Q2 2019 Earnings Call
[music] welcome to the second quarter 2019, Stanley Black <unk> Decker earnings Conference call.
My name is Shannon and I'll be your operator for today's call.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session. Please note that this conference is being recorded I will now turn the call over to the Vice President of Investor Relations Dennis Lang Mr. line you may begin.
Thank you Shannon good morning, everyone and thanks for joining us for Stanley Black <unk> Decker's second quarter 2019 conference call on the call. In addition to myself is Jim Loree, President and CEO , Don Allan Executive Vice President and CFO , and Jeff Bansal, Executive Vice President and President of global tools and storage.
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 Don and Jeff will review, our second quarter 2019 results and various other matters followed by acumen eight session consistent with other calls we're 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.
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 that we may make today, we direct you to the cautionary statement in the 8-K that we filed with our press release and in our most recent 34 Act filing.
I mean, it's my understanding that the webcast may have some issues with the advancing to slide a and so as such we will be identifying which slide that we're speaking to as we move through the presentation today.
I'll now turn the call over to our President and CEO Jim Loree.
Thanks, Dennis and good morning to our guess thank you for joining us.
Stanley Black <unk> Decker delivered a strong outperformance in the second quarter to close out the first half of 2019 in a solid position.
We continue to generate above market organic growth.
We achieved operating margin rate expansion and delivered adjusted EPS growth overcoming $110 million, a pre tax currency commodity and tariff headwinds.
This twoq you outperformance is a testament to the agility and the termination of our 61000 employees around the globe.
Their continued efforts to drive growth realized price and control costs.
Enabled us to successfully overcome the external forces that have pressured our margins in recent quarters with their help the company produced its first quarter of operating margin rate accretion since the fourth quarter 2017, a critical milestone.
On that positive note second quarter revenues were 3.8 billion up 3% versus prior year. This included 3% organic growth and 3% from acquisitions, which was partially offset by a three point currency headwind.
Price materialized as expected contributing two points of revenue growth in the quarter.
The growth was achieved despite some challenges in specific markets. This quarter, such as continued declines in global automotive light vehicle production and a deceleration and other industrial focused and markets.
Emerging market conditions were also generally weaker than normal in several markets around the world.
Tools and storage achieved a strong 5% organic growth rate with most regions and business units contributing.
The tools business continues to benefit from a powerful set of catalysts.
Including the ongoing Craftsman rollout.
We also benefited from continued focus on product innovation and commercial execution and as a result, the team continued to build on its record of consistently delivering market share gains.
Industrial total revenues grew 13% enabled by the U.S. attachments acquisition in its first full quarter of results the businesses demonstrating pro forma organic growth with solid operating margins and the financial performance remains on track.
Assimilation of employees suppliers and customers is well underway and going smoothly and all in all we are pleased with how the integration is progressing.
Security continues to demonstrate progress on its value creation plan with improvements in both operating margin dollar and rate versus prior year.
The margin improvements delivered to date are encouraging and we believe there's more to come.
We are now seeking to leverage our talent investments in our commercial initiatives to generate organic growth. The recent infusion of over 1000 digitally profession associates has upgraded the security talent base and enable the rapid commercialization of technology Center customer solutions.
We expect to see continued progress on all fronts in the coming quarters for security and as you can appreciate there is significant value creation potential associated.
With a successful transformation.
Moving to the overall company I'm pleased with our strong operational performance, which was punctuated by 60 basis points of operating margin rate expansion and 4% adjusted EPS growth versus prior year.
This was achieved with a laser focus on cost control and price execution with our business teams overcoming in the quarter approximately $110 million of mostly 2018 carryover headwinds.
With a solid first half behind US we are reiterating our full year adjusted EPS range of $8.50.
To $8.70.
This includes the 4% organic growth.
Margin rate expansion and 4% to 7% adjusted.
EPS growth versus prior year, while absorbing an estimated $390 million and combine tariff currency cost inflation.
Oh and pressures again, mostly from 2018 carryover.
The power of our growth catalyst is clear.
We continue to deliver above market organic growth, even as some markets around the world have slowed.
These share gains have resulted from execution of our SFS two data operating system and include an array of programs, including the Craftsman brand rollout breakthrough innovations such as to wall flexible atomic and extreme as well as from acquisition revenue synergies emerging markets and ecommerce.
To ensure that we create an even more resilient adaptable and agile organization. We recently launched a major company wide program that we call margin resiliency.
As mentioned in our May Investor Day. This program will deliver 300 to 500 million of annualized operating margin benefit over a multiyear period.
The effort is centered around creating benefits across our entire value chain by applying the latest digital technologies and techniques such as artificial intelligence advanced analytics and others to optimize performance and create incremental margin.
Specific areas of benefit include supply chain automation and optimization, including industry 4.0.
