Q3 2020 Stanley Black & Decker Inc Earnings Call
Name is Shannon and I'll be your operator for today's call.
At this time all participants are in listen only mode later.
Later, we will conduct a question answer session.
Please note that this conference is now recorded I will now turn the call over to the Vice President of Investor Relations finish line. So.
You may begin.
Thank you Shannon good morning, everyone and thanks for joining us for Stanley Black <unk> Decker's, 2023rd quarter Conference call.
On the call. In addition to myself is Jim Loree, President and CEO and Don Allan Executive Vice President and CFO, Our earnings release, which was issued earlier this morning, and 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 are in our press release.
This morning, Jim and Don will review, our 2023rd quarter results and various other matters, followed by Q and a session consistent with prior calls we're gonna be sticking with just one question for color 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 risk and uncertainty. It's therefore possible that the actual results may materially differ from any forward looking statements we might make today, we direct you to the cautionary statements in the 8-K that we filed with our press release and our most recent 34 Act filings I'll now.
Turning the call over to our President and CEO Jim Loree.
Thank you Dennis good morning, everyone.
What then and then full year it has been thus far going into 2020, we expected some volatility and uncertainty however.
No one could have anticipated the ups and downs in the twists and turns.
This year would take and there's still two months to go.
As you saw from this mornings press release, our team is doing an impressive job managing through the trials and tribulations of this era and I want to thank every one of our 54000 plus associates, who contributed to those results I'm happy to say that we nail what was perhaps one of the best quarters in our history.
Pick your metric gross margin operating margin free cash flow. The list goes on for me. The most gratifying is the operating margin rate of 17.7%.
We've proven over the decade since the black and Decker merger that we can produce organic growth at a reasonably consistent 4% to 6%. However.
However, our goal has always been to marry that up with relatively consistent operating margin rate accretion.
With a goal of breaking through that 15% ceiling at some point.
That has been elusive until now in.
In late 2017, we entered what turned out to be a three year period of significant external headwinds caused by tariffs cost inflation and FX pressures all totaling approximately $1 billion of on farm on favorable margin impact with.
With a lot of work and a strong constitution, we were able to offset those headwinds and generate a 6% EPS CAGR.
During that era, we also bought Irwin Lenox and Craftsman, among others and utilize those acquisitions to cement incredibly strong strategic partnerships with our two major home center partners in the U.S.
As well as building a thriving ecommerce business, including a partnership with North America's largest E commerce player.
And when they pandemic it by April we faced into four weeks of revenues down 40% as the world went into Lockdown and most retail channel partners dramatically cut their ordering.
In response, we beefed up our already strong liquidity position and took out $1 billion of cost, including a half billion of indirect or non people related cost we managed to keep our supply chain running with only minor disruption, including operating over 100 plans around the globe and have done so successfully throughout the pandemic.
Then a strange thing happened in North America people stuck in their homes began to do projects. Some d. I y., some through trades people and contractors and Pos at our retail partners began to skyrocket in may and has been an unprecedented levels ever since.
I may retailer inventories were plummeting and recognizing that our supply chain lead times.
Would preclude us from serving the demand if it's sustained we took a decision to invest $600 million in fast moving inventory in advance of orders from retailers beginning in the may timeframe.
That turned out to be an excellent call.
In the third quarter construction and DIY tool revenues in Europe, and the emerging markets began to recover while north American retail stayed strong this.
This caused a positive revisions to our revenue estimates and ultimately drove double digit growth in tools in the third quarter, even while some of our revenue shifted into October and the final days of September so with that as backdrop why am I. So excited about our record 17.7% operating margin rate.
The reason is that we believe we've achieved a new range of profitability to coupled with our continued organic growth.
Yes continued organic growth, we believe into if 2021 is a reasonably stable economic year.
That the 40% of our portfolio, but in 2020 will be significantly down organically that is industrial and the security segments.
As well as industrial tools will bounce back and become a positive. We also believe the tools and outdoor will be very strong in 2021 with channel inventory rebuilds and continued pandemic and demand at.
At least into the first half.
Our ecommerce position, which will approach $2 billion in 2020.
And also continued to be a robust growth driver as we capitalize on our strengths and make continued investments to make it even stronger.
We also believe that approximately $625 million of our 1 billion dollar cost takeout will stick, resulting in some carryover benefits next year and that the margin resiliency initiative will continue to bear fruit in 2021.
Building $100 million to $150 million of additional margin tailwind.
Perhaps most refreshing of all.
As the absence of sizable new headwinds in the area of FX inflation and tariffs.
For all those reasons as we sit here today amidst all the market uncertainty we believe the growth in margin story is sustainable in the stop start kind of pandemic economy that we're in.
My comments do not contemplate a severely pressured 2021 global economy, and we do not believe that scenario to be the likely case.
Our people have worked tirelessly to produce these results our third quarter financial performance reflects the agility courage in common sense of our leaders and their teams under the circumstances and we thank them for that.
Now for a few financial highlights.
Total company third quarter revenues were 3.9 billion up 6% versus prior year.
