year.
Approximately 60% of this is made up of indirect spend and deflation.
But the balance consisting of compensation and benefit actions.
We got off to a fast start in the program in the second quarter and we are approximately $50 million of head from an execution perspective. This was the result of a swift implementation across the entire company.
At this point, we're maintaining our 2020 estimate of 500 million of savings, which implies that we should realize about 325 million in the second half.
As you think about the total program over the next 12 months, we are still on track to deliver a billion dollars. The organization is.
During that these cost actions are highly sustainable heading into 2021.
As Jim mentioned in his opening remarks, we're converting a significant portion of the temporary comp the compensation actions, such as furloughs and reduced work weeks to permanent actions.
While the very difficult decision. This was needed to prepare the business for what remains uncertain demand environment and it removes a significant uncertainty for many of our employees who are impacted by these temporary actions, which were approximately 10000 employees.
It will also help ensure our compensation related actions are sustainable and we will have no snap back as we look into 2021.
As it relates to indirect spend the teams currently have about half of the savings identified as sustainable.
We are working to push this higher potentially up to 75%.
Based on external research for these types of programs a very good result is 50% sustainability and 70% would be a best in class result.
So this is a significant amount of forward progress as it relates to the implementation and sustainability of our cost program. At this point, we feel that two thirds of the 1 billion program can be permanent.
This would result in a positive 2021 carryover or tailwind of approximately $150 million dollars.
So now, let's just address decremental margins for Tony Tony We are assuming we can limit the decremental margins net of cost cutting to the mid to high teens in our base case.
Clearly this is a volume dependent.
And you can see better decremental margin potentially mid teens in our improved case, if we experienced a choppy recovery they could potentially be 20% to 21% this year.
As a reminder, our decremental margin performance peak to trough during the last two recessions.
What's contained to mid to high teens.
So these are very relevant compared to our current 2020 view.
I would like to wrap up my comments by summarizing our 2020 planning assumptions on slide 10.
From a revenue perspective, we see the potential for a range of down 7.5% to flat for second half organic revenue, which puts the full year decline in a range of 5% to 10%.
Planning assumptions limit decremental margins net of cost savings to mid to high teens for the full year 2020, with a range of outcomes dependent on volumes as I just mentioned.
From a cost structure perspective, we have a 180 million of savings included in artist estimate range assumptions from our Q4 19 cost reduction program and expect an additional 500 million from the cost actions announced last quarter.
Tariffs and FX are currently expected to be 180 million headwind with $115 million that behind us in the first half.
Finally, as you see in the middle of this page we have disclosed our planning assumptions for the below the line items. So as you work to your models of various business scenarios. Please utilize this information.
From a cash perspective, our focus is capital conservation and de leveraging.
We're maintaining our capital expenditure reductions in our temporary suspension of M&A and share repurchase activity.
We will keep a sharp focus on working capital management and have aligned our supply chain with the recent trends and we'll modulate accordingly based on the trajectory of the recovery.
We believe we are continuing to take the appropriate actions given the current environment and we're maintaining our approach to planning around a range of outcomes.
Good growth or cost savings track ahead.
We will remain flexible and reinvest in key areas, which could enhance growth in the short term and mid term.
We are prepared to react and respond as recovery continues either at a rapid pace, a choppy pace or any scenario in between.
Thank you and I will now turn it back to Jim.
Thanks, Don.
We continue to execute on a number of outstanding growth catalysts, which position us for continued market share gains as well as buffering the shocks of a volatile global economy like we're experiencing in 2020.
The Craftsman brand remains a key element of our growth strategy and we continue to see a strong customer response excellent growth and remain well on our path towards a billion dollars. This brand with its enduring value proposition is well positioned to benefit from the positive trends, we've seen in North American deal why.
We're continuing to invest in our innovation machine, bringing the new core and breakthrough innovations to market and most recently our to wall product line has had innovations that spanned the power spectrum to waltz atomic an extreme provides the highest power to power to wait ratio tools in the market.
While flexvolt is reaching up into higher power categories, where we continue to introduce new tools that are cordless for the first time.
And during 2019, we also closed on a.
20% stake in MTD, holding so leading outdoor power equipment manufacturer.
This is an exciting opportunity to increase our presence in both the gas and electric outdoor power equipment markets with the first opportunity to purchase the remaining 80% beginning in the middle of 2021.
MTD continues to make progress on improving their operating margins and is also benefiting from the focus on the home and garden nesting phenomenon that has emerged in recent months and as I mentioned earlier downturns are a time of opportunity as well as a time of disruption. So for example, we are the tools industry leader in ecommerce with global 2019.
It was a 1.3 billion.