Price realization indirect cost reduction and organizational efficiency.
Our ability to execute a program of this nature as forward facing and impactful as it is was made possible by our aggressive investments in recent years and digital transformation.
Our purposeful commitment to high performance innovation and social responsibility has enabled us to attract and inspire the talent capable of doing this.
Margin resiliency will have impact as early as the second half 2019, and the momentum will build in 2020 and beyond.
And finally as a separate but also positive note I'd like to highlight that last week, we increased our dividend for the 52nd consecutive year.
The quarterly payout now stands at 69 cents per share, which represents a 5% increase this is a reflection of our confidence in our cash generation capability and our capital allocation strategy of returning approximately 50% of our excess capital to shareholders through dividends and repurchases and 50% towards M&A over the long term and with that I'll now hand, it over to Don Allan for a more detailed discussion on second quarter results in 2019 guidance Don.
Thank you Jim and good morning, everyone I will now take a deeper dive into our business segment results for the second quarter.
For those following on I'm on slide five within the presentation.
Tools and storage revenue was up 2% as 5% organic growth was offset by three points of currency pressure.
Volume growth contributed three points spot price was aligned with our expectations and added another two points of growth.
The tools team continues to do an excellent job balancing price realization and margin recovery with above market organic growth and share gains.
The operating margin rate for the segment was 70%.
Expanding 80 basis points from the prior year as the benefits of volume leverage pricing and cost control more than offset the impacts of currency commodity inflation and terrorists.
Returning to margin expansion was an important milestone within tools and it was realized in the second quarter, while offsetting significant external headwinds as Jim mentioned, the company had $110 million of tariff commodity and currency headwinds to more than offset in the quarter the tools and storage business. When it was impacted by greater than 90% of these headwinds.
The strong organic growth and related share gains were experienced across most tools and storage regions and FP use.
Looking at it on a geographic basis, North America led the way and was up 7% organically.
This performance was driven by share gains in our us retail and commercial channels.
Up high single digits and mid single digits, respectively.
This was partially offset by a modest decline in the industrial focused business.
The overall North American results were robust considering that we saw some of our construction and industrial focused customers modestly pairing inventory during the quarter.
North America's growth was fueled by the Craftsman brand rollout price realization and new product innovations clearly these growth catalysts are resonating with the end user and delivering share gains as evidenced by double digit Pos experienced in the second quarter.
Moving on to Europe , Europe delivered 5% organic growth.
Eight out of 10 markets grew organically with double digit performances in central Europe and Iberia.
And solid mid single digit performances in Germany, the UK and the Nordics.
The team continues to gain share leveraging our strong portfolio of brands, new product innovation and commercial actions to produce above market growth.
And then finally in emerging markets.
Merging markets declined 2% the ongoing benefits from price new products and ecommerce expansion were more than offset by a three point impact from market contractions in Argentina, Mexico and Turkey.
Despite the pressures from these three markets, we continue to see broad based share gains across the region.
Brazil, Colombia, and Taiwan posted mid to high single digit growth, while Russia, Korea, and India, all posted robust double digit performances.
The emerging markets team is focused on delivering pricing benefits to recover currency headwinds and leveraging our growth catalysts to deliver share gains and what we expect to be a continued slower growth market environment in the back half of the year.
Now looking at the tools and storage yet to use both lines had a solid contribution to the overall performance.
Power tools and equipment delivered 6% organic growth benefiting from strong commercial execution and new product introductions in particular, the outdoor segment posted high teens growth driven by new products and expanded merchandising launched under Craftsman, Duall and Dewalt Flexvolt brands.
Jeff will provide more detail about this later in the call.
Additionally, we will begin shipping our newest we began shipping our newest breakthrough innovations atomic and extreme.
Which have a superior power to weight ratio compared to other products currently on the market.
And tools accessories, and storage delivered 4% organic growth as new product introductions and the ongoing kras been rollout continued.
Continued to contribute to growth.
So in summary, another excellent quarter for the tools and storage organization as they continued to leverage our growth catalysts to deliver above market organic growth and share gains.
Equally as important they return to margin expansion overcoming significant external headwinds through growth cost control and disciplined price execution.
Now turning to industrial this segment delivered 13% revenue growth, which included 18 points from the IRS attachments acquisition.
Which was partially offset by a 3% organic decline.
And a negative two points from currency.
Operating margin rate was down modestly year over year to 16.4% as productivity gains and cost control were more than offset by the impact from lower engineered fastening volume and commodity inflation.
Engineered fastening organic revenues were down 4% due to decline due to declines in automotive light vehicle production.
Lower system shipments and softer general industrial end markets, which were partially offset by fastener penetration gains.
We continue to see declines in underlying global automotive production for the fourth consecutive quarter.
Which had been down approximately 5% during the first half of 2019.