This included 4% organic growth and a two point contribution from the Cam acquisition and turning to profitability, we executed to deliver a gross margin rate of 35.9% or 160 basis points above that of prior year.
And as mentioned.
Our operating margin rate was a record 17.7% up 320 basis points. This achievement was a result of strong cost control our margin resiliency initiative.
Volume leverage and price and leading this performance was tools and storage delivering 11% organic growth and a record 21.5% operating margin rate.
Industrial achieve sequential improvement in both revenue and margins. Despite a steep year over year market driven to organic decline and effective cost management to protect margins helped position the business for outstanding volume leverage during an eventual market recovery.
And lastly.
Security delivered stable results even in this climate, we just a modest decline in organic growth and relatively flat operating margin. We continue to transform this business and are investing to capture the emerging health and safety opportunity related to the pandemic. We're excited to realize the benefits from this multiyear transformation with a.
Tangible for organic growth with margin expansion in 2021 and beyond.
And finally, all of this was punctuated by record adjusted EPS of $2.89, which was up 36% versus last year as well as $615 million of free cash flow in the quarter bring.
Bringing our year to date free cash flow to $391 million up over $400 million year over year.
And as we look ahead, our well established pandemic priorities remain consistent first ensuring the health and safety of our employees and our supply chain partners second maintaining business continuity and financial strength and stability.
Third serving our customers as they provide essential products and services to the world and fourth doing our part to mitigate the impact of the virus across the globe.
The pandemic is not over yet.
We are maintaining our focus and not letting our guard down as we enter the next phase and continue to manage with agility and resiliency.
These priorities have helped us keep our employees is safe and secure as possible operate continuously to serve our customers and to support our communities. During this challenging period.
We will continue to exercise discipline on expenses and reap the benefits of the cost savings program put in place earlier. This year, we are concurrently making investments in key growth areas associated with reconnecting with the home and outdoors E Commerce and health and safety.
Even as we work to ensure that our operating margin stay in the 15% plus Zip code.
In summary, it was a truly notable quarter and there's a lot to be excited about for the future, including MTD, which.
Which brings between two and $3 billion of revenue and becomes executable beginning in July 2021.
Thank you and I'll now turn it over to Don Ellen to provide you more color on the third quarter as well as our scenario planning as we look to the fourth quarter and beyond.
Thank you Jim and good morning, everyone.
I will now take a deeper dive into our business segment results for the third quarter.
Tools and storage delivered excellent revenue growth volume up 10% and price contributing one point.
The segment organic growth for the third quarter was impacted by the timing of promotional volume that ended up shipping in October versus our previous expectation of September.
This represented approximately $100 million to $125 million or a five to four to five point impact versus the Threeq revenue planning assumption, we communicated in late August.
As many of you know.
There is a significant amount of volume that goes into the channel for the fourth quarter holiday promotions during the September to October timeframe.
You will see this timing shift included in the Q4 planning assumptions that I will review later.
The third quarter operating margin rate was outstanding and clearly a record performance at 21.5% for two of the storage.
490 basis points versus the prior year as volume productivity cost control and price delivered the strong margin rate expansion.
As volume growth accelerated we experienced excellent operating leverage due to the significant adjustments to our cost base over the last six months in response to the pandemic.
Now, let's take a look at some of the geographies within tools and storage North America was up 11% organically.
U.S. retail delivered 16% organic growth driven by strong DIY and improving professional demand along with continued momentum within the ecommerce platforms.
Thats remained very robust throughout the quarter as we experienced an average growth in the low twentys percentile over the entire third quarter.
The U.S. retail store inventory levels, although up slightly from the beginning of the quarter remain significantly lower than last year.
The North American commercial and industrial tool channels continue to see a slower path of recovery compared to the strong results in us retail.
The commercial channel declined 7% during the quarter.
Within this channel there are mix of customers that serve both construction and industrial markets.
If you look at pure play construction focused customers in this channel Green shoots emerged and they delivered low single digit organic growth for the quarter a positive signal that the pro is returning.
Finally in North America, our industrial and automotive tools business declined, 11%, which was a significant improvement from the Twoq you decline of 25%.
Moving to Europe, Europe delivered 12% organic growth benefiting from similar trends in North America, as well as channel inventory recoveries as these markets emerge from the Q2 shutdowns.
We believe the channel inventory increases represented approximately a third of the growth within this region.
The result was led by construction markets and was experienced across all major geographies with the UK Central Europe, and Iberia up double digits, and France, Germany, Italy, and the Nordics up mid to high single digits.
Organic growth in emerging markets was up 11% led by pricing improved demand and an inventory recovery Latin America led the way it was up 12% in the quarter to.
The growth was broad based with Brazil, Argentina, Chile, and Colombia up double digits, with Mexico, and Peru up mid single digits.
Asia was down low single digits in the quarter with modest growth in South Korea, India, Japan, Malaysia and Vietnam.
Which was offset by declines in China and Southeast Asia.
And then finally, Russia, and Turkey had a very strong growth at very strong growth during Q3 contributing to the recovery for overall emerging market.
