Q4 2020 Stanley Black & Decker Inc Earnings Call
Yes.
Welcome to the fourth quarter and full year 2020, Stanley Black <unk> Decker earnings Conference call.
Name is Shannon and I'll be your operator for today's call at this time all participants are in a listen only mode.
Later, we will conduct a question and answer session.
Please note that this conference is being recorded.
Turn the call over to the Vice President of Investor Relations finish Lange Mr. Lang you may begin.
Thank you Shannon good morning, everyone and thanks for joining us for Stanley Black <unk> Decker's, 2024th quarter and full year earnings conference call on the call. In addition to myself is Jim Loree, President and CEO, 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.
All are available on the IR section of our website a replay of this morning's call will also be available beginning at 11 a M. Today the replay number and the access code are in our press release. This morning, Jim and Don will review, our 2024th quarter and full year results and various other matters followed by a Q&A session consistent with prior calls there.
Gonna be sticking with just one question per caller and as we normally do we will be making some forward looking statements. During the call based on our current views such statements are based on assumptions of events that may not prove to be accurate and as such they involve risks and uncertainty. It's therefore possible that actual results may materially differ from any forward looking statements that we might make today.
We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent 34 Act filings I'll now turn the call over to our President and CEO Jim Loree.
Thanks, Dennis and good morning today, we issued record fourth quarter results, marking an outstanding close to a very dynamic and successful year as I mentioned in our 2020 shareholder letter we expected the operating environment of the 2020 to be one of volatility uncertainty complexity and ambiguity.
Luca for short.
Last we had any thought of easing into that construct over time like others. We were thrust into action as the pandemic roared onto the scene in March and April and that is for many companies. The early days of the pandemic brought into focus the first rung of mass lows hierarchy of needs.
We quickly established pandemic era tactical priorities first protect the health and safety of our employees and supply chain partners.
Secondly, ensure the continuity of our operations and financial stability and third do what we can could mitigate the impact of the virus in our communities. We undertook a myriad of actions consistent with those priorities, including the implementation of intensive company wide safety protocols, Inc.
<unk> mandatory masks from day one.
Significant liquidity enhancements cost reductions some temporary some permanent as well as a substantial increase in our philanthropy both in dollar terms and in kind.
We asked our people to be guided by our purpose for those who make the world. We emphasized our three simple leadership principles, which include creating clarity inspiring engagement.
And growing and delivering.
Our people, while dealing with a personal hardships and challenges characteristic of this era responded beautifully to our lead amid.
Amidst four weeks of collapsing sellout revenue in April we were hunkered down ready to ride out the storm and then suddenly in the last week of April and on into the summer months.
An abrupt and very positive phenomenon emerged in the tools business.
Our end users many of them homebound with time on their hands discovered <unk> rediscovered DIY projects, both indoors and outdoors.
We enjoyed a surge in north American retail of a magnitude never before experienced.
By June Pos was running 30% to 40% greater than the prior year E commerce growth exploded at levels, even higher than that unfortunately, both we and our channel partners had solid inventory positions at the onset of the demand by May we were ramping up our factories to extraordinary levels by the third quarter the demand trend had extended to Europe.
In other markets around the world, albeit at somewhat lower levels, but still strong double digit territory.
The second half of 2020 proved to be an all out test of our supply chain resiliency and ability to serve the growth.
Customer inventory levels had been substantially reduced by mid year and our global factories were running at historic levels, just to keep up with the Pos demand and.
And they still are we faced rolling labor shortages supplier issues and various arbitrary government edicts and jurisdictions all over the globe.
However, we were able to prevail and operate continuously with only minor exceptions and along the way we've moved forward with significant capacity expansion actions for both power and hand tools and we look forward to serving continued growth in the future.
2020 was by far the most difficult backdrop, we've ever faced.
But we were prepared for volatility in our people rose to meet the challenges.
Fortunately, we went into it with strength and have stayed strong for the duration.
Back in 2016, we committed to envision that embody purpose driven performance. We've built a company that is anchored by a supportive people oriented culture striving to deliver top quartile shareholder return to become known as one of the world's great innovators and to elevate and already strong commitment to ESG and corporate social responsibility.
We demonstrated in 2020 that one corporations like ours put people first and work to have a positive impact on society at large the.
The result can be extraordinary resilience, which benefits our shareholders through outstanding growth cash flow margin expansion and ESG and that is the story of 2020.
On the heels of an excellent third quarter. The fourth quarter was the pinnacle of our 2020 performance and we entered 2021 stronger than ever.
Now I'll take a moment and recap the <unk> numbers, which demonstrate the power of our momentum as we enter 2021.
Revenues were up 19% to $4 4 billion with organic growth of 16%. This was led once again by tools <unk> storage, which had organic revenue up an impressive 25%. Our total company operating margin rate excluding charges was a fourth quarter record.
At 16, 5% up 290 basis points from prior year with volume leverage productivity cost actions price and margin resiliency initiatives all contributing.
<unk> EPS for the quarter was $3 29 up 51%, 51% versus prior year.
Now, let's turn to the full year revenues were $14 5 billion up 1% with 10% organic growth in the second half more than offsetting the first half pandemic related issues. Our full year operating margin rate expanded 110 basis points to 14, 6% attributable to strong cost control productivity or margin resiliency.
<unk> and price.
Adjusted EPS for the year was $9 <unk> and.
An 8% increase versus 2019.
Especially remarkable.
When considering our original pre pandemic guidance midpoint last January was $8 90 a share.
We converted the strong sales and margin results along with just over a half turn of working capital improvement.
So our record cash flow.
Free cash flow was $1 7 billion for the year, one 7 billion for the year, an all time record for the company.
Up 55% versus 2019, with a conversion rate of 136% and <unk>.