The infrastructure businesses delivered 2% organic growth, primarily driven by stronger onshore pipeline project and inspection activity in oil and gas.
The growth was partially offset by lower hydraulic demolition toll volumes, there's underlying market negatively impacted when scrap steel pricing declines.
And then finally, the security segment declined 3%.
With bolt on acquisitions contributing a positive two points.
And price delivering a positive one point.
This was more than offset by volume being down to 2%.
Unfavorable currency of three points and then a negative one point impact from the Sargent and Greenleaf divestiture.
North America security was flat as higher volumes within health care were offset by lower automatic door installations.
The strong order and backlog trends in this region continue to demonstrate growth is around the corner.
Europe was down 2% organically, France was again, a bright spot for the region as the team Leverages commercial action.
In the small to medium enterprise market.
That is associated with our overall transformation plan.
This growth however was more than offset by adverse market conditions in Sweden and the UK.
In terms of profitability of the segment operating margin expanded a significant 120 basis points in the quarter to 11.2%.
Once again, the security team demonstrated progress with its business transformation for the third consecutive quarter. They successfully live in margin rate and dollar expansion due to controlling costs and delivering operational efficiencies in our service and monitoring organizations.
To take the next step security need to demonstrate consistent organic growth in the back half of 2019.
We are encouraged by the value creation potential from our commercial investments.
Year to date, we have filled over 100, new sales positions and added over 40 technicians in the United States in Europe .
We are bringing in digitally enabled skill sets to develop new solutions that utilize the information flowing through our analytics platform.
To deliver insights to help our customers improve their operational efficiency.
We have also began commercializing new app based solutions for our small to medium sized customers.
While this is not yet manifested itself into significant organic growth.
We have seen strong order patterns and backlog improvements, which make us optimistic that growth is on the horizon.
Now, let's move to slide six.
And briefly look at the quarters free cash flow performance on the next page.
For the second quarter free cash flow was $404 million, which brings our year to date performance to a use of cash of $117 million.
The quarterly and year to date improvements versus the prior year predominantly explained by higher net income.
Lower capex.
And a significant improvement in working capital.
We remain confident that we will deliver strong cash flow generation for the year.
Utilizing our core SFS processes and principles.
Combined with reducing working capital levels in line with normal seasonality activity.
Therefore, we are reiterating our commitment to deliver a free cash flow conversion rate of approximately 85% to 90%.
Now, let's turn to earnings guidance on the next page slide seven.
We are reiterating our 2019 adjusted earnings per share guidance, which calls for approximately 4% organic growth.
And an adjusted earnings per share range of $8.50 update dollars and 70 cents.
Up approximately 6% at the midpoint.
On a GAAP basis, the EPS remain range remains unchanged at 750 to 770 per share.
Now diving into a little more detail on our 2019 adjusted EPS outlook you can see on the left hand side of the chart.
We estimate an incremental $50 million in external headwinds primarily related to live Threed, China tariff.
Which is in essence, increasing from 10% to 25%.
This increase will partially will be partially offset by slightly lower second half expectations.
Related to commodity inflation.
Additionally, we are modestly adjusting our full year expectations around organic volume growth, which reflects a slower market outlook for general industrial and emerging markets.
And incorporates the deceleration we saw during the second quarter.
Our plan still calls for a solid 4% organic growth as we execute our robust pipeline of growth catalysts.
Which will deliver above market share gains.
Offsetting these headwinds are incremental pricing actions the initial benefits from margin resiliency.
And the operational outperformance achieved during the second quarter.
Finally, we expect third quarter earnings per share to approximate 23% of the full year performance.
While the fourth quarter earnings per share will approximate 29% of the full year.
These quarters are slightly different than historical trends due to the timing of various brand transitions on revenue.
Impact of pricing in response to tariffs.
And the margin resiliency benefits.
In addition, we will have some variation the effective tax rate for each quarter.
Now turning to the segment outlook on the right side of the page tools and storage assumptions still calls for mid single digit organic growth and margin rate expansion year over year.
As demonstrated with the second quarter performance.
The team will continue to leverage price cost actions the margin resiliency initiative and volume to offset the external headwinds and deliver operating profit growth.
The second half of the year should see a continuation of margin expansion.
As we anniversary the carryover headwinds from 2018 and take actions to neutralize the incremental lift three Tara.
Moving to the industrial segment, we are now expecting low single digit organic decline, reflecting the slower market outlook across our general industrial and automotive end markets.
Total growth is expected to be positive, including the contributions from our acquisitions.
Engineered fastening organic growth is expected to decline low single digits.
But the second half performance should see a slight improvement sequentially versus the first half.
As the year over year Comparables will begin to ease.
Operating margins are expected to be down year over year, driven by lower volume and the impact from the external headwinds.
The industrial teams are focused on controlling costs and capitalizing on share gain opportunities that often present themselves during a difficult market backdrop.