Now, let's let's shift to the fuse with intelligent storage power tools and equipment delivered 22% organic growth then.
Benefiting from strong commercial execution and new product introductions.
Despite the difficult comps earlier in the year Craftsman is benefiting from the strong DIY and ecommerce momentum, resulting in growth significantly ahead of our expectations.
And starting to approach our annual goal of $1 billion in revenue.
Additionally, the Walt is capturing the positive trajectory in the pro recovery.
As well as new product introductions, such as power detect and continued expansion of our flexible atomic and extreme breakthrough innovations into new product categories.
Shifting to hand tools accessories, and storage, which declined 5% for Q3, new product introductions and DIY growth were not enough to counter a large exposure to industrial focused customers, which are still declining but sequentially improving as I mentioned previously.
Now we have ecommerce continues to see strong momentum and we saw that experienced throughout the quarter driven by impressive exponential growth across all regions. This channel represented approximately 18% of the global tools and storage revenue for the third quarter as we continue to expand our market leading share position in the strategic channel.
We are mark, we're making targeted investments to bring in world class talent and expand our digital capabilities to maximize this rapidly accelerating opportunity.
So in summary, despite a very dynamic environment. It was an outstanding quarter for tools and storage business delivered a record operating margin rate.
Executing on the cost actions, while demonstrating the agility to meet the strengthening demand that emerge throughout the quarter.
Great work by our tools <unk> storage team.
Turning to the industrial segment total growth was negative 7%, which included a 10 point benefit from the Cam acquisition and currency contributed a positive 1%. This.
This was offset by an 18% decline in volume.
Spiked a significant organic declines we are cautiously optimistic in the positive sequential improvement in the markets across many of our industrial businesses with automotive showing the largest Q3 sequential improvement.
Operating margin rate was down year over year to a respectable 12.3% as the impact from market driven volume decline was partially offset by swift cost control.
Our cost actions are having a significant impact and contributed to a 350 basis point sequential improvement in the margin.
Let's now dive a bit deeper into this segment engineered.
Engineered fastening organic revenues were down 14% driven by lower global light vehicle and industrial production.
The declines were experienced across all regions, although global light vehicle production remained down 5% year over year forecast continue to improve.
As a result, automotive fasteners experienced strong sequential improvement from April.
Relatively in line with this mid single digit decline in light vehicle production.
However, our auto systems business is still experiencing significant declines in the low twentys as Oems continue to conserve capital and response to the current market environment.
Industrial fasteners declined high teens, and despite more positive indications for global industrial production recovery in these markets have not bounce back as quickly are.
Our customer insights indicate that the majority of the manufacturers are balancing the initial surge and pent up demand following the Q2 closures with the slower trajectory towards normalized business activity.
Infrastructure declined 25% due to lower volumes and attachment tools, which was down in the high teens, while oil and gas declined 35% due to a sharp reduction in pipeline project activity.
While the outlook for oil and gas remains challenged we are beginning to see positive signs of an improving environment and attachment tools.
And finally, let's turn to security total revenue was relatively flat versus prior year with volume down, 4%, partially offset by benefits from both price and currency.
North America declined 3%, primarily due to lower installations, and a commercial electronic security and healthcare due to the pandemic.
Europe experienced a modest organic decline as growth within the Nordics and France was offset by lower volume in the UK.
However, global backlog remains in a healthy position and is up versus the prior year.
While the order rates in electronic security have continued to gain strong momentum since Q2.
One item to briefly note before I cover margins related to security. During Q3, we reached an agreement with Securitas to sell commercial electronic operations in five countries in Europe and emerging markets.
These businesses represent approximately $85 million in annual revenue.
And the divestiture will be modestly accretive to segment margins going forward.
This decision represented normal portfolio pruning and will allow our security team to focus our efforts and resources on our geographies, where we have strong market positions.
Now in terms of profitability the segment operating margin rate was up 10 basis points to 11% as.
As pricing cost control more than offset the impact from lower volume and growth investments.
We delivered this margin expansion and funded growth investments with a 90 basis point expansion in our gross margins another very positive sign of the business transformation underway.
As the market normalizes, and we ramp up the new growth opportunities within health and safety. The security business is well positioned to return to organic growth and consistent margin expansion as we head into 2021.
So in summary of all our business is a very strong quarter as we continue to navigate the uncertainty in the current environment.
As I take a step back and reflect I am so proud of how our team stepped up during the crisis positioned the business for success.
Industrial business hit with the steepest market declines is on track to deliver double digit margins this year.
A far far approved from the 7% margin prior recession trough, the industrial segment experienced by Black and Decker during 2009.
Security is taken Swift actions to return to margin expansion is now focused on accelerating its transformation with several exciting growth initiatives.
And of course, what a performance by tools to reposition its margin potential during this downturn, while simultaneously investing in programs that can keep us on the offensive as it relates to growth and share gain.
Lets now briefly look at how this translated into free cash flow performance on the next page.
On a year to date basis, our cash generation is $391 million, which is 412 million ahead of the prior year.
The strong performance was driven by approximately $600 million of free cash flow generated in the third quarter.