Lastly, I am happy to report that we successfully exceeded all of our five year medium term environmental health and safety goals established in 2015, we targeted a 20% reduction of our energy consumption, our carbon emissions, our water use and our waste generated in our facilities and more than attained each one of those goals.
In addition, we significantly improved our recycling and use of renewable energy.
And achieved our safety goals.
I became CEO in 2016, we updated our vision to elevate our commitment to social responsibility.
Achievement of these goals is an important milestone in our journey to execute on our 2030 sustainability strategy more goals in more milestones ahead as we continue on this March.
So where do we go from here.
In a world of elevated uncertainty here are a few observations to simplify and clarify our point of view on that for 'twenty, one and 'twenty two.
Without question tools and outdoor demand is on a roll and we think it will be for some time to come.
Benefiting from a series of exogenous factors, including first the secular surge in global DIY, driven by the consumers rediscovery of home and garden.
Secondly, a massive acceleration of the global shift to E commerce within our channels.
Which plays to our strength as the global tools leader in E Commerce.
And third <unk>.
Cyclical boom in North America home improvement driven by increasing new and preowned home sales associated largely with household formation and the urban Exodus and then there is the need to rebuild channel inventories levels inventory levels, which we believe are at least four weeks lower than desirable.
Our tools business has never been stronger or better positioned to gain share and we have consistently grown organically and gained share every year since the merger of Stanley and Black and Decker 11 years ago, our unmatched array of iconic brands market, leading innovation combined with our scale and organizational agility.
<unk> continues to support that investment thesis.
Total company operating margin reached new heights in the second half of 2020, breaking through the 15% threshold at 17, 7% and 16, 5% in <unk> and <unk>, respectively. This is a significant increase of about 300 basis points over prior year and it is not <unk>.
Incidence it derives from an intentional confluence of tight cost management volume leverage price mixed management and our margin resiliency initiative. The latter applies cutting edge digital technologies to optimize margin performance across multiple value pools.
<unk> pointed out that the third quarter benefited from cost reductions some of which were admittedly temporary in nature. These.
These sceptics now have to deal with the fourth quarter in which the 16, 5% includes the vast majority of temporary costs such as furloughs four day work weeks executive salary reductions and benefit deferrals back in the run rate.
This was accomplished as we began to fund significant new investments in growth initiatives, including major thrusts into E Commerce.
Revitalizing the black <unk> Decker brand.
Security health and safety and outdoor products.
And although the second half 'twenty, one tools growth comp is difficult. We believe it is manageable and we are predicting full year total company organic growth of approximately 6% at the midpoint with a super strong first half and a modest negative in the back half yielding 6% mid point, which is the high end of our long term.
Both objective for that measure.
Our strong share momentum aided by numerous growth catalysts, such as flexible craftsman atomic extreme power detect and E commerce.
It should not be underestimated.
On top of this there is an industrial related portion of tools that is in the midst of a cyclical rebound as we enter 2021, along with about $4 billion of industrial which includes engineered fastening automotive and the security segment revenue, which was negative in 2020 and all of those are expected to be positive in the aggregate in 2021.
So for all these reasons and more as Dan will cover in his remarks, our 2021 adjusted EPS guidance.
As introduced at $9 70 to $10 30, a share at the midpoint. This is $10 up 11%, which is a very good place to start our journey into 'twenty 'twenty one.
And while it is too early way too early to guess at what market conditions might be.
In 2022, we stand to benefit from our multi year relationship with MTT and our optionality to acquire the remaining 80% at a very attractive multiple with a window that begins to open in July of this year.
Which brings me to a brief update on M. T D. Our current planning assumption calls for the exercise of our M. T D option.
And the potential addition of up to $3 billion of revenue from the MTGE transaction in 2022 and.
And just to.
Clarify, we expect to implement or exercise the option in late 'twenty, one and begin to recognize revenue subsequent to <unk>.
Regulatory approvals and hopefully beginning in 2022, the lawn and garden category is experiencing similar benefits to tools from the consumers reconnection with the home and MPD LTM revenues now approximate $2 6 billion with a very strong second half revenue performance in the books.
Comparable to our tools business.
Additionally, MPD continues to make progress on multiple opportunities to generate operational efficiency and margin improvement delivering a 6% operating margin in 2020.
With momentum coming into the 2021 season and plenty of runway ahead for further improvement.
The transaction was structured in a financially prudent way whereby we purchased 20% of the company at an 11 times multiple with the option to purchase the remaining 80% anytime during a 10 year window. Beginning this July mtv's incremental EBITDA improvement since our initial purchase is shared 50 50 and is thus valued at <unk>.
Five five times, which provides us the ability to acquire a market leader in outdoor power equipment at an all in multiple at the time of option execution likely to approximate 7% to eight.
We are excited by the multiple levers to accelerate growth and margin expansion with this acquisition. In addition to the initial revenue contribution upon consolidation, we see additional organic growth opportunities in the pro outdoor equipment market as well as to drive electric powered and autonomous mower offerings, while employing.
Our successful commercial model to fully leverage our portfolio of brands and channels.
We're also working on a multi year roadmap to achieve 15% operating margin in the category.
Not likely some say however, we believe we are up to the challenge I remind the naysayers that black and Decker as operating margin was below 6% in the year before acquisition and the very same team that address that opportunity is still in the field today.
We continue to be encouraged by Mtv's innovation and product development pipeline as well as their progress on improving profitability and we're excited about this future combination.
Even before exercising our option we are bringing this vision to life in 2021 with SPD and MTV each independently launching a series of new products under the Dewalt Craftsman and black and Decker brands that are hitting the market now across the gas and electric power spectrum. A few notable examples MPD brings.
