Q1 2021 Stanley Black & Decker Inc Earnings Call
Okay.
Welcome to the first quarter 2021 Stanley Black <unk> Decker earnings Conference call. My name is Shannon and I will be.
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.
I'll now turn the call over to the Vice President of Investor Relations Dennis Lange, Mr. Lang you may begin.
Thank you Shannon good morning, everyone and thanks for joining us for Stanley Black <unk> Decker is 2021 first quarter conference call on the call. In addition to myself is Jim Loree, CEO, Don Allan President and CFO, and Lima, Chesney, Vice President of corporate finance and CFO of tools and storage our earnings release, which was issued earlier this.
This morning, and a supplemental presentation, which we'll 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 a M. Today.
The replay number and the access code are in our press release. This morning, Jim Don and Lee will review, our 2021 first quarter results and various other matters followed by a Q&A session consistent with other calls we are going to 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 future events that may not prove to be accurate and as such involve risks and uncertainty. It's therefore possible that the actual results may materially differ from any forward looking statements that we might make today, we direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent 34 Act filing.
I'll now turn the call over to our CEO Jim Loree.
Thanks, Dennis and good morning, everyone.
I have to say, it's an exciting day for us here at Stanley Black <unk> Decker.
We have the opportunity to report an outstanding start to 2021 highlighted by record revenue and EPS and many other accomplishments.
These powerful results were backed by strong markets and excellent operational execution, which supports our improved outlook for the year.
And thank you to our 53000 employees around the globe, who delivered these results by maintaining focus on our pandemic era of priorities.
The priorities of employee health and safety.
Serving our customers with continuous operations and.
Doing our part to help our communities mitigate the impact of the virus have served us extraordinarily well.
Past year.
First quarter revenues were up 34% to $4 2 billion versus prior year each of our segments and regions contributed to deliver an all time record 31% organic growth.
Our tools <unk> storage business continued on its extraordinary growth trajectory with 45% organic growth, yes, 45% growth in the quarter.
All regions and business units contributed to the performance with blazing hot markets across the globe led by a confluence of positive factors.
Vibrant markets and secular trends, including the consumer's reconnection with the home and garden ecommerce and outdoor electrification in concert with our ubiquitous channel strategy.
And an intense focus on supply chain execution enabled a strong business growth.
Our portfolio of iconic brands, such as the wall Craftsman and Stanley in combination with industry, leading innovation has proven to consistently deliver ongoing gains in market share at the Pos level and now at the southern level as well.
The tools first quarter performance is an outstanding example of what this powerful combination can deliver industrial.
Organic growth was 6% as we've seen a strong double digit recovery in automotive general industrial and attachment tool and markets along with share gains.
This was partially muted by continued market declines in aerospace and oil and gas.
And for security, 1% organic growth was in line with our expectations given the many restrictions placed on our installation and service techs.
We've made continual progress with our digital health and safety product offerings in the security business transformation to a data enabled technology provider is accelerating we.
We are excited about the full potential of these opportunities to support revenue growth throughout the year.
And there was great news regarding our operating margin rate as well the rate for the quarter was 17, 6% up 760 basis points from the prior year with volume leverage productivity cost control price and margin resiliency all contributing.
Adjusted EPS for the quarter was another all time record at $3 13.
Up 161% over prior year.
And both our operating cash flow and free cash flow were each about $240 million higher than in the same period in 2020.
A year in which the company generated a record $1 7 billion and free cash flow.
All in an impressive first quarter and a strong start to 2021.
This great performance and a sustained market recovery through April has given us more visibility into the second quarter and to some extent the back half as well.
As a result, our point of view for 2021 and momentum going into 2022 has significantly improved since I outlined our initial observations during our January earnings call.
First as you can see tools remains on our role in addition to all the positives already mentioned the pro is back in full force and the commercial and industrial markets are hot as well Europe is far stronger than previously imaginable. Given many countries are still bogged down in lockdowns and the emerging markets are.
Blazing, we are clearly benefiting from secular trends that have been amplified and accelerated by the pandemic.
We're also benefiting from the extraordinary efforts of our people to manage the supply chain effectively.
Numerous challenges, including parts availability among others with that said many of our retail partners, we'd like to replenish their inventories as our current production levels are basically serving their point of sale growth.
In this regard we recently have begun production and two new factories in Mexico.
And then and an additional one in Fort worth, Texas will be up and running in a matter of weeks.
Our current view is that this will enable the approximate four week channel inventory rebuild.
To occur in the back half of this year.
The secular surge in global DIY, driven by the consumers reconnection with the home and garden continues to be a key demand driver across our global markets.
A shift to E. Commerce continues and we achieved nearly a 100% growth in this growing channel during the quarter.
The electrification of the outdoor product market is accelerating just as we have launched a significant number of new products and increased listings. We now expect this business to reach $900 million in 2021.
Up approximately $250 million versus last year.
We are already benefiting from our multi year relationship with M. T D and our option to acquire the remaining 80% at a very attractive seven to eight times EBITDA multiple with a window that opens in July of this year.
