Q2 2022 Stanley Black & Decker Inc Earnings Call
Okay.
Yeah.
Welcome to the second quarter 2022 Stanley.
<unk>, Inc. Earnings Conference call. My name is Shannon and I'll be your operator for today's call. At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session. Please note that this conference is being recorded.
I will 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's 2022 second quarter webcast on webcast. In addition to myself as Don Allen, President and CEO and carbon wall Berger, Vice President and interim CFO , our earnings release, which was issued earlier this morning, and a supplemental presentation, which we will refer to.
Are available on the IR section of our website.
A replay of this morning's webcast will also be available beginning at 11 a M. Today.
This morning, Dan and Corbin, We will review, our 2022 second quarter results and various other matters followed by a Q&A session.
Consistent with prior calls we will 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 they involve risk and uncertainty. It's therefore possible that actual results may materially differ from any forward looking.
Statements that we may make today, we direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent 34 Act filings I will now turn the call over to our President and CEO Don Allen.
Thank you Dennis and good morning, everyone. As you saw from this morning's results, we continue to navigate a dynamic macro environment.
Inflation rising interest rates and now late in the quarter. We started to see these factors impact retail customer demand across our global tools and outdoor markets.
The significantly slower demand trends in June combined with a very late start to the outdoor season due to weather resulted in significant volume pressure versus expectations.
And revenue plan is well below our plans.
In response to the sudden shift in demand we have taken immediate corrective cost actions, which are already in progress.
We are now expecting demand to normalize closer to 2019 levels for the remainder of 2022.
The organization is focused on taking the necessary steps to reduce inventory generate cash flow and resize, our cost base through corporate simplification organizational optimization and supply chain transformation.
We will provide more detail on these areas later in our presentation, but we expect these initiatives can deliver pretax savings of $1 billion.
As well as a significant reduction in inventory beginning in the second half of 2022.
Through the end of 2023.
Over the last nine months, we've executed a number of acquisitions and divestitures that have successfully focused our company around our market, leading tools and outdoor businesses as.
As well as our strongly positioned industrial products business.
As you saw last week, our security and access technology transactions successfully closed and.
And we are using the $3 5 billion and cash growth.
Gross cash proceeds net of tax to fund the $2 $3 billion share repurchase from earlier this year as well as to strengthen the balance sheet and reduce debt levels in the third quarter.
We also expect our oil and gas divestiture to close within the third quarter. These.
These transactions enable us to intensify our focus on operational efficiency within our remaining now simplified business portfolio.
I also must continue to advance our strong innovation agenda pursue a faster path of electrification and outdoor in engineered fastening.
While we drive further global market penetration along the way.
We are redirecting resources within our tools and outdoor businesses to ensure we are extremely well positioned for strong long term growth profitability expansion consistent annual cash flow and improve shareholder returns.
Incorporating the changes from this new demand environment as well as factoring in the impact of our cost reduction plan caused us to revise our 2022 adjusted diluted EPS range down to $5 up to $6 and to update our free cash flow estimate to be one to $1 5 billion in the second.
Half of 'twenty two.
This free cash flow range excludes the tax payments associated with our security divestitures.
To summarize our second quarter revenues were $4 4 billion up 16% driven by our outdoor equipment acquisition organic revenue was down 6%, which was impacted by slower tools and outdoor demand trends across many of our global.
That's due to poor weather start to the outdoor season and reduced consumer spending.
Price realization contributed 7%, which accelerated sequentially from the first quarter.
Our total company operating margin was nine 2%.
Benefiting from the contribution of our pricing actions, but it was down versus prior year due to lower volume cost inflation and supply chain logistic cost increases. This resulted in second quarter adjusted EPS of $1 77.
More from carbon on Q2, 2022 guidance a bit later.
As I previously mentioned, we saw a swift deterioration in consumer tools and outdoor demand.
This was in contrast to professional tool demand and the professional outdoor independent channel, which remains healthy and continue to be active opportunities.
During this timeframe the consumer face price increases across many categories, including essentials like food and energy.
Consequently, our consumer categories have started to become impact that.
We have seen this phenomenon across many of our global markets, a central banks tightened the money supply to control high inflation.
The chart on the left illustrates our tools U S. Pos trends against a 2019 base.
Late in the quarter it became clear that the point of sale trends, we're settling into a much lower growth position.
And with information we have now we believe it's prudent to build this into our plan for the back half.
Price and a strong professional market delivered total dollar growth. After 2019 baseline however volumes turned negative versus 2019 in the later part of the quarter or specifically in the month of June .