World Class innovation in writing and zero turn mowers and through a licensing arrangement will launch a new lineup.
Of the wall branded gas powered professional mowers that are now beginning to rollout at one of our major U S retailers.
In addition, we have designed developed and are launching new cordless 20 volt walk behind Mowers also was strong listings that will be made in the USA with global materials and M. T D's Tupelo, Mississippi facility.
TD continues to expand its outdoor offering into new categories with Craftsman under license new to this new to market. This year will be an impressive lineup of zero turn gass mowers as well as gas powered solutions and riding and walk behind mowers concurrently SPD will expand our battery and electric powered offerings and push mowers power washers and.
Handheld products, such as chain saws, trimmers and blowers.
Lastly, as a part of our E Commerce focused brand refresh with black and Decker Black and Decker MTV will launch a new lineup.
Of gas handheld products under license and we will launch new electric offerings, including an autonomous robotic mower in Europe.
As you can see we've been busy working our partnership with TD and there is a lot to be excited about that and for 2021. These opportunities are planned to deliver more than $100 million of organic growth for SPD as well as support additional growth for M. T D with broad coverage across gas.
Powered products for MTV and electric and battery powered categories for SPD. We are just starting to tap into the significant potential ahead of us and now I'll turn it over to Don Allan to cover the fourth quarter in our 'twenty 'twenty one guidance done.
Thank you Jim and good morning, everyone.
We are incredibly pleased with our fourth quarter financial performance, which closed out an amazing back half 2020.
So now I would like to review our business segment results for the fourth quarter.
Tools <unk> storage delivered an exceptional 25% total and organic revenue growth with volume up 23% and price contributing an additional two points.
All regions continued to benefit from exceptionally strong revenue trends related to the consumers reconnection with the home and garden.
E Commerce continued to be very strong we had a strong holiday season, and a robust lineup of new products and innovation.
The operating margin rate for this segment was another outstanding results at 27%.
420 basis points versus the prior year as volume productivity cost control and price.
Modestly offset by new growth investments.
The revenue outlook improved during 2020, we released incremental SG&A investments to further the development of our brands via digital marketing.
Increased distribution capacity.
And added commercial resources to support our business model in brick and mortar and E commerce.
We believe much of these investments will drive further organic growth and share gains in 2021 and 2022.
Now, let's look at some of the geographies within tools <unk> storage in North America was up a robust 27% organically.
Retail continued to see exceptionally strong Pos.
Levering, 36% organic growth.
Through a very strong holiday season, along with continued momentum in E commerce.
Pos growth for the quarter approximated, 30% and.
And retailer inventories ended the year slightly below Q3 levels and well below prior year.
An amazing Q4 performance for the tools <unk> storage team.
And what's incredibly amazing is we still have a channel refill opportunity of four weeks in front of us that will likely materialize in the front part of 2021.
The North American commercial and industrial channels continue to experience positive sequential trends.
With both posting low single digit growth this quarter versus declines in Q3.
Airplane construction customers within these channels were up mid teens in Q4 significantly improved from the low single digit growth last quarter.
This trend is clearly another strong strong signal that professional demand is back and accelerating.
The tools <unk> storage European business also had an outstanding fourth quarter as all regions grew which resulted in 18% organic growth.
This performance was led by the U K Central Europe, Nordics, Benelux, and Iberia, all up double digits, with France, and Italy up mid single digits.
The team experienced strong revenue growth in both retail brick and mortar and E commerce.
Finally emerging markets delivered an exceptional quarter of organic growth as well up 22% with all regions posting positive revenue trends.
We experienced strong construction demand in these markets and when combined with positive pricing momentum. It supported this robust performance.
Latin America was the strongest performer delivering 36% organic growth with all countries up double digits.
While Russia, and Turkey had another very strong quarter also resulting in double digit growth in these markets.
Finally, Asia delivered low single digit growth led by South Korea, and India, Egypt double digits, which was partially offset by modest declines in China and southeast Asia.
Now, let's pivot and look at the tools <unk> storage at fuse power tools delivered 32% organic growth benefiting from the home and construction trends mentioned previously as well as strong commercial execution for the holiday season.
And new product introductions.
We continue to see strong share gains from our new innovations and flexible atomic and extreme which now represent over $600 million of annual revenue on a combined basis.
Our outdoor products business delivered 29% organic growth as these categories continued to benefit from the consumer reconnection with the home as well.
As new default and Craftsman cordless products were launched in 2020.
The hand tools and accessories and storage business delivered an impressive 15% organic growth in the quarter.
This was supported by new product launches the strong performance in emerging markets and Mac tools combined with the rebound in professional construction demand I just previously mentioned.
In summary, an amazing quarter, and an incredibly successful year for tools <unk> storage.
Team remained focused and responded with agility to the pandemic and quickly pivoted to fulfill the surging demand that emerged in the second half of the year.
This effort was remarkable and help them delivered record levels of growth and margin expansion during one of the most challenging operating environments in our lifetimes.
Right job by the entire team we thank them for their intense and focused effort.
I'm really excited to see the encore performance in 2021.
Turning to industrial total growth was 10%, which included an 11 point contribution from the <unk> acquisition and two points from currency.
This was partially offset by a 2% volume driven organic decline and a negative 1% impact from the divestiture of a noncore product line in oil and gas.
It was great to see continued improving trends sequentially is the organic decline in Q3 of <unk>, 18% improved to negative 2% in the fourth quarter.
A trend which is positioning this segment for organic growth in 2021.
The operating margin rate increased 110 basis points year over year to 14, 7% as the benefits from productivity and restructuring cost actions more than offset the impact of the lower volume.
Diving a bit deeper into this segment engineered fastening revenues were down 2% organically as growth in automotive was offset by an improved but still declining general industrial end market automotive.