Our cost focus combined with the surging demand and tools. This charge resulted in strong earnings growth lower.
Lower working capital versus the prior year and reduced capital expenditures.
As we look ahead into closing this year.
Priority is to ensure we maintain appropriate levels of working capital to support the continued strong growth for tools and storage into 2021 as.
As well as market recoveries and our other businesses.
As a result of this key priority our plan assumes $300 million of incremental working capital in Q4.
Which will reduce our normal seasonal working capital benefit versus prior years.
Even considering this planning assumption, we expect to generate a significant amount of cash in the fourth quarter and our planning assumption is for $800 million to $900 million of free cash flow for the full year 2020.
From a capital deployment perspective, while we have removed our explicit pause on M&A and share repurchase our priority today is de leveraging in line with our strong investment credit ratings.
In terms of our liquidity and balance sheet we.
We ended the quarter with full access to our $3 billion commercial paper facility.
And approximately $700 million of cash on hand.
As a reminder, we do not have any long term debt maturities until late next year.
So as you can see we have maintained flexibility from a liquidity standpoint.
I would now like to discuss the third quarter X the trends for demand and how we're planning for the fourth quarter.
On slide eight I will start on the left side of the page and walk through a segment view of our fourth quarter planning assumption range.
I will also provide color on the geographic rocky business exit trends.
In this case that will use September and October month to date actual shipments as our exit trend.
Which normalizes for various timing factors.
Our tools and storage, we are planning for a fourth quarter range of 8% to 10% organic growth.
One key assumption in the tools and storage rain can range continues to be the sustainability of the strong demand within U.S. retail.
I am happy to report that Pos in North American retail has remained strong.
While demand is lower than some of the stratospheric levels. We experienced in Q2. The Pos growth has remained very strong in the low twentys for the prior four and eight week period.
POS for the most recent four week period for brands such as Craftsman Stanley are delivering similar levels of growth that was demonstrated over the entirety of the third quarter.
Pos growth within our more pro focused brands such as the wall and Stanley Fatmax have accelerated in recent periods, reflecting the positive trajectory of the pro recovery, which gained momentum as the third quarter progressed.
Our planning range assumes that Pos we maintained in the mid teens to the low twentys for the entire fourth quarter.
The recoveries in Europe, and Latin America accelerated in the third quarter, and we continued to see positive momentum.
However, we are planning for a moderate deceleration of shipment growth from Q3.
Factoring in the inventory recover that a recovery that occurred for these regions.
[laughter].
Finally, the us commercial and industrial channels, along with Asia should continue to see sequential improvement.
But our planned at slower trajectory as compared to the other channels and regions within the segment.
The revenue trends in the tools business for the last eight weeks supporter view of continued strong performance as we've experienced growth of 12% and this time horizon. This.
This is slightly above the high end of our planning range for Q4. However.
However, we anticipate the deceleration in the into international markets, primarily to occur over the remainder of the quarter.
For industrial it plan assumes for an organic decline of 10% to 15%. Many of the markets are demonstrating continued recoveries excel.
The exception is our aerospace and oil and gas which are longer cycle and we are planning for protracted recovery.
On the positive side, we have continued to see improvement in automotive production forecast.
Industrial production trends.
And order momentum and attachment tools.
Midpoint would assume continued improvement within automotive attachment tools and general industrial end markets versus Q3.
Revenue trends for the last eight weeks support continued recovery for this segment as our shipments were down 11% organically.
In line with the more optic optimistic end of our Q4 planning rate.
Another positive thing signal is that engineered fastening as demonstrated organic growth over the last four weeks.
Market momentum and easier comps in this segment are starting to emerge.
Turning to security our plan assumes for a range of down low single digits.
To a high end up being relatively flat organically.
Exit trends for this business are tracking relatively in line with this range, which is a good result, considering that security grew 4% organically in Q4 2019.
Although the recovery continues to be mixed by country backlog remains strong and orders have been regaining momentum, which supports an opportunity for sequential improvement with installation and maintenance activity.
Additionally, the businesses focused on simultaneously sign.
Okay.
Simulating stimulating demand with the existing and new health and safety solutions, which have emerged from the pandemic and will begin to generate revenue prior to the end of year.
As you aggregate this for the total company, we're planning for a Q4 range of 3% to 5% organic growth.
The low end of this range represents a moderation in the strong Pos for the newest retail or a meaningful deceleration in the recovery trajectory than industrial security or the remaining tomorrow.
The high end of our range reflects continued positive momentum in the recovery and with North American Pos levels continuing to be strong.
We currently are not planning for an improvement in store inventory levels within this range for our tools and storage major customers.
The company revenue trend is up 7% organically across September and October month to date.
Considering we would expect it to be a little stronger initially due to the monthly timing and tools previously mentioned.
In our revenue range is reasonable expectation it is a regional expectations at this stage for the fourth quarter.
Now moving to page nine I would like to provide an update on our cost program. As a quick reminder, we targeted for areas of opportunity indirect spend compensation benefits and raw material deflation.
We are on track to capture the previously outlined $500 million 2020 benefit.