Our success comes from building a position as the world's leading tool company that can attract diverse world class talent.
And an array of iconic brands market, leading and leading innovation immense category breadth and depth and a passion to serve our customers shareholders and other stakeholders. In this regard I would like to understand underscore a key point.
We are gaining share and making bold investments to widen our lead in the future and as it relates to profitability. We once again delivered significant gross margin and operating margin expansion and are continuing to perform at historically strong levels.
At this point all temporary cost actions have been restored and we are making significant investments as I said, we have incorporated increased inflation into our outlook and we are taking aggressive actions to protect our margins in 2021 'twenty 'twenty, two and Lee will review those in a few moments. Additionally, our tech enabled margin resiliency program.
Port our margin rates.
Finally, the market rebounds across automotive general industrial attachment and markets and security continued.
We remain optimistic that this will continue and the potential for increased global infrastructure spend could enable further gains across the portfolio.
So in summary, we have high conviction in our prospects for growth supported by our catalyst the positive trends I outlined benefiting our markets and cyclical recoveries across the businesses. As a result, we are raising our adjusted EPS guidance to a range of $10 70.
To $11 per share.
This represents a significant update.
From our securities our previous guidance.
The revised midpoint of $10 85 now.
Now reflects a 20% increase versus prior year with a total company organic growth at 11% to 13% for the year and as you can see there's a lot to be excited about and what lies ahead of us in terms of significant opportunities for value creation and now I'll turn it over to Don Allan to cover the first quarter and our updated 2010.
'twenty one guidance.
Thank you Jim and good morning, everyone. I am pleased to report on the business segment results that contributed to our exceptional start to 2021.
Tools <unk> storage delivered 48% revenue growth with volume up 42% and price and currency each contributing an additional three points.
<unk> and 45% organic growth for the first quarter.
In addition, the operating margin rate for the segment was 21, 4%.
990 basis points versus the prior year.
This is the result of the team's relentless focus on margin excellence and strong operational performance.
Volume price productivity and cost control were the main drivers of this expansion.
These positive drivers were partially offset by higher costs and supply chain, such as expediting product via airfreight to serve the incredibly strong demand.
As well as new growth investments to support share gains in the future.
On a geographic basis, we had incredibly strong organic growth and market share gains across all regions.
41% in North America, 47% in Europe, and 67% in emerging markets.
This performance was driven by our industry, leading innovation strong professional demand and the ongoing trends from secular shifts related to ecommerce outdoor product electrification and the consumers reconnection with the home and garden.
The U S retail channel delivered 48% organic growth is underlying consumer demand remained elevated with continued momentum from professional and DIY users.
Additionally, our Omnichannel and E. Taylor ecommerce platforms nearly doubled in the first quarter, which further reinforces our conviction behind the additional investments we are making to capture this accelerating opportunity.
Point of sale growth for the quarter remained exceptionally strong and consistent with the high end of our forecasted Q1 range.
Retailer inventories remain relatively in line with Q4 2020 levels. So the anticipated increase in store inventories of approximately four to five weeks is now expected to occur in the back half of the year.
The North American commercial and industrial tool channels are continuing to experience positive sequential trends with growth in the mid thirties versus low single digit decline in Q4 2020.
Pure play construction focused customers within these channels were up close to 40%.
More than two times, the mid teens growth, we experienced last quarter.
Resounding signal that the pro is back and demand is clearly accelerating and this space.
Also with the recent positive trends in North American industrial manufacturing activity.
Our MRO customer base rebounded this quarter as well posting growth in the high twenty's as compared to double digit decline in the fourth quarter.
Now shifting to Europe, the European tools business realized an impressive share gains across all regions Jim.
By the rapid acceleration of e-commerce, as well as a retail channel the retail channel strength.
This performance was led by more than 80% organic growth in the U K.
While France Central Europe, the Nordics, Italy, and Iberia, where all up over 30%.
Finally, the momentum in emerging markets continued to accelerate with strong construction related demand. In addition to impressive traction in e-commerce.
Latin America was up 77% organically.
With all countries up over 50%.
Led by an outstanding 86% growth in Brazil.
Asia delivered 62% organic growth with China, and India, both at least doubling in size.
South Korea, Malaysia, and Vietnam, all grew in excess of 50%.
While Japan, Thailand, and Indonesia, each posted strong double digit growth for the quarter.
Russia, and Turkey remained strong delivering 52 and 89% growth respectively.
Those numbers are absolutely crazy.
They're wonderful so, let's turn our attention to tools <unk> storage at views after reviewing the fantastic geographic revenue performance.
Power tools delivered 50% organic growth, which was the result of continued momentum from the positive home and construction trends as well as sharp commercial and supply chain execution combined with new product launches.
Nucor innovation led the way.
Building upon our strength with Craftsman.
Fastest growing brand in the industry.
And the wall the largest professional tool brand in the world as measured by total revenue.
We built these positions with industry, leading innovation launching products such as flexible atomic extreme extreme power detect and flex volt advantage all within the last five years.