Automotive was up mid single digits behind high teens growth in automotive fasteners, which was partially offset by continued declines in systems as most new capital investment decisions related to new car models continued to be on hold.
However, global light vehicle production continues to improve and.
And we remain well positioned to outpace the underlying market with content gains in the fastener portion of this business.
Industrial fasteners declined high single digits.
In the fourth quarter.
Recovery in the industrial markets continues to progress and we once again saw sequential improvement.
Our infrastructure businesses declined 5% organically as positive attachment tools growth was more than offset by reduced pipeline construction in.
In oil and gas.
And finally, turning to security total revenue was down 3% with a 3% positive impact from currency, while price and acquisitions each contributing 1%.
This was offset by a five point decline in volume and a negative 3% due to the divestitures announced last quarter.
North America declined 5% as growth in health care was offset by lower installations in automatic doors and commercial electronic security.
These businesses are serving markets that are still slowly improving from the pandemic impact and also faced a difficult to 7% growth comparable in 2019.
European Security organic growth was relatively flat as they experienced solid growth in France from the new growth initiatives, which began to take root.
This performance was offset by lower volume in the U K related to the various intense lockdowns from the pandemic.
Our focus on health and safety initiatives, such as touchless doors contact tracing and health care solutions are building momentum and generated about 150 basis points of growth in Q4.
With the healthy backlog, our continued recovering market and the addition of these new solutions. We are optimistic that security can return to growth in the front half and for the full year of 2021.
In terms of profitability. The segment operating margin rate was 11, 2% flat versus the prior year as price and cost control were offset by the impact from lower volume and growth investments.
Now, let's take a look at our very strong free cash flow performance on the next page.
As you can see we were able to leverage our strong operational performance in the back half to generate a record full year free cash flow of approximately $1 7 billion in 2020.
This represents an increase of $593 million versus the prior year.
And our free cash flow conversion of 136% of net income.
This result was driven by the strong growth in tools <unk> storage, our companywide cost actions and lower capital spending delivering significant improvement in cash earnings.
Now as it relates to working capital, we delivered $10 for working capital turns up <unk> six turns year over year, reflecting the strong revenue performance and leveraging the SPD operating model to drive working capital efficiency across the company.
With the strong cash generation and inclusion of the excess cash on the balance sheet, which amounted to $1 4 billion at year end.
We believe we are well positioned from a leverage perspective heading into 2021.
A fantastic outcome.
Now I would like to discuss our views on 'twenty and 'twenty, one as improving channel and market visibility has enabled us to reinstate guidance.
Beginning with slide 10, I'd like to dive deeper into several of our 'twenty 'twenty, one organic growth assumptions.
We are experiencing a fast start to the first quarter as strong market trends in tools and storage continue.
Bind with improving industrial and security markets. Therefore, we expect organic revenue growth to approximate 21% to 26% for the company in the first quarter of 2021.
Tools <unk> storage is the largest contributor to this strong performance and our plans assume a <unk> organic growth range of 30% to 40%.
Underpinning this assumption is the continuation of the strong demand trends.
The potential for customer inventories to start to move back to historical levels and finally, we have an easier comp since Q1 2019.
At the beginning.
Q1, 2020 at the beginning impacts from the pandemic.
<unk> continues to be broad based with all regions contributing to very strong outlook.
Pos in U S retail through the first three weeks of January has remained in a similar band that we experienced during December and.
And we are assuming this trend will continue through the remainder of the quarter.
We are also seeing continued positive momentum in the commercial and industrial channels.
Tools, <unk> storage European and emerging markets continue to experience strong momentum as well.
And we are currently expecting demand trends in Q1 that are similar to the fourth quarter two Jeff completed.
Another way to look at the 30% to 40% tools and storage organic growth assumption is that it represents approximately $600 million to $800 million of Q1 organic growth.
January which is historically, a very slow months for tools <unk> storage.
Is on track to three or five weeks to deliver $400 million of growth in the month.
Additionally February and March were both negative comps in 2020.
Therefore, we believe with a continuation of market demand trends.
And a modest contribution from safety stock increases across our global customer base. This represents a very strong for reasonably balanced expectations for the first quarter.
Turning to industrial our first quarter assumes a decline of 5% up to flat organically.
To deconstruct this a bit at the midpoint of this range, we are calling for high single digit to low double digit growth in both the attachment tools.
And within automotive engineered fastening.
Which in total represent a little more than half of this segment.
<unk> this attachment tools experienced a 50% year over year increase in Q4 backlog.
In automotive this assumes a moderation of fastener volume growth to low double digits.
And a less severe decline on easier comps for our systems business.
We expect our industrial fastener business to continue its sequential improvement and be relatively flat.
Offsetting these positive factors in Q1, we anticipate steep declines in oil and gas and aerospace Cam.
<unk> is included in the organic growth calculation partway through the first quarter.
As both of these businesses are longer cycle, they held up relatively better when the initial impacts of the pandemic occurred and therefore will be challenged in the front half of 'twenty into 'twenty one.
Turning to security our plan assumes for a range of flat to up low single digits organically in Q1.
Exit trends in December for this business were strong and the backlog ended the year up double digits, which provides a good setup as we entered Q1.
Particularly as the easier comps beginning in the month of March <unk>.
Additionally, the business is focused on continuing to stimulate demand with their existing and new health and safety solutions that emerge from the pandemic and started to generate revenue prior to the end of the year.
Turning to the right side of this slide I want to touch on the full year growth assumptions for all segments in the first and second half planning assumptions for tools <unk> storage.
As you would expect we are planning for a very strong first half of the year.
We are expecting the strong trends I just talked about through.
I just talked through for Q1 to moderate in the second quarter, but remained quite strong.