During the third quarter, we realized $175 million of the benefit which brings our year to date savings for $350 million.
The organization continues to make progress on improving the sustainability of our cost actions.
As you think about the program heading into 2021.
We are still on track to deliver a positive carryover of $125 million net of costs associated with the story in the temporary cost actions implemented earlier this year.
In addition to this positive carryover we.
We continue to execute on our margin resiliency initiatives and expect to see an opportunity for $300 million to $500 million over the next three year period.
A reasonable expectation for the 2021 margin resiliency opportunity is a range of $100 million to $150 million.
As a reminder, we view this program as an incremental source of contingencies offset any unforeseen headwinds that may arise throughout the year.
Support investment into the business.
Or support margin expansion and outperformance.
Now I will quickly summarize our 2020 planning assumptions on slide 10.
From a revenue perspective, as I mentioned, we see a potential for a range of 3% to 5% organic growth in the fourth quarter.
From a cost structure perspective, we had $180 million of 2020 savings from our Q4 2019 cost reduction program.
And expect an additional 500 million from the cost actions announced earlier this year as I just mentioned.
Tariffs and FX are currently expected to be 165 million dollar headwind.
With $140 million of that behind us through three quarters.
Considering these factors we are planning for a full year operating margin dollar growth in the mid single digits and.
And significant margin rate expansion versus the prior year.
Finally, we have disclosed our assumptions for the below the line items as you work to model various business scenarios.
When you evaluate all these financial factors and complete the math. The result will be an EPS range centered around our 2019 as a result of $8.40 per share.
An excellent potential outcome, given where the world was six months ago in the depths of the crisis.
From a cash deployment perspective, our near term focus is deleveraging we.
We are maintaining our capital expenditure reductions, while continuing to invest in the key areas that drive growth margin resiliency or support footprint moves and tools and storage.
We will keep a sharp focus on working capital management and have aligned our supply chain to serve the strong revenue growth.
I know many of you are thinking about 2021 at this point.
As outlined earlier, we have built approximately $125 million the positive carry over from our cost program and have margin resilience at our disposal to serve as a contingency.
In addition, as Jim mentioned, we don't see major headwinds or Tailwinds from an input cost perspective at this stage.
Therefore, this sets up nicely to handle a significant amount of cost headwind should they emerge or outperform expectation that these headwinds do not emerge.
As it relates to revenue our visibility has improved but it's far too early to comment on market demand for 2021.
That being said, we don't except the notion that are set up as a story about insurmountable comps.
Consider that in 2020, approximately 25% of the portfolio is expected to show double digit market driven organic retraction, mainly concentrated in industrial focused end markets across our segments.
It is reasonable to expect growth from an arguably easy set of comps in this category.
20%.
Of the portfolio is showing modest retractions. This year. In addition to the 25% I. Just mentioned this would include security and some of our emerging market geographies and tools.
These businesses certainly don't have tough set ups as we sit here today and appear poised to be able to demonstrate growth.
The remaining 55% of the company, which includes North American retail and European tool European tools and storage.
We'll show growth this year.
But the set up for the front half of 2021 is very good as they retracted organically in the comparable period in 2020 and due to the shutdown and inventory corrections that we experience.
These markets have continued to see strong and the refocus on the home trend has emerged and continue.
Finally, we have a host of growth catalyst that Jim will outline in a moment. We believe we have the investments in the initiatives in place to drive the next leg of share gain across our business, but considering all these factors.
And of course, assuming no adverse changes in market demand due to major economic pullbacks, we do not see any reason at this point as to why we cannot demonstrate organic growth in each of our segments in 2021.
So hopefully this helps you see why we are excited with the potential for the company to create significant shareholder value in 2021 and beyond.
Thank you and I will now turn it back to Jim.
Okay. Thank you Don.
Like I said before no one could have anticipated the ups and downs on the twists and turns this year would take and it looks like it's going to be a great outcome.
We've covered a lot of ground already so I'll just take a few more minutes to highlight our growth catalysts.
The Craftsman brand rollout remains a key element of our growth strategy in the surge in DIY outdoor and positive trends in ecommerce have further accelerated this opportunity by the end of the year, we expect to deliver $900 million of cumulative growth from this program since acquisition and about $100 million ahead of our our latest plan.
And with more cressman growth opportunities on the horizon, we can reiterate our commitment to achieve the $1 billion revenue target is six years earlier than we committed during our initial acquisition announcement, we can now start to evaluate how much further we can go beyond $1 billion over the course of time.
Especially with the potential addition of outdoor power equipment through MTD.
The MTD opportunity gives us an option beginning in the middle of the next year to acquire the remaining 80% of one of the great American outdoor power equipment companies.
All in multiple that will be in the seven to eight times EBITDA range.
We continue to be encouraged by their product development pipe.
Applying as well as their progress on improving profitability.
That category is experiencing similar benefits from the consumers reconnection with the home and we continue to be excited about the runway for growth by leveraging brand technology and channel synergies. This combination has the potential to generate significant shareholder value by expanding our presence in the $20 billion plus market.
And everybody understands how the pandemic has accelerated the consumer shift to ecommerce.