We fully expect the business to emerge in a stronger position when the automotive market once again turned positive.
Finally in the security segment, we're expecting positive organic growth and operating margin dollars and rate expansion year over year as the team continues to execute on its transformation strategy.
So in summary for the whole company, we expect 4% organic growth for the full year, 4% to 7% adjusted EPS expansion.
Which is overcoming close to $400 million of commodity currency and tariff headwinds.
We continue to be encouraged by the collective efforts across the organization through the first half of the year.
This strong operational performance puts us in a position to deliver our 2019 EPS guidance.
While incorporating incorporating incremental tariff headwinds and navigating dynamic end markets.
We are very pleased to achieve operating margin rate expansion in the second quarter and believe this will continue for the remainder of 2019.
We remain focused on leveraging our continued above market organic growth pricing and cost actions. Additionally, we will begin to see the savings associated with the margin resiliency program in the second half.
These factors combine will result in operating margin growth and rate expansion for the full year of 2019.
With that I'd like to turn the call over to Jeff to provide some additional color on the tools and storage business Jeff.
Thank you thank you Don.
In tools and storage, we maintained our Q1 momentum led by another strong performance in North America and Europe .
Our continued focus on innovation led growth and the ongoing execution of brand initiatives were key drivers to this success and share gain.
Notably our innovations in cordless and quoted outdoor products across the Walt Craftsman and black and Decker have enabled a fantastic outdoor season, where we are up mid teens organically year to date.
And Craftsman outdoor we launched a broad range of cordless products for the season with the 60 volt system catering to outdoor enthusiasts and 20 volt range design for residential use.
And the Walt we also launched new 60 volt outdoor products, which are part of our flexible battery platform.
They are delivering growth in addition to our 20 volt outdoor line.
We're seeing strong Pos across the portfolio as dewalt outdoor continues to gain traction in the market.
More broadly our Dewalt 20 volt line is the largest professional cordless system in history with over 250 products augmented by the recent launch of the wall Atomic series, which is the best in class power to weight ratio product.
We're also pleased with the launch of our 12 volt toward extreme series a range of performance packed offering power tool inorganic solutions for a variety of applications, where this program just beginning to shift we expect to see incremental growth in the pro power tool space in the back half of the year.
Our global Cordless battery platform continues to expand our serving a broad spectrum of end users from heavy duty applications with large power requirements by Flexvolt compact applications in the mechanical electrical and plumbing and pro user segments by or the wallet extreme and atomic range.
This broad category innovation has been accelerated by tremendous brand execution across the Walt Stanley Stanley Fatmax, Irwin and Craftsman, all of which are positive year to date.
Lastly, a word on craftsman.
Overall performance and customer Rollouts remained on track and we continue to be well on our way to delivering three points of incremental growth the 2019, and our $1 billion target by 2021.
The most satisfying part of the Craftsman relaunch has been redesigned products are winning with the end user and delivering growth and share gain for us and our customers.
Now I will turn it back over to Jim to wrap today's presentation.
Thanks, Jeff Great quarter.
So to recap we had strong operational performance.
In the second quarter, serving us well in this dynamic external operating environment, partially due to the outperformance based on margin rate accretion, we're able to reaffirm our full year guidance today.
Despite somewhat slower end markets, especially in industrial automotive and as we look to close out a successful 2019, we are focused on day to day execution and operational excellence.
In accordance with our SFS, two though operating system.
This includes continuing to leverage our organic growth catalysts building momentum and realizing early benefits from the margin resiliency program.
Successfully integrating our recent acquisitions and generating strong free cash flow.
I'm confident that our seasoned management team will bring the same level of passion intensity and agility that we demonstrated in the first half to successfully deliver the second half of 2019, while at the same time preparing for a strong 2020 and beyond.
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.
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Our first question comes from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Julian Julian.
Hey, maybe just my question would be around the phasing of the gross external headwinds and what that means for operating margins in the second half so.
I think your guidance implies about a $120 million of gross external headwinds less for the second half maybe help us understand how much of that falls in the third quarter.
And just following up on the commentary on margin expansion for the rest of the year.
But I think you said.
Are you, saying that Q3 margins will be up year on year.
As well or it was just a general second half comment.
Okay. So.
You are correct to a $120 million in the back half of the headwinds that an accurate calculation and then.
The third quarter with the split would be roughly $75 million to $80 million in the third quarter and the remainder in the fourth quarter, So a bigger amount hitting in the third quarter.
As as things like commodity continue to tail off.
Et cetera, and then we obviously have new new headwinds in both quarters from tariffs so that would be the split there we're seeing and we do expect margin expansion both in the third and the fourth quarter. However, the third quarter will be.