The continued market recoveries in security and industrial strong demand in tools and relatively easy year over year comps positions. The company for an organic growth range of 19% to 20, 24% for the first quarter.
For the second half.
We have moderated our assumptions to incorporate the difficult comps created by the strong second half 2020 growth in tools.
While we are pushing for more growth and share gains. We felt it was prudent to set expectations for a decline of 3% to 8% organically for the company.
This is how we have constructed our overall range of 4% to 8% organic growth for the full year for Stanley Black <unk> Decker.
For tools <unk> storage. We are also assuming full year growth of 48%, which includes organic growth of 27% to 32% in the first half for the reasons previously mentioned.
And a decline of 7% to 12% in the back half while.
While the growth in tools is retracting versus 2020 in the back half.
The range is up 4% to 10% versus the back half of 2019.
This is a reasonable two year assumption based on the historical growth numbers, we have seen for this business.
That being said this is a short cycle business and we are ensuring the supply chain can accommodate second half scenarios that are improved versus this range.
The potential scenario, we must be prepared for is robust tools in stores storage markets that continue for the majority of 2021.
We have not assumed this will occur in our guidance, but we will be ready to respond. If this does evolve in the coming months.
For industrial.
<unk>, we are assuming 2% to 6% growth in 2021 with a stronger performance in the front half due to the easier comps and.
Engineered fastening and attachment tools have a lot of momentum and we are well positioned to capitalize upon the recovery as it unfolds in 2021.
As it relates to oil and gas and aerospace we expect they will remain a significant headwind to growth in the front half, but this eases a bit as we move into the back half.
Finally for security, we see a range for 4% to 6% growth for the full year.
This is fairly consistent across the two halves.
Front half is easier comps in the back half carries a stronger level of growth from the ramp up of our health and safety focus growth initiatives we.
We are excited by the prospects for these tech enabled products, which contributed one five points of growth in the fourth quarter and could represent up to a $100 million of revenue in 2021.
So in summary, we are expecting 4% to 8% organic full year growth with growth. In every segment, we are well positioned to capture market recoveries and share gains in each of our businesses and feel this is a balanced range that acknowledges the current environment. We will continue to watch our markets and we will be prepared if the back half.
<unk> proves to be conservative.
Now I'll summarize the remaining guidance assumptions on slide 11.
We are re initiative, we are initiating guidance in 2021 with an adjusted earnings per share range of $9 70 to $10 30.
Up approximately 11% versus prior year prior year at the midpoint.
On a GAAP basis, we expect the earnings per share range to be $9 15 to $9 85.
Inclusive of various one time charges related to facility moves deal and integration costs and functional transformation initiatives.
This range is 40 wider than our traditional guide recognizing that while the visibility has improved the operating environment remains dynamic.
Since I, just covered organic growth, let's jump right into the cost structure structure considerations.
We expect $125 million of carryover cost savings net of the reversal of temporary actions from the cost program, we implemented in the second quarter of 2020.
These actions will primarily benefit the first quarter with a modest benefit in the second quarter.
From an inflation perspective, we currently see the potential for approximately $75 million of headwind primarily associated with steel base metals transportation electronic components and resins keep.
Keep in mind, we generally lock in our supply agreements one to two quarters out so the timing of this headwind is back half weighted.
Partially offsetting this headwind is a tailwind of roughly $45 million related to foreign exchange.
Therefore at this point in time, we have included $30 million of a headwind associated with these externally driven cost inputs.
Should we see additional pressure in commodities or should currency reverse.
We will utilize our productivity programs and pricing to neutralize the pressure over time.
However specific to 2021 as a reminder, we have $100 million to $150 million of margin resiliency benefits as a contingency which is not included in our guidance. This.
This contingency will assist in mitigating new headwinds in these areas during 2020, if they emerge.
Finally, we have disclosed our current full year assumptions for the significant below the line items and our expectation for pre tax M&A and other charges to assist with your modeling.
Turning to cash flow, we expect another strong performance in 2021 with free cash flow conversion approximating GAAP net income.
Underpinning this expectation as capital expenditures of approximately 3% of net sales. In addition, we will utilize the SPD operating model to drive efficiencies in working capital to deliver turns improvement.
Lastly, we expect the first quarter's earnings per share to be approximately 24% of the full year performance, which is primarily driven by operating leverage on the organic growth assumptions I walked through for Q1, and the $150 million of benefit from the carryover cost actions we have implemented.
So in summary for the total company, we expect 4% to 8% organic growth and 7% to 14% adjusted EPS expansion.
A strong forecast it represents a balance due recognizing the dynamic operating environment, but also incorporates more difficult comps.
And inflation assumptions into the plan, while delivering healthy margin expansion and EPS growth for the full year.
The organization remains focused on meeting the needs of several ongoing strong and sequentially improving markets leveraging our organic growth catalysts as well.
Executing margin resiliency and generating strong free cash flow, while not losing sight of ensuring we keep our employees safe and assisting our communities through the remainder of this pandemic.
With that I would like to turn the call back over to Jim to close out with a summary of our prepared remarks Jim.
Thanks, Don very clear very transparent.
Very exciting.
In summary, 2020 was an extraordinary year for Stanley Black <unk> Decker and this performance was possible due to the agility passion and dedication of our people combined with a strong cultural and financial Foundation.
It's hard to pick one element to get most enthused about given the 2020 performance, especially in the second half as well as the improving outlook is that the growth the margin expansion or the extraordinary cash flow and the potential for more is it the demonstrated resilience of this purpose driven company or is it the enormous potential given the way.
The company is positioned for 2021 and 2022.
In my view, it's all of the above.
We are energized by the existence of a multiyear runway for growth and profitability improvement.