We have analyzed the trends in the pricing in the market and do not see retail price gaps versus competition.
This coupled with our information at the category and retailer level leads us to conclude that our markets are softening.
Outdoor power equipment also experienced slowing demand during the month of June customer inventory levels are elevated largely driven by a very slow start to the season due to poor weather.
Which clearly is impacting replenishment demand across the retail outdoor power equipment industry.
Poor consumer outdoor season is a well known fact and the industry. Initially due to poor weather start and then declining consumer spending due to inflationary pressures previously discussed.
However, there are a couple of significant positive factors to consider in this difficult demand environment.
One we will be past the constraints on semiconductor supply in the third quarter and other inputs have greatly improved as well. Therefore, we are expecting better fill rates in the back half to capitalize on the continued strength, we're seeing for professional end user driven demand and tools and outdoor.
And to the tools inventories at many of our major customers in North America are below 2019 levels.
Which should limit our destocking risk.
To customers and certain other geographies such as Europe .
And as well as the U S outdoor retail category I mentioned.
Across our industrial businesses backlogs remained strong and demand for aerospace fasteners is steadily climbing.
As the recovery in narrow body production has begun.
The auto recovery continues to be choppy, but we do see some improvement and continue to outperform light vehicle production levels.
Demand of electric vehicles remains well above supply.
And Oems continued to pursue strategic long term transformation to EV centric portfolios.
In summary, we see a demand environment that is modestly higher than 2019 levels and therefore, we are implementing an aggressive cost and inventory response to this new environment.
While also pivoting the company to a new strategy for long term success.
We continue to have conviction in the long term outlook of the markets, we serve around construction repair and remodel outdoor and across the industrial sector.
With the housing inventory at historical lows and relative strength in the industrial markets. We serve our businesses are squarely positioned to satisfy our customer demands as we navigate the current environment.
The portfolio transformation that we've orchestrated over the past nine years is coming to conclusion.
And we are setting up our core businesses to emerge even stronger on the other side of demand disruption.
As we look ahead Stanley Black <unk> Decker is important point of inflection in our vision and strategy.
We must ensure our customers and end users and their needs are where our energy and resources are fully focus our.
Our plan is to rapidly optimize our organizational structure to support our simplified company.
We will take the complexity out of our businesses.
And the decision making processes.
And then we will invest to accelerate growth to enable us to grow organically two to three times the market.
The operating environment clearly has dramatically changed in the last month.
Especially as.
As we've really evolved into the last stages of the quarter or June .
Accepting my current role of the leadership team and I are accelerated intensified the organization and operational streamlining efforts.
We are rallying the teams are out a more focused portfolio and providing the businesses with the resources closer to the point of impact.
Our tools outdoor industrial businesses are high quality assets today, and we have the opportunity to improve them further through faster organic growth and significant operational enhancements to improve our margins.
As we think about our leading franchises the key areas of focus will be innovation electrification market leadership and supply chain transformation.
<unk> always keeping the customer and end user needs in our sites.
First we are re imagining tools and outdoor innovation to create shorter innovation cycles and new technologies. So we can provide differentiated competitive offerings would speed to market.
This includes introducing a high quality of new margin accretive core innovations to the portfolio and.
In addition to more big swing innovations that carry the same disruptive power of our successful franchise extension such as flexible atomic extreme and power stack.
Secondly, we are taking meaningful action to deliver innovation and electrification with.
With power tools, and outdoor power equipment as well as capitalizing on our partnerships with auto Oems to leverage our highly engineered auto fastening solutions the electric vehicle market rapidly expands.
These are big opportunities for growth and margin expansion across the portfolio.
We are accelerating our efforts in these areas as these trends are moving quickly and we must maintain our market leadership position during this technology shift.
Next we will step up our commercial support bringing more digital tools to our commercial model and increasing sales leadership to directly engage with our customers and end users. These resources drive share gain and key information from our end users related to our products.
And potential new innovations. In addition, we will enhance our efforts in digital marketing around new innovation launches promotions and other key end user interactions.
Finally to enable this growth we need to accelerate our supply chain transformation.
One of many lessons from the pandemic is that complex and long supply chains are prone to disruption and in our specific case are not match well with the short cycle nature of our businesses.
So you have a choice maintained very high levels of inventory due to the long supply chain or heavier supply chain closer to your customers elevate your agility and resiliency to better serve those customers.
We believe being closer to the customer is the right answer.
Organizationally, we are working to ensure.
That I have the right people in the right roles to execute this vision.
We haven't accomplished leadership team supported by a diverse extremely capable organization, which is comprised of Stanley Black <unk> Decker veterans and supplemented by new talent with fresh perspectives and industry expertise.