These products are delivering growth well ahead of the SBU average and are positioned for our pro users.
To further highlight positive professional demand.
Flex vault grew over 80% in the quarter.
This quarter and moving ahead, we are providing more topline disclosure for our outdoor products business, particularly as it increases importance of the growth catalysts and with our option to purchase the remaining 80% of MTBE opening mid year.
I am pleased to report it was a record breaking start to the season with organic growth in excess of 120%.
This performance was driven by the incremental listing wins, we covered last quarter.
And leveraging cordless innovations under the black and Decker Craftsman and Dewalt brands.
All of our major retailers participated in this explosive growth.
It is exciting to see our new products hit the market in early season reads on sell through are very positive.
This is a major growth margin and ESG opportunity as we shape the conversion to electrification and bring our cordless capabilities to the outdoor equipment market.
Could not be more excited about this industry and the growth potential it creates for our company over the next several years.
Finally handles accessories and storage grew 28% organically as market rebounds, and new product introductions fueled the growth.
We continue to innovate in our key construction auto and industrial markets.
We are seeing new product momentum, including a variety of craftsman, and dewalt plastic and metal storage solutions as well as robust growth in there.
And new dwarf Kate measures and accessories.
So in summary, there are a few points I want to reinforce related to our tools and storage business.
John we continue to leverage and an industry leading position.
The team has built this position over time and it is supported by our innovation brands category breadth operational excellence and focused on keeping our customers and end users at the center of what we do.
Two this is a global phenomenon.
The powerful trends that we are harnessing for growth are not unique to one geography.
And three this is fueled and enabled by the dedication passion and agility of our people the business delivered the largest first quarter in history as it relates to sales profits and margin rate and the execution was superb.
Thank you to the entire team for a job well done.
I am excited about the possibility of record breaking performances continuing into future quarters, well done tools team.
Moving to industrial this.
Segment delivered 11% total revenue growth, which includes 6% volume, 3% currency and 3% from Mccann acquisition.
This was partially offset by one point from an oil and gas product line divestiture.
Segment organic growth continued to improve sequentially with positive 6% growth in the quarter.
The operating margin reached 15, 9% an increase of 270 basis points versus the prior year as the benefits from volume productivity and cost reductions were only partially offset by new growth investments.
Looking further within this segment engineered fastening revenues were up 9% organically as we continue to see improving automotive and industrial end markets.
Automotive fasteners were up 16%.
<unk> global light vehicle production by approximately 500 basis points.
This was held back somewhat as we move through the quarter and navigated OEM disruptions due to their supply shortages.
Our automotive system business was up 17% a very good sign that capital spending is improving with our automotive Oems.
Growth within industrial fasteners turned positive this quarter delivering low double digit growth.
Driven by the continued momentum in global manufacturing and industrial activity combined with a modest impact from customer inventory increases.
Infrastructure organic revenues were down 2%.
However.
Catchment tools had 16% growth as demand increase from Oems and independent dealers.
This was more than offset by significantly reduced pipeline construction activity, which resulted in a 30% decline in oil and gas.
Shifting to security total revenue was up 2% with a four point positive impact from currency.
Rice and acquisitions, each contributing to the point.
This was partially offset by a four point decline related to the international divestitures completed in the third quarter of last year.
Overall, North America was flat organically as growth from health and safety offerings within automatic doors and health care were offset by lower installations within commercial electronic security.
The field organization continues to experience productivity challenges as our customers slowly reopen and allow more on site access.
European organic growth was up 4% as new data driven product solutions supported 17% growth in France, and 4% in the Nordics Fran.
France in particular has embraced the technology transfer and a transformation we ignited in this business in 2019.
And it is experiencing the growth that we believe is possible across the entirety of commercial electronic security.
Our new solutions and health and safety continued to build momentum contributing approximately two points of growth in the quarter.
The positive secular trends in underlying demand once again proved resilient in these markets despite incremental lockdowns due to the pandemic.
It's a bid and quote activity for these new solutions continues to build.
And that combined with the executed backlog at record highs gives us confidence that security is set up to deliver strong organic growth for the remainder of 2021.
Overall security segment profit rate kind of excluding charges was eight 5%.
Up 110 basis points versus the prior year.
As price and cost control was partially offset by the impact from growth investments.
To our SaaS solutions, Touchless store technology, and other health and safety options.
I would now like to turn it over to Lee <unk>, who is our VP of corporate finance and CFO for tools <unk> storage.
Many of you know Lee from Investor conferences over the last year and he will now walk you through the cash flow for the quarter and our game plan to tackle inflation Lee.
Thank you John and good morning, everyone moving to slide seven I will now review our free cash flow performance.
Free cash flow improved $242 million versus prior year behind the strong operational performance and earnings growth now.
Now please keep in mind that our free cash flow outflow in the first quarter is in line with normal working capital seasonality, which was somewhat amplified by the strong demand to start the year and as compared to a historically slower period for the business working capital balances also are higher than prior year as we work to serve the strong demand as well as an improvement.
The inventory positions for us and our customers.