Shareholder value creation potential is certainly compelling over the medium to long term and while pursuing these shareholder rewards. We are also mindful of our responsibility to society and the multiple stakeholders that we serve and our sustained commitment to ESG and social responsibility is strong authentic and we continue to <unk>.
Elevated overtime.
And as you can see there's a lot to be excited about with our Mcd partnership and for 2021. These opportunities are planned to deliver more than $100 million of organic growth for SPD as well as to support additional growth for MTV.
So I want to thank everybody.
It's been an exciting year theres a lot of really great things ahead.
Now I'll turn it over to Dennis.
Great. Thanks, Jim Shannon, we can now open the call to Q&A. Please thank you.
Ladies and gentlemen to ask a question you will need to press star one of your telephone.
The pound key.
Could you please limit yourself to one question. Please shambaugh somehow the Tony lost there.
Our first question comes from Nigel Coe with Wolfe Research Your line is open.
Thanks, Good morning, guys.
Hey, good morning, John and Jeff.
Okay.
Pete.
Hey, Mike.
Guidance, you got there and if I different way, but well done there.
So on MPT just wanted to.
Touch on that a bit of.
Confusion out there just wanted to clarify MPD is not in your guidance at all but can you clarify that.
And then on the seven to eight times EBITDA based on a trailing EBITDA and would that be at 40, EBITDA I just want to clarify that as well and then just my real question is on the road to mid teens margins. What do you think are the biggest drivers.
Of that move.
Kind of timescale on that would be would be helpful. Thanks.
Okay. So thank you Nigel.
To be very clear there is no acquisition of MTT in the guidance.
There is some licensing income associated with some of the opportunities I described in the comments there is some organic growth in our Stanley based on some collaboration with MTT on products that we will be selling.
Through our own channels and our own brands.
But there is no nothing related to the acquisition in the guidance.
The multiple.
He is going to be a trailing multiple because that's how the that's how the option is basically priced based on trailing EBITDA.
And so that's where the seven to eight times comes from.
And as far as the.
The road to a mid teens operating margin.
It's our.
Our objective to get the operating margin up to around somewhere around eight ish percent next.
Next year, maybe a little higher if the volume kind of comes through the way we think.
And so if we start from a base of maybe 8% to 10%.
There is a whole series of cost reduction value creation activities that exist.
And our plan if you will it's a.
Somewhat.
High level plan, because we're not able to get in and do.
Super detailed diligence at this point, but we have been working with a major consulting firm to come up with some.
Our point of view on how we can get to a number something in the neighborhood of probably $50 million to $100 million of additional margin improvement.
That is not being implemented by MTV for various reasons one they may not have the appetite for it or they may not have the capability to do it.
But we have.
Some ideas that are pretty specific in that regard.
It gets us up until like the 12.
Ish kind of a zone and then from 12 to 15, it really is going to be a function of.
Really leveraging the synergies between the companies the channel synergies the brand synergies the growth and also a major thrust into the professional channel I must say that.
Having spent some time at MTT in September I was blown away by the quality of their innovation pipeline. The collaboration to the extent we've been allowed to do that through you know based on certain legal constraints and so on but the collaboration that we have been able to do in terms of light weighting electrification.
Autonomy those types of things, it's really really impressive and what they've done on their own as impressive too so combination of all those things.
I expect that we will make a major thrust into the pro channel the products are going to be very very strong and when we start.
Branding those products with some of our major brands such as to wall, I think theres going to be a really compelling value proposition for the channel and the end user to.
To carry those products from buy those products. So that's kind of where we're going with MTV you can start to see that.
In the marketplace in 2021 some of the.
I'll call them.
Collaborations around just the edges without really being.
100% owned by Us and the ability for us to generate $100 million of organic growth just with some.
Some modest collaboration in terms of commercial and product is.
Really kind of underlines the.
The potential and the power of this this relationship.
Thank you. Our next question comes from Jeff Sprague with vertical research. Your line is open.
Thank you good morning, good morning.
Greg.
Hard to say, where the start you guys could just maybe drop the mic and ended the call but.
Yeah.
I was wondering I guess for Don but.
Maybe elaborate a little bit more on how we should think about tools margins going forward is as Jim said, you kind of show this year with the cost back in the base what you can do.
But it sounds like there is some investment coming back in and some other things. So should we think should we be thinking about this kind of 18% to 20% range that I think you were talking about on the Q3 call was kind of a.
Reasonable framework as we pencil out 2021 here.
Absolutely I mean.
So we feel even more confident.
Now to kind of confirm what I said in October on the earnings call that that range does it makes sense.
For 2021 between 18 and 20%.
You should see all four quarters in that range. So there shouldnt be a lot of significant variation in that regard there will be a little bit of investment that we will make but it's going to be more along the lines of some of the growth initiatives that we started here in 2020 and E Commerce and a few other areas and so we're going to continue to invest in that space.
That will.
Drive additional share gains and more organic growth so.
We feel really positive about how the business positioned itself from a profitability perspective.
Although the rates are in the back half we're over 20%.
So, we'll see a little bit of a retraction going into next year for the reasons I articulated.
I think over the long term, we feel like it's a business that will continue to progress and improve its profitability over the coming years. It won't just be a one or two year phenomenon.
Thank you. Our next question comes from Markus <unk> with UBS. Your line is open.
Yes, hi, good morning, everyone. Thanks for all the detail.
Maybe connect in recent weeks there had been some concern around raw materials and Don you mentioned, the 100 $150 million contingency that is not part of guidance just want to make sure then that Brian not part of the guidance and.
Wondering how quickly you could put that into effect.
And also what are you seeing up to date.
So far on the.
The raw material side. Thank you.
Yes, I'll start with the raw material part of that question I mean, we.
We saw these trends kind of emerge in October timeframe November.