But with a sudden acceleration in the shift to ecommerce our growth opportunity here has become events to put it in perspective. It took a decade for ecommerce to become 10% of our revenue and almost overnight. It grew to nearly 15% of sales and is increasing quickly with our market position brands digital capabilities and global customer.
Our relationships, what a great opportunity to build upon our strengths in this area.
Thats excellent margins. This is one of the major growth areas that will attract significant new investment from us in the second half and beyond.
And in a matter of months Society has discovered a new found obsession with health and safety. This in turn has thrust our security business with its healthcare electronic security and automatic doors businesses smack in the middle of a new growth landscape. For example, we are commercializing new solutions, such as automated entrance management with temperature Mont.
During.
Contact in proximity tracing and touchless doors for commercial buildings and manufacturing plants, we're allocating resources to scale the solutions and benefit quickly from these new sources of potential growth.
We expect all of these growth catalysts, which include exercising our option to acquire the remaining 80% of MTD most likely in early 2022 to contribute $3 billion to $4 billion of incremental annual revenue beginning in 2022, great long term growth story as we look ahead to the future. So in closing were delay.
Good where the second quarter performance under the circumstances, we were able to quickly pivot to serve a rapidly improving demand environment and whether it in good stead. What we currently believe to be the trough revenue performance for the year.
Maintaining an intense focus on cost control and delivering on the improved demand trends within the quarter, we're able to limit the impact to our margin rates and deliver $1.60 bps. Unfortunately, we were in a strong position going into the crisis, and where the dedication and commitment of our talented diverse management team and all of our great people are taking the necessary actions.
Stay strong during the crisis and to emerge from it even stronger we're now ready for Q and a Dennis. Thank you. Thanks, Jim Shannon, we can now open the call to Q and eight please thank you.
Ladies and gentlemen to ask a question you need to press Star wondering your telephone to withdraw your question press the pound.
Yes, please limit yourself to one question.
Somebody will how that you any roster.
Our first question comes from Nigel Coe with Wolfe Research Your line is open.
Good morning, Jim Good morning.
Hi, good morning high.
So I want to set off with the.
Well, thanks will detail the diesel and tested in the second though for the.
Detrimental margins just wanted to fund the Fytwenty mid to high teens commitments.
Imply second half close it too low to mid.
Teens, I think if we take in the 24% decremental and Thats all for the year is that correct number one and the to assume that industrial come in a bit of fresh in the back half of the seems to imply that.
To margins potentially up in the back half of the just one quick showing that we think about this correctly. Thanks.
Yes. So on your first question, that's an accurate kind of view of the decrementals in the back half.
Yes, I think the margins for industrial will be very pressured, especially in the third quarter, but get better and the fourth quarter a bit, but they still won't be improving year over year.
But at this stage, we do think tool margins will be improving in the back half year over year.
Probably will be more improvement in Q3 than Q4 right now.
Due to various comp and other matters, but also our insight for Q3 is is very clear versus the insights for Q4 is still a little unclear.
So thats, probably another factor in that analysis as well.
Thank you. Our next question comes from Tim was with Baird. Your line is open.
Hey, everybody good morning nice.
Quarter Ben Thanks.
Just on my questions on inventory really within the tools business.
Just wondering if you could provide color on where you think channel inventory is relative to normal and.
Talking to your customers just how long do you think it takes back ticket.
Whenever I guess is normally just it seems like it could be in multi quarter tailwind if you're only shipping the Pos now.
So just some color there on what you think.
Toward a levels on a relative to normal and how long you could take it back.
Yeah, I mean inventory levels are exceedingly low.
And.
Pretty much as low as I've seen them.
In my time here.
And I think the the customers would probably prefer to have higher inventories if they could.
But as you as you point out we're simply keeping up with Pos right now.
We were fortunate we built a pretty substantial amount of inventory earlier in the quarter. When we started to see the.
The pls dramatically outperformed the the shipments and the customers in the beginning in the quarter, we're still on the process of.
In inventory correction themselves and then and took a while the realized that the pls needed to be replenished like ace up in the middle of the quarter.
In the order started rolling in probably in the back half of the quarter, but by then with our supply chain.
Cycle time, we fortunately producing sufficient inventory to at least keep up with the Pos and we're actually took us a while to get to the point, where we are keeping up with POS there was substantial inventory drain on the channel.
Throughout the throughout the quarter stabilizing pretty much near the end and then has been stable for several weeks now.
And my comments in the script and what Jim said, we don't want to leave the impression that inventory levels are so low that is causing.
Major issues with the end user, but then when you look at the weeks stock and you look at a typical range of.
It can be anywhere from nine weeks to 15 weeks, depending on the customer we're definitely at very low end of that range and so thats.
Thats a factor in as we think about going forward and we are producing oil.
Enough.
Products in the tools space that if there is a desire by our customers later in the year to restock will have the ability to do that even if the POS is continues to run at the levels. It's running at now.