Probably a modest expansion in the 20 to 40 Bips range, and then well see a larger expansion in the fourth quarter as a lot of the actions that we're taking in response to the new tariff such as pricing, we'll get a full effect in the fourth quarter and then some of the margin resiliency things we've been working on.
That will that will grow across the back half of the year and we'll see a larger impact in the fourth quarter.
Hence why we see figure expansion in the fourth quarter.
Thank you. Our next question comes from Nigel Coe with Wolfe Research. Your line is open.
Thanks, Good morning.
Wondering hey, let me just.
Jim you talked about.
Deceleration through the quarter and maybe just talk about.
How how June trends you guys.
You Didnt mentioned weather so congrats on that but I'm sure weather was a factor and maybe just touch on inventory.
Had headwinds that you still with big box channels.
And I'll leave that thanks, guys.
Yes.
We don't want to get too much into the.
Month by month.
Data, but suffice it to say that.
We didn't really see a significant slowing in the.
Construction DIY type markets.
The slowing was.
Predominantly in the industrial general industrial end, specifically automotive.
Sectors of our business so.
Our DIY construction and those types of tools held up very well I mean, we've got Pos is strong as I've ever seen in 20 years.
So if the market slowing it's not it's not slowing for us.
None that part of the mine in that part of the right business.
The inventory corrections, we saw were in the industrial channel.
And.
We saw other corrections that are more modest in different parts of the company that just normal course activity though.
Thank you. Our next question comes from Michael Rehaut with Jpmorgan. Your line is open.
Okay. Thanks.
Good morning, everyone.
Michael Good morning.
First question I had was on the the core organic growth.
The business continues to perform very well.
Just wanted to understand given some of the comments around industrial wood.
Might not as much impact the tools segment more perhaps the.
Other segments, but your comments around.
Some slowing of end markets emerging markets et cetera.
How would you expect the back half the play out from a great organic growth standpoint.
You versus.
For you and then just lastly, if I could sneak.
A clarifying question as well.
Don you mentioned the tax rate.
Impacting threeq to Fourq results.
A little more detail there if possible. Thanks.
Sure.
So the organic tools and storage performance as we mentioned in Q2 with 5% organic growth and we got a little bit of negative.
Decline in some of the industrial channels that we serve for industrial tools about 2% of a decline in those particular businesses. So nothing significant.
We do believe as we look at the back half of the year for tools that were we think the organic growth is somewhere between five and 6%.
For the back half with the quarters being pretty much in that range for both quarters. So.
The trend that we saw in the for the second quarter feels like the right trend as we go into the back half of the year and so we've shown a little bit of moderation in the industrial section of <unk>.
Of the tools business.
On the tax rate the third quarter tax rate is kind of 25% to 26%.
And the fourth quarter will be a a around 15% to 16%.
Thank you. Our next question comes from Nicole Nicole Deblase with Deutsche Bank. Your line is open.
Yes. Thanks, Good morning, guys morning, Nicole.
Hey, there. So just one quick one on Threeq versus Fourq, you ramp I didn't hear you guys talk about organic growth for the two corners, I know the comps a little bit easier in the third quarter, a little harder in the fourth so just how to think about the 4%.
For the rest of the year and then.
On just on tools and storage did you guys see the three percentage point benefit from cross in this quarter, implying that just the underlying market was kind of flattish.
So on the.
Third and fourth quarter organic growth, 4% for the year and when you look at the third and fourth quarter split the third quarter is a little bit below the 4%, which was a bit above the 4% and we have to remember in the fourth quarter, there's a lot of.
Activity that will be happening around the brand transition in particular.
So we'll see a positive impact from that well see some of it in the third quarter as well, but we'll see a bigger ramp most likely in the early part of the fourth quarter. So thats just something to consider as you think about the performance on the Craftsman side, Yeah. We saw a significant impact of about three points related to the craftsman roll out and so as you saw from the performance in North America, We had a very strong high single digit retail performance.
Across many of our key customers and not just related to craftsmen cracked certainly kras and was a significant part of that but then we saw some negative performance in emerging markets I mentioned, the three countries that were contracting and we saw some positive performances in the European market. So you know overall kind of dependent netted to a relatively small number but we had some significant pockets of growth as you look at them.
Thank you. Our next question comes from Tim lows with Baird. Your line is open.
Hey, everybody good morning.
Good morning, maybe just touching on Europe , a little bit.
You know I think accelerating organic growth in that region pretty impressive. So I'm just thinking as you look over the next 12 months.
Just the sustainability of a mid single digit type organic growth.
Number in Europe and.
The programs that may be supporting that as some color and then what do you. What do you think Europe on an underlying basis in tools. This is actually growing thanks to the market.
So I'll take that one this is Jeff.
We're quite optimistic for the remainder of.
Of the year.
In Europe . So if you remember we had a little more than 2% growth organic growth in Europe in the first quarter, 5% here in the second and we feel comfortable with that same type of growth rate in the end the back half.