And the categories I mentioned of steel resin electronic components.
And so that's.
That is going to continue for a period of time right now we have $75 million.
Of an increase in those types of categories and our guidance for 2021.
I don't think its going to radically deviate from that it could go up a little bit as the year goes on but we do have to keep in mind that the way that we structure our contracts. It usually takes a good six months for that to really impact our P&L, which gives us time to respond with <unk>.
Pricing actions, if that makes sense or productivity or whatever the case may be.
And then that kind of helps us mitigate that over a longer period of time, maybe over a multi year period of time those actions be.
The margin Resiliency program is an annual program that we started about three years ago, which was built on let's look at the different areas of our company. The functions. The operations teams, how we price our products et cetera, and use technology, such as artificial intelligence advanced data analytic.
<unk>.
And make better decisions in those particular areas to drive efficiency and effectiveness.
And we've seen that over the last few years.
The ongoing process of the team that's been created in the technology that they use we have about 100 people that are focused on this full time in the company.
Jive is about $100 million to $150 million of annual value now, we could put that in our P&L and make it part of our guidance, but we think it's more prudent in volatile times like this to have it outside the guidance as a contingency and so when new things come your way that are headwinds you have an offset these things are underway they're in process.
So they are driving value of this month and all 12 months out of the year and so if the headwinds don't come you get the opportunity to position yourself to outperform and we think it's a very balanced way to approach.
Guidance and the way the way to operate in this world given the level of volatility that we've all seen in the last four years, but in particular, the last 12 months.
And I just wanted to comment too on the inflation perception because.
It was it was really interesting sitting here and listening to some of the feedback from investors over the you know from the last couple weeks about this inflation concern and we were scratching our heads to some extent because we've had inflation more often more years did not over the 20 plus years I've been here.
And we've always been able to offset a part of it was with price and new product development, new product introductions and so on.
And.
And then Theres always productivity that has come through and helped offset the rest of it and actually giving us some decent margin accretion in certain years, even when there was inflation and so this reflects reaction.
Occurred, which was Oh, my gosh Stanley Black <unk> Decker is inflation prone it didn't make any sense to us, but then when we thought about it we realize that if you go back to the 17 18 nine.
19 kind of timeframe. There was this $1 billion of headwinds that we have all behind us now and in that $1 billion of headwinds was.
Triad of things it was the inflation it was the tariffs and it was the FX and $1 billion was just too big.
A series of headwinds to just offset what the normal types of offsets that I talked about so we ended up having to do some restructuring and by the way, we still generated 6% earnings growth during that timeframe. So it wasn't catastrophic or it was just a a lot of work and a lot of pain in order to get through that period, and we did it but any one of those whether it was the FX.
Or the inflation or the tariffs any one of those we could have handled easily through our normal.
Contingencies and things like that but when we put them altogether and that three years in a row. It just became.
It became a lot and so that perception I think developed so immediately when the winds of inflation started blowing in the third and fourth quarter.
We got this.
<unk> from the from the investment community, but I think.
As of today I hope that we can put that behind us because it is not a significant material issue to us in 'twenty one.
Our next question comes from Tim <unk> with Baird. Your line is open.
Yeah, Hey, Hey, good morning, guys nice.
My.
<unk> really just.
Im curious if theres a way that you could kind of frame or parse out what you're seeing from the DIY and your pro business.
I know, it's more of an art and a science, particularly in the home Center channel, but just.
I'm curious if we start to hit tougher DIY comps in the second half if your pro business and the pro channels can help absorb this and so it really just any color on DIY versus pro and if there's any acceleration in pro that's built into your assumptions.
Well I did lay out.
In my remarks kind of the things that I thought were driving the demand, which is one is the secular shift to DIY with so many people at home and with the home being the focal point as.
As well as outdoor.
You know being the focal point people's activities and the number of projects and the number of people doing projects in doing projects for the first time.
Third levels.
And.
I think another thing is the installed base of battery systems is a big deal with this kind of growth that we have.
<unk>.
In 2020 and now into 'twenty one.
There are going to be more and more first timers or people that have bought new battery systems investing in additional tools for their battery systems.
And frankly, I think once people discover DIY it tends to be somewhat addictive. So I think that you know we're going to have a it is a secular shift in my opinion I think the home center.
<unk> would agree with that I've heard them talk about that as well so that's a big deal.
Obviously, it abates over time as the comps kind of get tougher in terms of its percentage impact on growth.
What we saw in 2000, what relative to the pros was in the beginning the pros like let's say like April may.
Projects kind of came to a grinding halt for the most part except for the really essential ones and then into the summer or the pro started coming back in into the third and fourth quarter.
Can't even get a contractor in this country anymore. If you want one so at.
At least I've had that experience I think the contractors are very busy in the resi <unk> in both the remodeling and new construction areas.
They're they've got a tremendous backlog I think they are back.
I think that that has played out.
So.
As we go forward I think what we're really looking at is more of.
Kind of going up against the comps and getting back to a more normal environment as we get into 'twenty, two and beyond but it's.
It is one that you know it.
It is an art as you say and it's difficult to really parse.
In great detail exactly what's happening, but that is our gut feel an incident based on what we can see here at this point.
Thank you. Our next question comes from Nicole <unk> with Deutsche Bank. Your line is open.
Yeah. Thanks, good morning, guys.
Morning.
Can we first Jeff clear something up with respect to the inflation headwind is that just the pure inflation headwind or is there any offset from pricing embedded in that and then secondly, Mike.
Real question is can you just talk a little bit about expectations from margins, but then the other two segments, whether youll talk about expected incrementals on.
Volume growth that you set out however, you want to do it but you got to get some color there too.
Yes, the $75 million as gross inflation doesn't have any price offset in it and we'll work through those plans as these these emerge and decide where it makes sense for pricing actions and win.