We continue to bring in new members of our leadership team to partner with our existing seasoned leaders.
A few examples of this are Robert RAF and John Wyatt are leading our tool and outdoor businesses.
Tabor.
Alright, Tamar, who joined us at our Chief supply chain Officer in January I am excited to see Robert rejoined the tools business.
The team with fresh energy and insight. He is a veteran tool executive who also led our security business transformation.
He knows the business the team and our customers.
And we'll bring that perspective as he gets the tool organization focused on our shared vision.
Tamar brings nearly 30 years of experience, leading global transformation expansions and post acquisition integrations of supply chain from multibillion dollar consumer goods organizations. He is ideally suited to lead the transformation of our supply chain.
All of these growth and supply chain investments are necessary to support higher growth and share gains with our target objective being two to three times the market growth.
Now, let's get tactical.
Let me describe our global cost reduction program.
Which has the savings potential of $150 million to $200 million in 2022 growing to $1 billion by the end of next year and totaling $2 billion within three years.
These actions are necessary as we successfully navigate the current market environment.
But importantly, when the time is right we will give us the ability to further accelerate investment in the commercial programs I just outlined.
Over the past two months, we have applied rigorous prioritization to eliminate and reduce overlapping capabilities and functions.
As a more straightforward company, we don't need the same structure that was set up for a diversified industrial model. The corporate simplification is nearing completion and it will generate $200 million of annualized savings.
The resizing effort allows us to ensure our resources serve our core businesses and are closer to the point of impact with the customer and in our supply chain.
As a result of these initiatives, we expect the 2023 corporate spending level will be below the 2019 spend.
To help us navigate today's economic cross currents and the spirit of simplification, we're also attacking indirect spend.
We are prioritizing across all categories and cost centers to requalify, what we will continue in the near term.
We expect this exercise to generate an additional $200 million of annualized savings.
Next we have an opportunity to improve the speed and agility of our operating and decision making processes.
We are doing this by reducing the complexity of how we are operating as an organization.
Including evaluating the number of layers in our structure from the C suite to the point of impact.
To put this in perspective.
We believe we can move from our current organizational structure, which has 12 layers down closer to 7% to eight layers.
I believe that we function much better as a company when our leaders can come together quickly for prioritization and decision, making and results.
And it resulted in us moving forward in a more agile manner.
Additionally, as we have gone deeper into our outdoor integration, we see opportunities for savings, where there are synergies with our tools business.
We're implementing the spans and layers and cost synergy exercises during Q3.
And expect this effort to deliver an additional $100 million.
In annual savings.
Lastly, we are accelerating our supply chain transformation.
We believe there is approximately $1 5 billion of P&L efficiencies that can be gained by this acceleration over the next three years with $500 million by the end of 2023.
I will go into more detail on this value stream and Justin just a moment.
So to summarize we believe this program can deliver cost savings of $150 million to $200 million in 2022 $1 billion by the end of 2023 and $2 billion within three years.
I will now dive a little bit deeper into the supply chain transformation, which is the largest driver of this global cost plan, particularly in the medium term.
As mentioned, we are embarking on a three year journey that will completely reshape our supply chain.
We'll be focused on accelerating our make where we sell strategy to be closer to our customers and more responsive to demand are.
Our supply chain needs to be agile and adaptive with new product innovation and therefore, as we ramp up our investments in innovation and expand the quantity of our new products, we bring to market annually. We also need a supply chain that significantly reduces.
Innovation cycle time to launch new products much faster than today.
This transformation is a key pillar of our strategy and a catalyst for returning our gross margins to 30, 35% plus level.
Our success with this transformation will build a more sustainable agile and efficient supply chain that is resilient in an ever changing and dynamic operating environment and further enable our advanced manufacturing technologies.
We will be focused around four value streams first product platforming platforming shifts our optimization focus from cost to supply by leveraging product families designed around common building blocks.
This shift enables us to standardize our components to platform solutions that create economies of scale with our key suppliers, which ultimately reduces the complexity in our product design and supply base.
It also reduces time to market on innovation by leveraging common design.
We also believe we can reduce the number of skus in our system by 40% plus.
These programs collectively can deliver cost savings of approximately $300 million.
The next significant opportunity this strategic sourcing, which has a savings potential of $500 million.
As we look to set up our supply base through our make where we sell strategy, we have an opportunity to deepen our relationships with suppliers and help them optimize supply and efficiency.
In addition, we have significant opportunities to leverage contract manufacturing and in parts of our supply chain that can improve cost and speed to market.