Despite the higher balance it was working capital turns hit seven one a one point churn improvement versus prior year.
We remain confident that we will deliver strong cash flow generation for the year inclusive of Capex investments to support further growth.
We will continue to drive working capital efficiency across the company in combination with our strong earnings performance.
I'd now like to give you a quick update on commodity inflation.
As many of you follow steel and resin represent the two largest commodity exposures and they have been impacted by rapid spot market increases as the global supply chain responds to the surge of demand and temporary supply gaps.
This dynamic has occurred across many of our key commodities components finished goods that we purchase.
We now expect inflation headwinds to approximate $235 million, which is up $160 million versus our previous outlook of $75 million Curran.
Currency, however remains a $45 million positive offset to this cost pressure.
The drivers of the incremental inflation, our steel resins copper aluminum and some purchase materials, such as batteries and electrical components.
And as a reminder, we generally lock in our supply agreements one to two quarters in advance and this pressure has has to work its way through inventory and therefore, the majority of this year over year headwinds will be realized in the second half of the year.
In response, we are initiating additional pricing and productivity actions, which will partially offset the 2021 impact of the headwinds as well provide a significant carryover benefit into 2022.
We believe these actions can offset about a third to a half of the 160 million incremental headwinds and have included that assumption in our guidance.
Additionally, we continue to have approximately $100 million of margin resiliency available over the balance of the year, which is not included in our guidance today.
This will act as an additional contingency to help us offset any incremental headwinds that may materialize or support a better margin outcome for the whole year.
We are remaining agile in our response to inflation and are leveraging the SPD operating model to continue to deliver the strong margin levels, we've established and for full year 2020 and implied in our guidance for 2021.
With that I'll turn it back over to Don who will walk you through our updated guidance.
Thanks, Lee turning to slide nine I will now outline the organic growth assumptions for both the second quarter and full year.
We expect second quarter organic revenue growth to approximate 30% for the company.
And <unk>, we expect the tools <unk> storage business to grow 35%, 40% with continued strength across all regions and channels.
We are planning for industrial to grow in the mid to high teens with continued momentum in industrial fasteners and markets and attachment tools.
Motive will continue to show growth on the easier comps, but we have incorporated moderated demand levels versus Q1, acknowledging the OEM supply constraints in the industry.
Finally, aerospace and oil and gas are expected to remain depressed, partially offsetting the stronger growth expectations in other areas of this segment.
Turning to security, we expect low double digit growth in the second quarter.
We plan for revenue levels to improve sequentially as we will benefit from increased access to customer sites to execute on our record backlog from the first quarter.
Shifting to the full year, we are raising the total company organic growth range to 11% to 13%.
Upward revisions in tools and storage and industrial.
Our confidence of growing market demand in tools and storage continues to strengthen.
We are raising the tools and storage or ganic growth expectations to 14% to 16% versus our prior estimate of 4% to 8% for the full year.
Both the first and second half assumptions improved.
The first half assumption is based on stronger visibility to Q2 demand combined with the outstanding Q1 performance.
The second half assumption includes the benefit from increases in channel inventory back to historical levels.
Despite the improvement we are assuming a decline between 2% to 4% in the back half acknowledging the tough comps.
This represents growth of 12% to 16% versus 2019 and is a reasonable two year growth assumption given the strong market recovery occurring.
However, we are preparing the supply chain for stronger demand scenarios, and we will be ready should our planning assumption proves to be conservative.
Which is very rich.
Very well could be given current global demand trends.
The industrial outlook improved to 4% to 6% for 2021.
As we have better visibility to industrial attachment tool market recoveries.
We have built in the expected automotive customer supply chain constraints into our view.
And then finally aerospace and oil and gas and oil and gas will continue to be a significant headwind.
Right now our view is that these markets will remain depressed for 2020 one.
But becoming upside opportunity next year.
Last week lastly, we are maintaining our security organic growth assumption at 4% to 6% for the full year.
Our record backlog and commercial electronic security is encouraging and coupled with our data and technology based product offerings and health and safety solutions.
We're optimistic that the growth can accelerate throughout the remainder of the year.
Now I'll summarize the remaining guidance assumptions on slide 10.
We are raising and narrowing the 2021 adjusted EPS outlook to reflect the exceptional start to the year and improved demand outlook across most of our businesses.
On a GAAP basis, we expect.
The earnings per share range to be 10 to 15 to $10 55.
Inclusive of various one time charges related to facility moves deal and integration costs and functional transformation initiatives.
On adjusted basis, we are increasing the EPS outlook from a $9 70 to $10 30 range up to a 10, 7% to $11 range.
At the midpoint. This is an increase of 85 versus the prior guide and a 20% EPS growth versus the prior year.
The drivers for improved adjusted EPS are outlined on the right hand side of the slide.
Walking from the $10 mid point from our January guidance incremental pricing and volume net of incremental growth investments along with margin resiliency and other actions contribute approximately $1 50.
This is partially offset by commodity inflation headwinds of approximately 80.