Our next question comes from market to minimize with your line is open.
Hi, good morning, everyone and thanks for the scenario very high.
Very helpful.
Can I ask about the the positive carry over into 21 that you mentioned the 160 million.
Just confirming that is pre any of the supply chain savings and potential cost savings that you might have from that.
By rearranging the sign up supply into Europe, and the U.S., so that would be incremental on top of stuff.
And then for like is there any change maybe putting dots.
On a bit more forward in time.
Okay, Great if you could elaborate and thank you.
Yeah, I mean, it maybe the best way to answer that question because it's very good question is that.
If you think about.
Our margin resiliency program.
Which Jim commented on.
Related to how it contributed to this year is cost actions, we still think theres a great deal of value going forward in that program and we believe this a range of $300 million to $500 million of opportunity that we can capture over the next three to four years.
And part of that would be what you're talking about release shifting the supply chain into value opportunities that happened there associated with that there is also many other things associated with industry for it out though.
Advanced analytics, better pricing analytical and technology tools.
Our organizations have really digitized themselves.
And the supply chain continues to do that to really create more value on a go forward basis. So one of them really positive that's coming out of this crisis is that we're not like depleting our margin resiliency.
Value creation, we still see a great deal of value going forward and.
At this point I would just assume it's probably 100 to 150 million per year for the next three years, starting next year, we'll certainly refine that as we get closer to the end of this year.
But.
That is an opportunity that we will continue to pursue and as you can see is a lot of value so associated with it.
Thank you. Our next question comes from Nicole Deblase with Deutsche Bank. Your line is open.
Yes. Thanks, good morning, guys good morning.
Morning.
So I'm going ask one really easy question in silence, hoping maybe you can make an exception answer for me.
First on just the cost savings the remaining three.
325 for the rest of this year, how does that split between Threeq and Fourq Hill, and then I guess my bigger question is when we think about that.
I stayed to potentially Ike assets keep I'll go back to work, what's the potential that that could be offset by the pro coming back.
That is kind of content.
Yes, the first one it's pretty it's a pretty even split between Q3 in Q4, and then I'll pass your second question over to Jim, Yes, I mean actually I think they're both relatively easy questions because.
Clearly the DIY pain is something that.
Makes logical sense when you when you take into account the.
Perfect. Even if there is a stimulus which I suspect there will be it will be a lower.
Dollar amount than.
Than we've seen thus far.
And so I think that there probably will be some some Pos fade I'd just like it's it's on sustainable to keep circa 40% Pos going for a long long period of time.
So, yes, I think thats, probably it probably going to happen.
But the the pro has been.
Pretty much.
On hold you know very very quiet in terms of.
What we're seeing there and of course with the housing market potentially heating up here in the de urbanization and so forth that's likely to go on and starting to go on likely to continue and.
So forth I think we're going to see a fair amount of.
Pros coming back into the mix from the sidelines. So I think there is some potential of that could happen.
Thank you. Our next question comes from Michael We have with Jpmorgan. Your line is open.
Hey.
Good morning, everyone, Congrats and other results in the efforts so far thanks, Michael bike.
Hi, good question around.
The cost savings program Wasnt sure when you talk about still reiterating the full billion dollar savings.
Billion dollars and savings and 500 million 2020.
What I understand a portion of both of which is the temporary actions.
That you had said prior this calls maybe 30% of the overall total.
At the same time, you're talking about walking back 9000 employees, which is wonderful but.
Understood that part of that was.
Part of the temporary action.
Just wanted to get it then for and then you know you talk also about the carry over 150 million with disclosed that two thirds of the overall actions being permanent so just trying to get a sense or the remaining third how that flows through.
And maybe timing of that.
Perhaps the saw in.
Kind of talking about working to get this tenant reactions permanent.
But it doesn't seem like maybe in the next six to 12 months.
You'll get that will believe if I'm understanding that right, but but perhaps you could you walk us through that.
I think the way to think about it Michael is that.
If we got the full billion, obviously, we have another half billion of incremental benefit 2021.
But we do recognize that thats, probably not likely.
That we're going to get that type of carryover because we're going to have some of these temporary things that come back into our systems such as we have suspended certain employee benefits. As an example, that's going to be something we can tolerate as an organization for one year, but we can't continue that into next year, so that'll be something that.
Back into our cost base, we did some of these temporary compensation things that we're reversing for the reasons, we articulated which will create kind of an incremental costs next year year over year, but then would then we're shifting into since then we have some things that indirect that we did temporarily this year that will increase and our cost base next year, but then what we're doing so.
We're focusing in other categories, where we're taking permanent head count actions here right now through as Jim mentioned into September timeframe.
That will kind of help offset a portion of that and then.