And tools, we are the industry leader in this channel by a factor of approximately three acts and we've been working on it for 10 years building ecommerce partnerships with major players all around the world over that timeframe. It has evolved from nothing to representing at least 18% of sales up five points this year alone.
We are investing in new talent digital capabilities, and our brands, including the revitalization of the black and Decker brand to capture this compelling opportunity and.
And we have the products. Despite all the cost actions, we are continuing to invest in our product innovation machine, bringing nucor in breakthrough innovations to the market.
Tools, we continue to strengthen our position as the industry leader in maximizing power output with innovations like the well powered to detect and Flexvolt advantage.
The extension of our innovative atomic an extreme power tool platforms into new products and categories is providing more solutions for users to expand their tool kits with the highest power to weight ratios available in the market.
And the societal obsession with health and safety that we're all experiencing right now that's created new opportunities for security. Our transformation came at the right time, a security is leveraging capabilities that have been developed during the last last two years, such as did digitally provision proficient talent technology.
And partnerships.
Commercialize new solutions these are products such as automated entry.
Entrance management with facility threshold controls contacting proximity tracing and touchless stores for commercial establishment that will begin to show revenue in 2021 and taken together. These growth catalysts have the potential to generate over $3 billion to $4 billion of revenue annually over a multiyear period.
The shareholder value creation potential is compelling over the medium to long term.
And as for the short term it was a remarkable quarter and one for the record books. Despite the pandemic, we're running on all cylinders the fourth quarter it looks to be strong as Don pointed out as well I want to thank you all for your interest and support as well as thank our Stanley Black <unk> Decker leaders and their associates for their commitment and effort as we look ahead to our.
Next chapter, which we expect to be a powerful growth story with significant margin accretion potential Dennis we are now ready for Q and a great. Thanks, Jim Shannon, we can now open the call to Q and eight please thank you.
Ladies and gentlemen to ask the question you need to press star one on your telephone.
All your questions Mr. County, we ask that you please limit yourself to one question.
Tim I'll listen Paul this morning roster.
Our first question is from Jeff Sprague with vertical research your line is open.
Thank you good day everyone.
A bunch of questions I guess I'll Trust those behind me, we'll ask the ones idle I wanted to focus in on margins a little bit more.
We could.
And just to understand if there was.
Anything really unusual.
The tools margin in the quarter.
And then and then just thinking about what you are suggesting for organic growth. It looks like it would put tools revenues in Q4, similar maybe up slightly from Q3.
So maybe you could just give us a little additional color on margins specifically in tools and storage.
Three into Q4.
Thank you.
Sure Jeff So.
Yes, I mean, the third quarter margins as we mentioned we're really.
Standing at 21.5%.
And there was nothing unusual in there or onetime in nature. It was really a demonstration of.
The significant amount of cost that we took out very quickly back starting in March and April timeframe of this year.
A lot of that was temporary than we did a very quick pivot. If you remember back in June and July.
To convert a large portion of that to permanent cost actions.
And in.
And make it sustainable going forward, because we recognize the volatility of.
The situation and we're really starting to see the benefit of those cost actions flowing through the margins and maintaining our core maintaining our cost base at this level as we see the strong topline growth and get outstanding operating leverage as a result.
Let me just be clear that for those of you are wondering if we're just cranking up the plants and that's resulting in some unusual.
Benefits to margins that's not the case the way that you have got accounting works that actually gets hung up on your balance sheet for almost six months and you don't really see that benefit to later on down the road. So we're not seeing that benefit because I know thats probably a question. Some of you have it's really just what I mentioned is really focused on the cost actions, we take and we took in the benefit.
Operating leverage associated with that.
On the organic growth what part of your question Yeah, I would say were probably looking at a similar to Q4 to what we just experienced in Q3 for tools and frankly for the company as well overall.
And we'll see how that plays out we've had a great start to the fourth quarter were really feel positive about the performance in the month of October but.
But we also know that in the fourth quarter the heavy revenue month.
Really the biggest one is October and then the beginning of November is pretty strong too. So it's great to have that start at the beginning of the quarter.
Our next question comes from deeper right event with Wells Fargo Securities. Your line is open.
Hi, good morning, all.
I'll stick with the margin theme here too.
Don you noted.
Tools and storage margins have stepped up higher can you talk about how much of that structural lift in margin.
Six over the medium term that is how much higher than the 17% CNS margins, we should be expecting on a go forward basis. We are also a quick clarification on 2021 margin facilities measure is just under 250 million will that be pulled only if things deteriorate worse.
Oh plan or will that be layered in respect. Thank you.
Surety, but so.
On your first question the lead.
We really are very focused right now and how do we take this step change in margin rates for tools and do our best to make a large part of its sustainable.
And I really think when you see the Q4 results and actually when you do the math and you start to think through the.
The models, you're going to see that the margin rate in Q4 is going to be although not as high as Q3, because we do have a normal ticked down due to some holiday mix factors that occur in the fourth quarter.
But still will be around 20% it will be a very strong.
Margin rate for the fourth quarter for tools and storage when I think about going forward into next year.