In addition, we are planning to call our series C preferred stock and the elimination of the preferred dividend adds <unk> 15 cents benefit to 2021.
Bringing us to the current adjusted EPS midpoint of $2 85.
Demand variability that I covered earlier.
Earlier remains as the primary driver beyond the adjusted EPS.
We have also disclosed our current year for our current full year assumptions for the significant below the line items.
Our expectation for the pretax M&A and other charges to assist with your modeling.
Additionally, the company is reiterating free cash flow to approximate GAAP net income.
And lastly, we expect second quarters adjusted earnings per share to be approximately 25% of the full year performance.
So in summary, we expect 11% to 13% organic growth and approximately 18% to 22% adjusted EPS expansion for the company in 2021.
A very healthy EPS expansion for the year, you had a balanced view recognizing the dynamic operating environment.
As I said earlier, we are preparing for the potential for higher market demand beyond this guidance view.
And as Lee mentioned have $100 million of margin resiliency not included in our guidance as a contingency to drive better performance bar withstand new volatility.
From a capital allocation point of view, we are very well positioned and have excellent flexibility due to our current cash position and leverage ratios.
Therefore, we can retire the preferred stock mentioned earlier.
And react accordingly, if our stock price trend presents an opportunity in the short term.
While staying on track with our expected timing of MPD later this year or early next.
We are confident that we are positioning the company to deliver above market organic growth with operating leverage strong free cash flow generation.
And top quartile shareholder returns over the long term.
All while maintaining the safety of our employees and continuing to assist in our communities.
With that I will now turn the call back over to Jim to conclude with a summary of our prepared remarks. Thanks, so much done.
As you out there have seen and heard we had a very strong start to the year as we delivered record organic growth, reflecting positive secular trends vibrant markets and a strong array of growth catalysts.
I am pleased with our team's continued efforts and excited about the enormous potential given the improved outlook and strong momentum we built over the last 12 months as we look to the future. Our portfolio is uniquely positioned to benefit from these trends several of which have been accelerated and amplified by the pandemic.
Sumit reconnection with home and Garden E Commerce, electrification and health and safety.
We are capitalizing on this opportunity by funding innovation commercial and capacity investments to support continued organic growth and share gains. Additionally, our option to acquire the remaining stake in Mcd in July.
Has the potential to add up to $3 billion of revenue in 2022.
And create an exciting multiyear runway for growth and significant EPS and cash flow accretion.
Our passion for positive differentiated performance.
Coming known as one of the world's most innovative companies and elevating our commitment to corporate social responsibility.
S G.
<unk> never been stronger and that is in the wake of 116% Tsi delivery during the 20 years or so since I've held C level positions in this company with support during that entire period from Donald Lee.
We have a clear vision for winning in the 2020 is taking our story to yet an even higher level, which you'll see up close and personal if you attend our virtual growth summit on may 13th.
This event will be a great opportunity for us to communicate more details on the compelling array of opportunities we are pursuing for growth and margin expansion as well as our strong commitment to planet people prosperity and governance, we will be showcasing a number of the executives leading these initiatives. So please reach out to Dennis if you're.
Interested in attending and we look forward to seeing you there and now we're ready for Q&A Dennis Greg.
Thanks, Jim Shannon, we can now open the call to Q&A. Please thank you.
Yes.
Thank you to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Yes could you please limit yourself to one question. Please Jim Attwood compile the Q&A roster.
Our first question comes from Nigel Coe with Wolfe Research Your line is open.
Thanks, guys good morning.
Good morning.
Lots to unpack here, but I think I'll get the ball rolling on inflation.
Obviously, a big big step up in the <unk>.
235, how will ring fenced is up to 35 at this point.
Seaman <unk>.
<unk> spot prices hold.
For the balance of the year and maybe just talk about the price actions Youre planning.
To try and cover that.
I know it's industrial.
Neutral pricing so I'm, just wondering whats the strategy triangle regular price in industrial.
Yes, sure I'll start with that and then Lee will probably add a little color too.
Yeah, I mean, we were at $2 35 for inflation and the impact this year up about $160 million from what we said back in January.
I would say this is a very vol.
Volatile environment, right now and it really depends on where the demand goes in the back half of the year.
I do believe as the year progresses, and we get closer to July it's difficult to have a material impact in the current year if inflation continues to.
Increase that being said, there's been a few positive trends and some of these commodities in the last two or three weeks, where it appears to be stabilizing so two or three weeks does not make a trend but it is something that at least is encouraging in the sense that maybe this is starting to modulate a little bit but it will be one of the more volatile things that we'll have to match.
Now the good news is that I do believe we will be managing through a very strong demand market for the remainder of the year and most likely into next year as well.
So that clearly is a benefit associated with inflation.
We are aggressively underway of focus on pricing actions across.
The two major businesses, where this impacts which is obviously tools and storage and industrial.
Towards the storage, we will do what they typically do which is a very surgical approach focused on areas that we think pricing does.
It does not impact demand in a significant way and so we will manage through that dynamic with our customers as we always do and I think we'll have a pretty good success rate industrial actually is an area that.