And then we also are trying to sustain some of these indirect savings. So there are permanent and so ultimately when you look at $1 billion that we've gone. After we think we found 650 million of it roughly that is permit and.
And when you do all the math of all those pluses and minuses Adams, Dennis could give you little more detail offline, if you'd like youre going to get a situation, where you get a value a 500 million. This year, it's incremental over last year and you're getting into value of 150 incremental next year over this year and.
And that's really how it works.
Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Maybe just a question around the tools margins for the medium term.
So looking at your guidance it looks like the tools margins back to that sort of 17% Clos.
Level in Q2 in the second half.
Historically, that's where they've kind of peaked out so I just wondered as we looked ahead what type of incremental margins should we expect in tools when sales growth resumes.
And do you think but in the medium term an operating margin aspiration of sort of 19, 20% until so is realistic given the margin resiliency assets, so pushing through higher than those on.
Yes, I mean, we're very very pleased with the tools margins in this quarter because.
They they are pretty much at what has historically been peak levels at a time when revenue is that what we think is a trough.
In the cycle so.
Yes, I mean, I think thats a very significant.
Probability that they will they will accrete upwards.
There's a lot of positive things that Don has talked about I've referred to on a relative to the impact on margins from the cost reductions from margin resiliency.
Cetera, and so.
I think hopefully we'll Ford foretell.
Very positive story in the future and I think equally important is the lack of.
What we've had over the past few years, which which have been really significant headwinds from the dollar the strength of the dollar which is kind of backed off a bit and hopefully we'll we'll continue along those lines for awhile and also the tariffs are kind of anniversarying out here as we speak in the next quarter.
And inflation has turned into.
Deflation so.
There's a lot of powerful things happening in the tools margin story that I think bodes very well for going forward theres always going to be new headwinds overtime. So we can't get.
Crazy about it but clearly the momentum is upward.
Thank you. Our next question comes home depot, rather than with Wells Fargo. Your line is open.
Hi.
Can you talk to what kind of initiate as being taken other than just expanding other than just.
More taking divest mistaken MTD.
If you can just focused on what kind of way calls or end market.
Probably perhaps is it more lifefocus maybe clearly.
Products more equal more ecommerce friendly.
Yes, the broader question talking to that is ending the process of managing to coal, but did you discover any new adjacent markets. Our newer opportunities you can expand into thank you.
That's great. It's a great question and it's so I was trying to kind of get at that with them when I talked about the trends that occurred.
With the advent of Cove at the the first being the a sudden shift into.
Into ecommerce in terms of of revenue waiting and the consumer preferences and then in addition to that you have this.
Kind of re imagination.
Re acclamation to the home people spending time at home doing projects at home and then also out in the garden and landscaping. So a lot of DIY in that area I think thats going to be a relatively.
I'll call it a semi permanent trend, which means probably for at least a couple of years, we'll see that.
Then finally, this obsession with health and safety so all of those things play to our portfolio.
With the world's leading.
Certainly worlds leading tool business.
And a great position in E commerce and in DIY both in.
In the U.S. and into early North North America, and in Europe and.
And then the MTD.
Acquisition, which hopefully will be able to do in early 2022.
Thats going really well and into in terms of the cost Takeouts that we had.
Working with MTD on making sure they're margins get up to acceptable levels and also from a from a revenue point of view MTD is doing quite well as well as well.
Significant growth and this at this period of time, so that's going to be a great story and that's.
Probably going to be about $3 billion. When we when we exercise that option of revenue that we're going to bring on probably at a weighted multiple when you take into account. The first 20% and then the second 80% will weighted multiple probably beer in the seven to eight times EBITDA range, which is going to be just fantastic.
And then the security business because of this new found obsession with health and safety the security business, which has what is today a relatively small but extremely sophisticated healthcare business that serves acute care facilities and elder living facilities.
It has very sophisticated technology in terms of.
T in particular and artificial intelligence using that business to help with the contact tracing and other.
Relevant health care applications in one of them being to the protection of elders.
In these elder care facilities, which as we all know as one of the great tragic stories of Cobot 19.
Most states are running around 50% plus of their a of their desks associated with elder care facilities. So we're going to be trying to help out with that.
As a.
Social kind of.
Project to help.
Deal with a safety and elder care facilities, and then the electronic security business, which.
For a long time has been on the bubble. If you will certainly has now moved into the strike zone in terms of strategic relevance with all of its applications that relate to health safety and security so.
Yes, I think it's a really great.
Time for our portfolio based on what we see out there in the in the world today.
Thank you and this concludes the question answer session and I would now like turn the call back over to Dennis mine for any closing remarks.
Shannon Thanks, we'd like to thank everyone again for calling in this morning and for your participation on the call. Obviously, please contact me if you have any further questions. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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Okay.
Thanks.
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Hi.