Finally, our simplification efforts within our first value stream product platforming also carries benefits here as we have less unique parts in sourcing complexity, which results in higher scale purchases.
Our current supply chain as a result of organic growth and additions through acquisitions and while it has been optimized over the years there is significant opportunity to reduce complexity eliminate logistical inefficiencies increased.
Increased scale for our manufacturing and serve our customers better.
Currently we have approximately 120 manufacturing facilities in our network.
As we think about our supply chain of the future we will.
Want to be closer to our customer and we want to do it at a lower cost.
This means we need to simplify and consolidate our regional footprints around high performing industry Coronado technology enabled sites.
Our target is to reduce our operating footprint by at least 30% and.
And optimize our distribution network, which can generate approximately $300 million in savings.
Lastly, we see an opportunity to capture $400 million through operational excellence.
This is focused on driving incremental efficiencies across our facilities leveraging the SPD operating model, having the right levels of inventory and streamlining the spans and layers within our operations organization to align around our core businesses.
These value streams totaled approximately $1 5 billion.
Of our over three years.
With an opportunity for $500 million during the first 18 months of the program.
Clearly this represents a significant value creation opportunity. However, it also creates an opportunity to elevate the focus on our customers and end user needs.
Carbon will now take you through more detailed commentary on our second quarter results as well as what we believe this near term demand environment means for the remainder of the year Corvus.
Thank you Don and good morning, everyone. Let me walk through the details of our second quarter business results.
Beginning with tools and outdoor revenue grew 17% as the MTV and <unk> acquisitions contributed $900 million of revenue and price realization contributed 7% accelerating approximately one five points sequentially as a result of our third round of global price increases implemented in May.
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These factors were partially offset by a 16% decline in volume and a negative 2% impact from currency, which both softened as we move through the quarter as interest rates increased and inflation and non discretionary categories like gas and fuel hit consumers' wallets.
As a result U S retail point of sale demand soften during May and June that said, our professional customer channels and products remains solid and outperformed our consumer oriented offerings.
On an organic basis regional performances were flat in the emerging markets down 10% in Europe and down 11% in North America.
Operating margin for the segment was 10, 8% excluding acquisitions margin was a point better at 11, 8%. However, still below the 19, 9% level from the same period last year as the benefit from our price actions was more than offset by inflation higher supply chain costs and lower.
<unk>.
Our cross channel sales were down versus 2021 levels. However against a pre pandemic 2019 baseline retail was up mid single digits and commercial and industrial was up low double digits.
Turning to the tools and outdoor SP use power tools and hand tools declined organically by 6% and 8% respectively, driven by the softening of retail demand and against a very strong period in the prior year.
Operationally the teams have been successful in alleviating our semi conductor supply constraints and are beginning to see semi conductor driven fill rate improvements for the previously constrained products.
Fill rates are on a path to return to targeted levels in the third quarter.
As we look forward our investments in innovation electrification and commercial resources will support the launch of new product introductions expected in the back half and into 2023.
We're launching we're launching a series of new to Walt Cordless solutions, continuing to electrify the professional job site as.
As we convert current product categories still largely still relying largely unquoted and gas powered products to next generation battery powered tools. We will also pay or these new products with the dewalt power stack, our industry, leading battery technology that launched only seven months ago.
Coming later this year is the world's first innovation, the new dual wall impact connect which consists of new accessories that attached to and impact driver and will allow end users to effortlessly cut copper in PVC pipe up to four times faster than standard hand tools.
We will also launch new category solutions for the trade users with our Craftsman and Stanley brands, expanding these 20 volt systems to more than 100 products by early 2023.
As we have throughout our history, we remain committed to serving the ongoing performance needs of the most demanding pro and trade users of the Dewalt Stanley and Craftsman solutions.
The outdoor business declined 8% on a pro forma organic basis. This decline was driven by a very slow start to the season due to poor weather as well as softening consumer demand similar to many other discretionary retail categories.
Due to the softer demand our retailers are working down inventory and have eased replenishment at this point.
Despite this season being slower than 2021 pro forma sales are still favorable as compared to 2019 levels, primarily driven by the secular gains we have experienced from electrification, which remains our focus going forward.
The outdoor team continues to advance our platform integration efforts and we are excited about the innovation growth and synergy opportunities ahead stay.
Stay tuned for the exciting launch of our hosted new outdoor offerings, including innovations in handheld walk behind and ride on equipment for the 2023 season.
Now shifting to industrial segment revenue increased 8% versus last year as eight points of price realization coupled with four points of volume were partially offset by about a four point negative impact from currency.