We feel better about we feel like we have good processes in place we've already got price actions that we've taken.
In the last 30 days and we will likely take can take some more in the next 90 days and those particular businesses, but we feel like that is well under control in the industrial team has been very focused on that so I think the area of.
Of interest that we're all going to be watching is making sure we get the right impact in pricing in the tools and storage business now that being said, we do what we normally do to manage through this dynamic which is in the short term. We're looking at other areas of productivity. We look at margin resiliency as a contingency to help offset that if needed.
<unk>.
We're optimistic as we go through the year that we will find a way to navigate this headwind and be able to to offset it.
Completely right now as Lee said, we think we're more like one 3rd% to 50% at this stage, but as the next three months Goodbye I think we're going to make more progress in that regard.
Yes, I think you said it well it's volatile, but we are off from running on the action side, it's going on in all three businesses.
Some of them have been announced but we're in conversations with with with all really all parties and then I remind everyone. We still have our margin resiliency contingency, where you know we have a $100 million that's not in our guidance. So if if inflation was the creep up we have some coverage there and you know I think we feel pretty good place.
Thank you. Our next question comes from Jeff Sprague with vertical research. Your line is open.
Thank you good morning, Hey, Jeff Good morning, Hey, good morning, Greg.
Hey.
Maybe just play a little bit into the cost question, but just curious on the new plants right two in Mexico and.
Worth finally standing up I think.
Initially.
Those were viewed as kind of a.
Presenting an opportunity to shift geographically and get out from under tariffs. It sounds like they might just simply be need needed for volume, but but to what extent.
Do you see an opportunity.
Geographically shift your sourcing.
And then kind of change the cost structure from that vantage point.
Well, we will get there eventually I would say.
Unfortunately, or fortunately, depending on how you look at it but the the volume youre spot on the volume has precluded any major <unk>.
Shifting although you get minor shifts because you know the.
The waiting.
The change in waiting just from having the additional production.
In these places.
But the reality is when you are trying to serve demand.
Up 45% year over year.
The opportunity to do.
Production shifts is essentially you know.
Ltd.
And so.
Once the demand returns to what I would call it more.
Historical levels and at some point that it undoubtedly will.
Then the trend will be in great shape in terms of.
We have the plans and programs we have the people all set up to do it we just need a window of opportunity to make that happen.
And in the meantime, we will continue to serve the demand that we have.
I would just add one thing to that one thing we are doing is as we bring up these new plants in Mexico. We are building out the supply base in Mexico with it.
So.
Jim's point whenever we do get to the stage, where we can shift.
More production from China into Mexico, as an example, the <unk>.
Hi, Beth will be well established and.
Well connected to our existing facilities at that stage.
Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
I just wanted to go back.
Good morning, just wanted to circle back to the margin outlook.
And then looking at the sort of the guidance for Q2, and what you've said for the year.
Am I right in thinking that the second half sort of firm wide margin youre looking at maybe about a sort of 15%, maybe a little bit lower margin in the second half.
So down maybe a couple of hundred points year on year, just wanted to make sure I wasn't way off on that math and also sort of allied to that.
If you could help us understand of the 235 million commodity headwinds.
<unk> of that is in the second half please.
Yes.
Commodity headwind is close to $200 million in the second half. So a large portion of that $2 35 is hitting us in the second half.
So it really is a good lead into your first part of your question, which I do think the operating margin for the company in Q2 will be somewhere around 15%, maybe a little bit higher than 15%.
In the back half it'll be somewhere between 14 and 14, 5%.
Depending on how where the demand goes in and our success in really offsetting that headwind along the lines I described.
So for the full year, our operating margin rate will be up modestly year over year. When you look at the big drivers of that clearly a large part of that is in our tools business, because that's where a large part of the commodity headwind is focused at this stage and so for the second quarter tools should be around 19%, maybe a little bit better 19% down 19.
And then in the back half it will be around 17% to 17, 5% margins and so we look at that and we say that's just slightly below our 2018% to 20% range that we laid out there and we just want to remind everybody that range wasn't necessarily applicable for every single quarter. It was more about an annual.
Performance in our long term performance as well and so for the year, we would expect the tools operating margin rate to be.
Somewhere between 18, 5% to 19%.
And which would be a significant increase over last years margin rate of 18, 3%.
Thank you. Our next question comes from Tim <unk> with Baird. Your line is open.
Yeah, Hey, Hey, everybody next network could start for the year.
Thanks, Jim Thanks, Tim.
Mike My question really just on supply chain.
I guess, where are you seeing the most acute pressure on the supply side, maybe if you could just talk a little bit about some of.
The bigger actions that you're taking to just make sure you are at least keeping up with sell through demand.
Yes so.
The.
It's fairly straightforward in the sense that its batteries.
Semiconductors.
We don't have resin resin shortages per se so.
I know some manufacturers are facing resin shortage shortages, that's not our issue.
Batteries I think we are pretty much solved the problem that if the second half.
If the second half growth accelerates beyond the guidance.
First of all.