Really driven by share gain if you if you look at the results were posting.
We're we've been up somewhere between eight and eight of 10 and 10 of 10 total markets for the last several years and that that that trend continues so the expansion and growth of the Walt.
Stanley brands like Fokko et cetera in Europe have been extraordinarily positive. So we feel we feel very good about it and I think our intelligence would tell us that the European tool business is growing well less than half of that is what we think probably less than 2% and we're probably going to into your closer to five so we feel good about it but again, it's probably more share gain than it is robust end market.
Our next question comes from Justin steer with Zelman and Associates. Your line is open.
Morning, guys. Thank you majors.
The.
As today I know you have the cost reduction program rolling through that $60 million I think per quarter on that $250 million program announced last year that seems to be phasing well, but as you think about this program and some other programs that you maybe.
For hurling.
The balance of the year.
SGN today, and then thinking about the next year. This is a permanent or should we think about some of these costs coming back next year if growth is better next year.
Yeah, I would say that the vast majority of this is permanent change like anytime you do a cost reduction program you make decisions, maybe a freeze merits and some other things that are definitely temporary but those are modest.
When you look at the total impact of $250 million and so as we think about margin resiliency initiatives going forward.
Those will be permitted kind of process sustainable structural changes and how we do business to make us more efficient and effective.
And meeting the needs of our customers and as we work with our vendors and other partners across the business. So the margin resiliency initiative is really about sustainable permanent change.
Our next question comes from Josh Raskin with Morgan Stanley . Your line is open.
Hi, Good morning, guys, Hey, Josh.
Just want to follow up Don on your pulling on the Threeq versus Fourq, you phasing and you mentioned the price was was part of it.
And I know that Theres, probably a lot of little things that add up to that third quarter versus fourth quarter EPS growth rate, but if I remember last year.
The expectation for price in the fourth quarter was was pretty high and then ultimately with with promo activity and I think seasonally just having a harder time getting price in the fourth quarter given the holiday.
That ends up being kind of a long pied is is there something different about how you are expecting to go through that process. This year or something that you think has changed in the market from a pricing perspective.
Yeah, I would say part of what's happening in the fourth quarter is price because we had a full quarter impact versus the third quarter getting a partial impact.
But the bigger impact of wire earnings are up.
Or will be up in the fourth quarter is that the the the dollar volume for revenue is expected to be.
Significantly higher than the third quarter and given that we have various brand transitions that we will be executing on.
We expect the.
Industrial segment to perform at a higher level given had a very difficult fourth quarter last year and there's there are anniversary ing. Some of those headwinds and then obviously, we expect security to demonstrate some growth as well. So it's all those different factors, but if you look at.
A 4.5% roughly organic growth performance in the fourth quarter.
You're going to get to a sequential growth number in revenue that close to $250 million to $270 million.
And as that flows through to operating margin and eventually earnings that's going to be a significant reason for the higher level of performance.
Combined with all the other little things that you mentioned like price margin resiliency et cetera, the tailing off of commodity inflation, that's going to happen more in the fourth quarter versus the third quarter. It's all those different factors that are going to drive that I think one of the things that.
And I did mentioned, but I will mention now is that when you look at the operating margin dollars as a percentage of the full year the percentage in the third quarter isn't dramatically different than the percentage in the third quarter of last year.
And so when you look at the OEM dollar percentage to the full year by quarter.
You look at the first quarter was lower by about two to three points versus last year, the fourth quarter. It would be higher by two or three points for the reasons I mentioned, but the two quarters in between are pretty much in line with last year's performance. When you look at that level. You can do the same thing a pre tax it's relatively the same thing it's really when you get down to EPS that you'll see a bigger deviation because of the tax rate.
Our next question comes from Deepa Raghavan with Wells Fargo. Your line is open.
Good morning.
Okay quarter.
Obviously, a lot of moving pieces within your guidance.
Can you talk through some of the items that positively surprised you on the quarter.
It could be with your pricing initiatives that cost actions.
Weather was in markets or regions that surprised you favorably or at or what what also was unfavorable versus your prior thoughts.
Related Lee.
Are you seeing any incremental plus bag our demand impacts from this continued price increases that you are living in the market. Thank you.
Okay. So I'll I'll take the first part and then maybe I'll pass the second question over to Jeff around pricing, but.
On the as far as the quarter, what things we saw that we're a little bit different than expectation, yes emerging markets clearly was lower.
To some extent, we expected some slowness, especially in.
In Argentina, and Turkey, but Mexico is a bit of a surprise given the events that happened in the middle of the quarter around the threats of potential tariff at seem to slow the market's a little bit in the back half of the quarter. So that was certainly a.
A little bit different than expectation when I look at kind of the retail tools performance I think we'd say it pretty much.