We are now looking at this business as being a very high teens margin business, we want to be able to maintain that going forward.
So that's our view at this stage and.
They will exit the year around 18% for the full year for margins and.
We would expect them to continue to be somewhere between 18 and 20% next year.
Barring any unusual things that.
Headwinds or things like that that we're not expecting at this stage.
As far as margin resiliency.
That we're going after that number no matter. What so these are these are things associated with it.
And just before that no commercial pricing excellence.
Some of the plant moves were doing around the world to streamline our operations.
Et cetera, and so we will aggressively go after that $300 million to $500 million over the next three years.
The 100 to 150 million for 2021, and so it sets up a nice contingency if we need it and as I said in my script, if we don't need it.
Help us have either make some investments or have an outperformance or a mix of both.
Our next question comes from Josh Pokrzywinski with Morgan Stanley. Your line is open.
Hi, good morning, guys.
Yes.
I'll just shift over to growth and Don one comment you made about the lack of contemplated inventory replenishment.
I know what kind of talking about percentages and percentages given that it's really just a phenomenon that prize in us retail, but I think some of Jim's earlier comments dating back to the other points in the third quarter suggests there's maybe four or five weeks of inventory that could use replenished at some point.
My math would say that on the totality of tools and storage, that's still kind of a mid to high single digit percentage of of.
Any given quarters of growth potential is.
That's something that we see stretching out year ended the first half at 21.
And is that kind of the right order of magnitude to think about what that would be stock means in terms of segment organic growth.
Yes, the read to its Jim I know you directed towards Don but I feel lonely because everybody wants to talk about margins.
I'm not an expert on the I mean, I I know how to make and then expand but I'm not an expert on the details of the margins. So I'll take that one and we've had a lot of.
Customer contact with our partners who.
Have these inventories that are not where they want them to be.
And the fill rates are not exactly where they want them to be although I think we are doing reasonably well in relation to their typical suppliers.
So there is this replenishment and you and I think you are in the right zone that for four weeks or so of inventory that we would all of those.
Customers and.
And us, we'd all like to to to replenish, but keeping up with the Pos at the levels that is that right now is really a challenge so.
Yes, I think you've got it right.
In this in the sense that it's not going to be solved in the fourth quarter and the customers are very very clear about it must be so solved in the in the first the first quarter.
And we hope to be able to do that and to fulfill their needs. Thank you.
Our next question comes from Julian Mitchell with Barclays. Your line is open.
Thanks, Good morning.
Apologies to you and maybe one more question on the margin.
[laughter].
Looking at it from maybe two parts I suppose in Twentytwenty one.
I understand that the margin resiliency and the carryover sort of net of temporary actions.
Should we expect much in the way of things like.
Outright new selling costs coming back or are in the perhaps.
Stepping up or are those sort of all included when you talk about a reinstatement of actions and also beyond 21.
So on incremental margin to what do you think your entitlement is there when you consider the competition the channel, but also you'll margin resiliency assets.
Yes, I would say that if you look at the back half of this year for tools and storage margins.
We're clearly benefiting from some amazing operating leverage that.
Most likely we will not get that magnitude of operating leverage next year, because we will do some of the things you mentioned, we will continue to invest in growth and so we may not have 21.5% or 20% margins like we are going to have in the back half of this year, but we believe we're going to have margins that.
As I said are somewhere between 18, and 20% so pretty robust margins as we make some of those investments, which means our operating leverage will still be very very strong.
Probably somewhere between 30, and 40% leading to more towards the 40% next year.
And pretty robust and so.
I think we've positioned our cost base, we are positioning our manufacturing footprint as we continue to make changes to that as well as expand some capacity in certain areas around distribution.
And manufacturing to allow us to make sure that we continue to have that type of leverage as were able to benefit from the significant growth environment, which has the potential to continue for much longer than the first three to six months of next year, we'll see how that plays out.
And whether there are certain factors like the U.S. stimulus and other things that continue to drive that type of performance, but theres a lot of activity as you know a focus around the home as Jim touched on an EAC ecommerce as well and so we're really trying to prepare ourselves for that type of environment that may continue for maybe 12 to 18 months and as a result.
So I expect to see very strong margins throughout next year and the range that I mentioned.
Thank you. Our next question comes from Michael Rehaut with JP Morgan Your line is open.
All right. Thank you, yes, I'm here on muted. Thank you for taking my question.
I just wanted to get a a finer understanding on the promotional sales shift.
Number one and tools and storage the looked like it was.
Spectating, another four to five points of growth in the third quarter, but now that.
Shifting to the fourth quarter.
However.
I would be surprised if you were to say excluding that if that normal shifted had occurred or.
The sales were in September.
I'd be hard pressed to say you would be looking for.
Mid single digit organic growth rate. So just wanted to try to understand how that kind of work through and also if it has different those sales have different margins being promotional sales.
And lastly, I'd just love to get some additional comments in terms of the growth opportunity you see.
For the company over the next couple of years in ecommerce.
I'll take the.
Latter part of your question and Don will take your the former part.
Okay. So.