Good at the guidance level, and we're only talking about wood upside ever be constrained.
<unk> no issue.
I made a trip to Asia.
Specifically to free up battery capacity for the second half.
And we were successful in that regard so.
Batteries are no issue and it just comes down to semiconductors, and how many hundreds of millions of dollars of more upside versus what's in the guidance as it relates to revenue.
Can we achieve before we start running into shortages and we're working on that issue as well and we think we have some ability to make headway on that.
In that regard as well.
Thank you. Our next question comes from Rob Wertheimer with Melius Research Your line is open.
Hey, good morning, everybody.
No longer work with execution.
Tomorrow.
I wanted to shift from a cost sides of the revenue side and you touched on some of the share gains that you've seen including the online channel, where I guess that kind of accelerates.
Penetration of new markets, and I wonder whatever additional color youre willing to give on that on whether the percent.
Globally online is it continuing to shift and maybe just for those of US who don't know the markets as well when you gained share in E M or even in Europe are you are you winning against other global players that maybe a year or two or three behind you or are you maybe more winning against smaller players who might have a hard time really ever catching up I'll stop.
Yeah, I think our.
E Commerce strategy was born about 10 years ago or so.
No.
When we did the black <unk> Decker merger with Stanley and.
At that time E Commerce was.
Zero.
Close to zero just a smidge.
And year after year after year, we worked hard developing that channel.
After the acquisition or the merger and last year, we were up almost $1 $8 billion of.
Revenue and not only did we do it with.
The major e-commerce player in the United States, but we did it.
Systematically around the globe and so.
Pretty much everywhere you look we have.
Deep relationships with the big B to B to C players.
And.
A flourishing business in that channel.
Channel shift that occurred.
Last year.
Percentage of revenue went from 12% to 18% and tools.
<unk> was truly remarkable and now you know wood.
Almost two weeks.
e-commerce growth in the first quarter.
That $1 7 billion plus business has incredibly strong prospects globally for this year and instead of resting on our laurels and just enjoying that advantage because we share about a three to one relative market share advantage in in that channel globally.
Instead of resting on laurels, we have taken a really significant.
Investments in in this.
Channel.
Beginning in the fourth quarter third and third and fourth quarter of last year, and then accelerating into 2021 two to the extent that.
We now have them.
Big teams of people working on on this project.
B to B to C around the globe as well as we are starting to go in markets, where we are under indexed.
So take for example, China.
India.
And Germany.
And we are investing in D C capability and we'll be doing a lot in that regard.
Because those channels are so.
Difficult to penetrate given the existing share positions of the.
Players that are out there today, so I would say that the share gains.
Are coming from.
The major power tools players in other tool and then maybe in handfuls, it's more of the minor.
More local players.
And I think that's going to continue we will see.
We will see how the e-commerce investments grow in the industry over time, and I would expect them to but right now we have a big first mover advantage and we are pressing the accelerator to the floor to make sure that we sustain that advantage for as long as possible.
Thank you. Our next question comes from markets Mittermeier with UBS. Your line is open.
Yes, hi, good morning, everyone. Good morning, good morning actually.
Morning, Good morning, Hi, good actually ask a question on security.
Ashley on the comments on France up 17% Europe up 4% in depth data driven product solutions business, what exactly you Scott.
In.
Is that a near term kind of COVID-19 beneficiary that you see or is that something that could really make a dent in overall security segment growth here going forward. Thank you.
Sure Marc is yes, we.
Actually holding up France, as an example, and that's why I use that in <unk>.
My comments is really what the business could be because they've taken.
The SaaS solutions.
Which really drive a lot of value with the customers with so it is taking data from video analytics.
And doing analysis, and really helping our customers run their business more efficiently and effectively.
And so they are ahead of the rest of the business and the geographies of electronic security and they've been aggressively rolling this out and they've they've used the pandemic as an opportunity to work with our customers to help them with the areas that I described to ensure they achieve higher levels of productivity.
Make better business decisions around in the case of if it's a retail operation where their products are located in a store.
When they do.
Discounting in revenue and sales opportunities et cetera. So this is a great pilot example of what the business can achieve and then the North American business in the Nordics business in particular is gaining some traction in this space as well there are probably three or four quarters behind where Frances.
We really see this as an exciting opportunity to continue to transform the business and a great pilot is an example of what can be done.
Thank you. Our next question comes from Nicole <unk> with Deutsche Bank. Your line is open.
Yeah. Thanks, good morning, guys.
Good morning.
Brian discussion.
Discussion.
Should we think about the carryover impact at this point to 2022, both with respect to input.
You guys plan to put into place put into place to offset a third tier.
Perfect Nicole so as we highlighted earlier.
The 21 number.
Yeah, I'd say this.
Equivalent, maybe a $150 million to $200 million of potential.
Potential pressure in 'twenty, two and here there is a bit of a toss.
Topic out there of <unk>.
Is this inflation going to continue because there has been some supply disruptions, but right now we're going with the mindset that it will and accordingly, that's why we're working on the pricing actions to get the benefit you'll see this year, but you know next year, you'll actually have a potential scenario, where you actually have more benefits than we have headwinds.