It was in line with expectation no real unusual surprises are either positive or negative in that regard, although I think the Pos was a positive surprise.
Yes, the load and was kind of as expected below double digit Pos is always a positive probably above expectations. That's a fair point Jim.
But as far as our kind of revenue performance that really wasn't anything.
That really stood out as unusual but thats a great positive trend as we think about.
Execution in the back half of the year, especially the third quarter.
And then industrial slowing down a little bit as we mentioned in the industrial tool business.
I was a little bit of difference versus expectations.
However, we expect that a lot of that slowness in our industrial segment.
Jeff you want to take the price question, Yeah, maybe that to two things that we talk about industrial within tools. The industrial construction part of our business, which is the hard core construction part of the business can continue to perform really well Pos was great.
Growth was great when you get into heavy duty manufacturing industrial like the industrial storage business and some of those things. They were pressured. So we continue to win any every part of construction. It was more the industrial manufacturing part that that was pressured a bit in the quarter.
In regards to price in Pos.
We've we've done everything we can.
To deal with the effects of price inside of our business.
And then that is that is required us to pass on price to our customers as well because we there's no way we could contain at all.
But even as we've done that in the last year to date basis were up double digit Pos on.
Year to date basis, and Thats from everything from outdoor through cordless power tools brands everything so we feel like we've done a really good job of managing price and volume to this point.
Future will continue to stay really close to it but we feel like we've done a pretty good job with our customers are managing the volume price equation and then as a result robust Pos driving growth for us and our customers.
Yes, I think the other positive even though it's not a huge positive versus our expectations, but the the fact that Europe has been able to continue to be very strong even in the face of tremendous uncertainty over there everything.
Every.
Almost every country you look out you see political geopolitical turmoil and.
Economic stress just limited growth and so I think that that kind of mid single digit growth performance in <unk> and Europe continued to sustain that and.
I think that bodes well as well as just said for the second half and in Europe .
Our next question comes from Robert Barry with Buckingham Research. Your line is open.
Hey, guys good morning.
Morning.
Just a couple of quick follow ups I think you were expecting margins to be only very modestly up into Q and then much more meaningful in the back half and it looks like Twoq you ended up being more meaningful and now Threeq you, it's going to be only pretty modest. So just curious what kind of drove the outperformance in twoq, you or why that kind of shift is happening.
And then just a quick follow up on the Craftsman channel loading when when does that peak that contribution to growth.
Thanks.
Okay I'll start with the margin.
Question and pass the Craftsman question over to Jeff.
Yes, we expected modest.
Rate accretion in the second quarter for tools and storage, we ended up getting close to 80 bips of accretion in the second quarter, we still expect.
Good accretion in the third quarter.
I'm not quite as much as 80, bips, but I'm still very healthy performance and then it gets even stronger in the fourth quarter.
The second quarter. It really is just a factor of us being very.
Focused on how we manage as I mentioned in my comments and we mentioned a fair several times over the last year really that balance between.
Volume growth pricing and making sure that we're focused both on organic growth and margin rate accretion performance and I think the tools team did a great job managing that dynamic in the second quarter to get this type of performance.
It's a little bit of timing related to tariffs, where some of the tariffs shifted into the third quarter related to the new list three one's going from 10% to 25% that was a little bit of a positive that didnt impact us in Q2.
Just given the timing of it.
But beyond that it was really just strong execution by the tools team.
Jeff you want to take the Craftsman question sure Don in regards to the question on Craftsman loading.
I would say probably the the loading itself anniversaries to a large degree in the fourth quarter. So if you look at the Rollouts, we've been rolling out grasping for increased on an increasing basis over six quarters. So it really is the fourth quarter, where it starts to anniversary most of the largest loads.
At the same time, we stay really close to that Pos and I think we said before and I'll say it again the.
The Pos and craftsman tends to be almost twice what it replaced in the categories that we've we've added it so even though we're anniversary ing. The loading we still feel really good about the three points of incremental growth in our path to a billion dollars.
By 2021, so both those things are they are positive at this point.
Our next question comes from Ken Zener with Keybanc. Your line is open.
Good morning, gentlemen.
Learn Corning.
Jeff I Wonder if you could comment.
In the old days have black index or the outdoor power tool group had an effect on to Q.
Obviously with your.
Growing investment and insight into the outdoor power tool and given the very wet.
Second quarter could you comment on any.
Perhaps drag you saw there but also.
For whoever how that might affect the execution of when you get a more.
It's a great business, but it becomes more seasonal how that kind of effects.
Perhaps operations or how you approach a very wet winter and how we should think about that going forward.
Well.
Yes, our result in outdoor has been really good so we're up.
Mid single digits by 15% on a year to date basis, some weeks 19%.
And the best Intelligence, we have says the outdoor space would be up about a third of that so.