But it is a gross number and so that means.
The annualized number is probably 125 to $1 50.
When you think about it and so.
What's the right magnitude at this stage for these different areas.
The areas that really are being hit hard our steel resin electronic components, and then battery cells or base metals. If you want to call it that way or however, you want to call it but those four categories are things that.
There is a high demand for right now as we all know the question is how long does that demand last is there a there's parts of the economy that are really going strong and theres. Other parts of the economy that are not that have not recovered as well and the timing of that recovery is going to depend on.
How the.
Vaccines roll out and how we eventually get to herd immunity.
And how quickly that occurs so.
It could be seeing a short term bubble here.
Moderates for a period of time or it could be something that continues to to grow modestly over multiple years. So so time will tell but I think we.
We've got that in the right box right now and it's something we can manage going forward with all the levers that I described.
The other two segments for profitability improvement.
I can probably be cute and give you all kinds of leverage factors I think it might be simply you just say if you think about the whole company's operating margin rate.
We're trying to improve about 50 basis points year over year.
Tools as China improve roughly the same number maybe a little bit more and so.
So that means industrial and security are going to prove about same number two so I think you can kind of look at a $50 is anywhere from 40 to 60 basis point improvement in all three segments.
The net result for the company of about 50 basis points for the full year.
Thank you. Our next question comes from Josh <unk> with Morgan Stanley. Your line is now open.
Hey, I appreciate all the detail this morning, especially on the inflation front.
So I only have one question I don't have like the imaginary ones in a real one.
Just thinking about the.
<unk>.
Yes.
4% to 8% tools <unk> storage growth for the full year, Jim I think you gave some parameters around inventory.
Seems like it rounds to something in the neighborhood of two points of kind of full year benefit from replenishment. If we're way off with that let us know, but is the rest of that kind of evenly split North America and international I think if I'm, taking some of the inputs and making some assumptions it seems like kind of core growth in the U S business.
Inclusive of pro.
It is pretty modest restock is that kind of a fair calibration of the moving pieces.
Yes, I think it is.
No.
We're talking about four weeks, probably is a reasonable number to improve it is a global number we're talking about because we do see opportunity across the globe.
Probably heavily more heavily weighted to North America, because we know those inventories are definitely at the very low end of the range of where we like to be and so you know maybe 75% to 80% of it is weighted to the U S and North America.
But.
When you think about that.
The growth that could come with that it's probably a couple points of growth maybe two five points of growth for the full year, which means it could be five points in the first half so.
The magnitude we're talking about.
I think we will see it start to evolve in Q1, but it might be more heavily weighted to Q2 because of the Pos just seems really robust in Q1 at this stage.
Thank you. Our next question comes from Michael Rehaut with Jpmorgan. Your line is open.
Hi, This is ally home and on for Mike. Thanks for taking my question.
Just following up on that I was wondering if you could talk about your ability from a production and inventory standpoint to.
Continuing to meet the strong demand.
Both in <unk> and just through the remainder of the year ramp up.
And then any potential challenges either in capacity or.
There are other COVID-19 impacts.
Yeah. We were we were very fortunate that we were able to really first of all we started the.
The year, where they really solid inventory position both in the company and in the channels, which are at least the north American channels, where the demand really spiked and so that was helpful. Because.
It was kind of a strange situation, but got into may and.
And we were looking at Pos that we're starting to skyrocket in the orders were not coming in from the channel and so we ended up.
Building quite a bit of inventory starting in may.
Actually over $500 million of inventory we built.
To serve Pls demand that had that was occurring and we had kind of a bet that the Pos was going to continue at that rate and it did and that enabled us to.
Get ahead of the.
The situation. So that we have been now if you look at this point in time, we're essentially serving the Po and have been for.
Two quarters now.
And.
We're able to do that.
Our end user or end users continue to.
Very very robust and buying tools and our channel partners would like more they would like their inventory restored and that is the challenge and so one of the things that we've done and we were also very fortunate from the standpoint of our made in the or make where you sell campaign that we've been working on for three or four years had some pretty significant capacity additions.
Both in Mexico, and in North America, and in the U S. In a number of those.
Either.
Online or coming online, including our major plant in Mexico, and a major plant in the U S in <unk>.
Later in 2021, and so as we look forward, we were not counting on those to to necessarily get the inventories back to where they need to be in the channels, but we are.
Looking forward to the fact that we will have more capacity in the system significantly more capacity as we get into 'twenty 'twenty. One so we're not too concerned about that.
Meantime, theres, a tremendous amount of inefficiency that's been built into into our our cost of goods sold here in the.
Second third and fourth quarters, especially the third and fourth quarters, where.
In order to meet the fill rate.
Objectives and keep the inventories at the levels that we've been able to we've done a lot of.
Heroic things that had been costly things like air freight and expediting and.
Items of that nature and those those items.
Ultimately will be released I think to some extent by the capacity is coming online in the future and but in the meantime, there kind of built into the run rate you can see.
The margins are even with those inefficiencies are pretty good and we have really pushed our supply chain hard to serve our customers.
Thus far.
It's been successful as you can see.
Thank you. This concludes the question and answer session I would now like to turn the call back over to Dennis Lange for closing remarks.
Jason and thanks, we'd like to thank everyone again for calling in this morning and for your participation on the call. Obviously piece 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.
Okay.
Yeah.
Yes.
Yes.
Okay.
[music].
Sure.
[music].
No.
No.
Jim.
Jim.
Okay.
Okay.
Okay.
John.
Yes.
Jim.
[music] Roger.
Yes.
Okay.
Yes.
Yes.
Okay.
[music].
Okay.
David.
Okay.
David.
Okay.
Okay.
Yes.
[music].