Yes, so if we go back to the tools shift from Q3 to Q4 about four to five points.
As I mentioned in you mentioned as well.
So yeah. When you think about the dynamics of what's happening in the fourth quarter, we were getting a really strong surge here in October some things that shifted.
From the month of September to October and.
When you look at the performance for the full quarter, it's going to be a similar type result, as what we experienced in Q3, so if that four or five points. It shifted into Q3, we'd be kind of looking at a.
Mid to high single digit performance and.
And tools and storage.
For the full quarter, but that factors in a lot of different things you have to recognize that although Pos and North America strong and we're assuming it's somewhere between.
Okay.
Mid teens to low 20 percentile.
Other things or the growth of the d. selling and certain parts like the European markets. The emerging markets, we saw some inventory.
Kind of stocking and restocking in those geographies that will not repeat itself here in the fourth quarter. So although we'll see growth there won't be of the same magnitude.
We saw there and then we still have some.
Portions of the business that are retracting, although retracting at slightly lower percentages than what we're seeing what we saw in Q3, we still have that as a factor as well. So when you pull that all together that's kind of how you get to that that net result at the end of the day Jim.
So on E. Commerce, obviously, we're very excited about this topic because when it was not very popular we were.
Kind of.
A couple of yards in a cloud of dust, just workman like going after and building at zero and almost zero and.
2010.
And today, we're knocking on the door of $2 billion in E Commerce and the profitability is good it's not something that you can worry about negative mix. The profitability is good the cost to serve is actually a reasonable.
Vis-a-vis other channels and.
Gross margins are excellent so.
Today, we have.
<unk> network of partnerships around the world with major ecommerce players and we're very very pleased with that im proud of that.
Ranging from Ali Baba too.
Amazon too and some of the regional players and.
So forth its all be.
To be to see as opposed to.
D to C.
Which.
You know is is okay for us it's worked well.
And frankly, our competition has more or less shied away have not really made it a strategic.
Focus in general so we sit here today in a very good place with strength.
And so we're not.
Naive to think that the competition is not going to jump in of course they are.
But we are going to double down in this area and have already constructed a $75 million worth of investments over the next year or two.
To to strengthen our position in E commerce and one of the big.
Initiatives is the black and Decker brand revitalization, it's probably a little known fact, but the black and Decker brand is plays extremely well with the younger generations and of course younger generations are are the.
The core of the ecommerce growth in the future so.
Jeff cancel you know running this black and Decker revitalization initiative in partnership with a major E Commerce player in North America.
Is.
Kind of a one of our.
Elements of the strategy and then we also have significant investments in the quarter. So strengthening the core E commerce that we have.
As well with additional resources.
Additional focus on content.
Creation and market development and then also initiatives are pretty significant initiatives in Germany, China, and India, All D to C. So areas, where our share is not.
Where we're under index, if you will from a.
Existing channel perspective, going D to C in those markets.
Because we have very little to lose especially in China, and India and.
Really excited about this I think you know ecommerce is going to be a major major growth driver for many years to come.
Thank you and our last question comes from Joe Ritchie with Goldman Sachs. Your line is open.
Hi, Thanks, Good morning, guys.
Good morning.
So I wanted to maybe sneak on growth.
For my one question.
When you guys. This year the your 8-K in for quarter three Q I think you guys were calling for high teen keenest growth and recognize the promotional activity was four to five points and.
So I was wondering if you can maybe just elaborate what else changed relative to your expectations earlier in the quarter and then specifically I've heard you call out.
International Decelerating and inventory levels, just any more color around around that specifically would be helpful. Thank you.
Yes, I would say that when we did the announcement back in late August.
We said Q3 for tools, we'd see kind of a high teens performance for organic and we talked about the reasons for why it's different.
We also communicated that we expected Q4 to have kind of low single digit growth. So we're we're indicating that the back half would probably grow.
Somewhere around 70% in that range. We're now looking at the back half that is going to grow around 10%.
Potentially a little bit better if some of the trends continue here in Q4 that we saw in October.
So we're seeing a better growth profile for the back half of the year in total versus what we thought about a month and a half ago or so.
For the tools and storage business and a large part of that is is the continued strength of north American retail and what we're seeing there with Pos and although we do have some de selling in.
Europe, and so that the growth number will be.
Lower but still very good versus Q3, because Q3 was pretty robust and kind of mid teens number for growth, we'll probably see something that's closer to half of that in our European markets and that factors in some of the inventory stocking that we saw.
In Q3, so the things that have really shifted our that you know, we we were able to recognize how much inventory was built in our customers throughout the third quarter and there was a significant amount in some of the international markets and very little in the North American retail channel.
And then here in the fourth quarter, we see the dynamic of of not having as I said, we're not really putting any inventory build in the fourth quarter.
At the end of the day could there be a little bit in the North American retail channel when we're done maybe but it's probably going to be pretty modest to the point that Jim made money answered. This question earlier the bigger part of the adjustment is going to happen in Q1.
Thank you. This concludes the question answer session I now like turn the call back over to Dennis Miller for closing remarks Shannay.
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. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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