That clearly represent share gains across black and decker craftsmen and the wall.
And I think the thing that's changed over the last.
25 years Ive been in the outdoor business.
Is.
We've become a much more prevalent player for a longer part of the season. So while we historically participated in the spring part of the outdoor season, we've gotten far far better at other categories were now that that's elongated well into the fall and early winter blowers and some of those things that we historically had done so that if you think about it that way we ship those products in Q1, they sell in Q2 blowers and so forth happy to Q3 through outdoors become it's a seasonal business, but it's now three quarters of our year versus what used to be one quarter of our year and so all in all I don't think.
The season hasn't impacted us.
And I think the season in total was up a bit further in the market, but ours was probably three times to the market growth and we feel good about that same prospect for the fall as well, we have really good promos and listings and so forth.
Our next question comes from Michael Wood with Nomura Instinet. Your line is open.
Hi, good morning.
I wanted to give us any initial quantification of the 2020 carryover.
Sternal headwinds from Paris, FX commodities and.
Potential offsets with the carryover from your cost action and you also called out less commodity inflation. Just curious if you could pinpoint where you're seeing that and does that become a year over year tailwind by year end.
Yes, so obviously, we'll have a carryover impact from from the list three tariffs going from 10% to 25%. So we only have about a half year impact of that this year, that's roughly $70 million of an impact.
In 2019, so you can expect that to be roughly the same in 2020 the commodity impact.
Deflation impact or lower inflation.
It's probably 15 to 20 million this year most of that hitting the fourth quarter. So we'd expect a little bit of a carryover impact than that it's coming from things and certain steals and resins, primarily that's driving it but.
We also seeing in a couple of other categories, it's kind of spread across various different categories. No. One big one driving all of it so if things stay where they are we would expect.
On a carryover impact and maybe as reasonably close to the tariff in fact at this stage. So hopefully they neutralizing themselves as we look at it right now.
Our next question comes from Sam Darkatsh with Raymond James Your line is open.
Good morning. This is Josh filling in for Sam Thanks for taking my question.
Good morning Arnie.
I wanted to dig into the incremental pricing you maintained your organic growth guidance for the year, but with lower volume expectations offset by some incremental pricing could you give us some more color on which segments and which geographies that incremental pricing is coming in and what gives you confidence that those markets will support those increases. Thank you.
Well I mean, we've been as you know we've been getting price in the market.
For over a year now related to all these different headwinds and so some of these are going to start to anniversary themselves in the back half of the year. So you have had a full year impact.
We will have new pricing actions related to.
The list three going.
Susan going from 10% to 25% in the back half of this year.
We've been running at about a two point.
Price impact I would expect that probably would be.
Somewhere between one to two points in the back half of the year and given that we're starting to anniversary. Some of these things are likely being maybe closer to one versus two two so.
The impact of price than our organic growth.
We'll be a little bit smaller than what we've experienced in the first half of the year and then obviously the offsetting impact and to get to 4% organic growth will be volume, which means it will be a little bit bigger versus what you just mentioned.
Our next question comes from Ross Gilardi with Bank of America. Your line is open.
Thanks, Good morning, guys.
Good morning.
I was just wondering if you guys don't want to question on on the security business.
I was interested in your comment on improving trends in what parts of the business.
Are you seeing strength and then just more broadly in Hawaii.
Clearly, making a little margin progress you are still a long way from from the mid teens operating margin objectives that you want the business. How we look at it next year, if you're still making positive progress that you are still well short of your your margin targets with respect to retaining or divesting the business.
Well, the retaining or divesting of the business question is a question that we promised to answer a year two years from now.
A year ago.
And.
Right now we're not speculating on all these different aspects of.
And scenarios, what ifs and so on what we're focused on is.
Margin improvement inorganic growth and transformation of the business model to make it a more relevant business model and a more defensible business model for the for the 2000 Twentys.
And.
Regardless of whether we elect to keep it or divested.
Either way the value that we're creating by focusing on this is substantial and that's the way we're thinking about it right now we don't want to distract ourselves with having to evaluate.
What's the right time to divest should we divest of whats the right divestiture approach if we choose to do that I mean, there is a lot of complexities associated with those questions, which will will answer at the appropriate time, but for now we're focused on.
Margin improvement, which we've accomplished the beginnings of now and we're as mostly in the electronic business I'll tell you it's a.
It's across the board and the electronic business, where we're focused on margin improvement and now we're moving.
Now that we have that going were moving to an extreme focus on driving the value proposition and the go to market feet on the street selling the applications that weve developed.
Thank you. This concludes the Q and a session I would now like to turn the conference back over to Denis Lang for closing remarks.
Shannon Thanks, we'd like to thank everyone again for calling in this morning and for your participation on the call. Obviously, please contact me if you have further questions. Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for joining and have a wonderful day.
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