Thank you. Our next question comes from Michael Rehaut with Jpmorgan. Your line is open.
Hi, This is a lot hillman on for Mike Congrats on the results and thanks for taking my question.
Can you talk about your sense for your Pos in tools <unk> storage relative to the underlying market and whether that delta is widening so in other words, how much of the strong Pos could be related to your gaining share versus an underlying continuing strong market.
Yes.
POS continues to be very robust and it's in those numbers that we provided back in January in that range in the.
The trends continue and so we.
We believe that we're gaining very significant share, but there also was a pretty strong market demand as well thats occurring right now and so it's difficult to gauge exactly at this stage in this short window, how much is share gain versus market growth, but I think it's more slanted towards share gain than it is market growth at this stage.
And and so I think that's the right way to think about it the proof will be in the putting out two or three quarters from now when we're able to look at.
What the actual GDP performance was and what the performance was for certain trends in the tool industry, but I believe that if you look at these.
Right now probably at least half of it is related to share gains if not more.
Thank you. Our next question comes from Ross Gilardi with Bank of America. Your line is open.
Hey, good morning, Thanks for squeezing me in sure sure.
Yes, I just wanted to ask you about the second half outlook for tools <unk> storage you took it up but it's still down.
And just really do you feel like you've got to have an inevitable contraction at some point in the next 12 to 18 months, just because the comps because the.
The market's running so hot that it's really more of a timing issue or could we just be in the beginning of a multi year.
Sustained expansion and then just the second part to that did you push the four to five week restock into the second half and essentially leave the minus 7% to 12% underlying.
Underlying for the back half unchanged I wasn't sure if I was interpreting your formal remarks properly.
Yes, I will.
And then second part of the question. We we did that we just we put the benefit of the inventory restock in the back half of the year, but we did not change the underlying demand assumption from January so thats. The thats really the opportunity as we progress through the next 90 days and we provide an update to all of you in July where are where are we at that.
Stage and I think that's the big opportunity in front of us, which leads a little bit into the first part of your question.
I personally ask Jim.
Jim to comment on this as well because I know he is a strong point of view as well I really think this is a robust market, we're going to see for a while.
And I think when you look at all the different dynamics that are happening in various geographies and the recovery coming out of the pandemic people are still going to have a very intense focus on their homes because.
Many of US will continue to work in a hybrid environment, even when we get back to an office on a on a part time basis. So you wanted to have an environment at home that really is.
Sufficient to meet the needs of both work and personal.
Habits and behaviors and then you have things like infrastructure, which are just massive bills that across the globe. I mean, we tend to talk about the U S is an area, where there could be a potential large infrastructure investment, but theres a lot of other major countries really thinking about doing the same thing over the next 12 to 24 months. So you can see.
Significant influx into the economy.
From that as well both in the U S and globally. So.
Just sit here and wonder is there really a dip coming in the next six to 12 months and the more I think about it the more I feel like that we're going to continue to see strong demand and growth continue obviously I don't think we're going to grow 40%, 50% every quarter for the next three years.
I do think there's a path for growth for the next two to three years, Jim I think you covered it very well done.
Only thing I would say.
I think we're going to be able to solidify the base and then get back to a more normal kind of <unk>.
5% to 10% kind of growth.
Environment after that that's my best guess right now just based on everything I know about the secular trends in particular.
You think of what.
All the different things when we mentioned a number of them.
But the resurgence of DIY.
There's a whole generation of people now that have.
Become familiar with DIY, we have a whole generation of people that are using the law black <unk> Decker.
And the other craftsman other tools.
That will continue to add to their collections we have the.
Reconnection with home and garden that Don referenced.
Outdoor seems to be the electrification seems to be taken off in a big way and of course, we will enjoy.
Electrifying the small gas engine market when we do the MTGE acquisition.
Which is in our planning assumptions for.
The second half of this year.
In terms of executing the option and we don't know when that will close in wood and that closes not necessarily in our guidance and then theres. The urban Exodus you know there's a big article in the Wall Street Journal front page today about that.
So this whole notion of.
Gradual exodus from.
Urban centers into suburban and rural areas.
A tremendous amount of home improvement and home sales that go on as a result of that and that is a generational thing as well.
And on and on and on so.
I just believe the base is preserved.
I think our forecast for the second half is on the conservative side.
And in all likelihood we will see that base preserved in the second half of my my view.
But we have some of the other uncertainties out there relative to inflation and other things that I think we took a very prudent approach to our guidance, we had a great increase.
And just the share gain in general with the company and our E Commerce.
Our e-commerce share, which is definitely an ongoing and.
An ongoing phenomenon so on.
Balanced I think anybody that's looking for a big contraction.
In.
2022 was probably going to Miss the boat.
C.
Thank you I would now like to turn the call back over to Dennis Lange for any closing remarks.
Janet 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 there if any further questions. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Robert.
Jim.
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John.
Yes.
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Thanks.
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Yeah.