Operating margin was nine 3%, which compares to 10, 5% in the second quarter of last year.
As the benefit of price realization was more than offset by commodity inflation.
Looking within this segment engineered fastening organic revenues were up 7% as 7% General industrial fastener growth was accompanied by 4% growth in the auto fastener business, along with an acceleration for aerospace fasteners, which was up 36%.
The auto fastener business continues to successfully operate in a dynamic environment and outpaced light vehicle production by five points.
Our industrial fastener business has a healthy backlog, which is up 18% versus last year.
Aerospace fasteners to delivered its fourth consecutive quarter of sequential revenue improvement. This business is focused on capturing the recovery in OEM production, which is underway.
Infrastructure organic revenues were up 26%.
Driven by 17% growth in attachment tools.
Infrastructure backlog remains strong up 44% versus last year and the team continues to partner with suppliers to successfully fill booked orders.
Moving onto our aggressive plan to reduce inventory to generate strong cash flow in the second half.
Our second quarter, ending inventory balance was $6 $6 billion.
Up approximately $400 million versus the first quarter and up versus historical levels of stock.
The main factors contributing to the increase versus prior years, where an elevated level of in process inventory as a result of the congested global supply chain along with higher inflation.
<unk> finished goods above current demand requirements and approximately $1 billion of additional inventory from the outdoor acquisitions.
We are implementing actions to significantly reduce working capital by 1% to one $5 billion in the second half of 2022, primarily from inventory reductions.
There are five parallel work streams already underway to enact a sequential inventory decline with a sense of urgency.
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Production curtailments to slow finished goods manufacturing have already started.
Second commercial teams are working on expediting sell through of on hand finished goods.
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Stock levels are being reviewed and optimized.
Fourth goods and transit are being actively addressed as we work to reduce lead times and slow production and lastly levels of raw material and with our being evaluated to meet current production requirements.
This inventory reduction plan has P&L cost implications for the next few quarters, but it is necessary to realign our inventory to the current demand environment and meet our cash generation requirements, let's.
Let's transition to the next slide where I'll speak further about gross margin.
Total company adjusted gross margin for the second quarter was approximately 28% down two points from the prior two quarters and against the 36% we had in the prior year the.
The confluence of the elongated supply chain inflation and easing consumer demand impacted gross margins, partially offset by the implementation of price increases.
Over the last 12 months, we've been responding to inflation with multiple rounds of price increases, which is reflected in our price performance over the last few quarters.
At this stage, given the slowing demand environment and moderating spot commodity rates, we're targeting surgical opportunities for price as opposed to additional broad based global price increases.
The cumulative impact of rising inflation and global supply chain costs and inefficiencies are now capitalized in inventory.
While we believe we can optimize moving forward. These capitalized costs will be with us until our inventory returns to normalized levels.
In addition, there will be costs associated with plants running at curtailed levels, while we destock.
We expect the cost dynamic of this inventory normalization process to take three to four quarters with gross margins sequentially, improving as we move into and through the first half of 2023.
These are short term, but necessary impacts as we prioritize cash flow in this environment.
To quantify this opportunity, we see 300 basis points of improvement potential once the destocking is complete.
We're clearly not satisfied with 30% gross margins and have begun implementing the following actions to accelerate the pace and increase the magnitude of this improvement first.
We're immediately attacking the fixed and semi fixed cost across our manufacturing base, capturing the quick wins from the first phase of our supply chain transformation.
Second <unk>.
Spot commodity prices have moderated from the peak levels in April while this will take until 2023 to work its way into the P&L. We plan to aggressively go after savings to capture this opportunity.
In total these.
These two actions can accelerate the pace of margin improvement and enable us to achieve low thirties gross margins in the back half of next year.
Our three year target is to get our gross margins back to 35% plus and the $1 5 billion supply chain transformation that Don discussed is how we do it.
So to summarize prior.
Prioritizing cash generation is the right decision for the company by Curtailing, our production plans and lowering our inventories to set ourselves up for a stronger 2023 and beyond.
Now let me pull all this together into what it means for 2022 guidance.
We're expecting total revenue growth to be in the low double digits, we're updating our adjusted earnings per share to a range of $5 to $6.
On a GAAP basis, we expect the earnings per share range to be 80.
To $2 <unk> inclusive of onetime charges related to restructuring expenses, a voluntary retirement program the.
The Russian business closure and integration related costs.
The current estimate for pre tax charges in 2022 is approximately $760 to $810 million.
The change in pre tax charges from April guidance, primarily relate to a roughly $170 million noncash asset impairment charge related to the oil and gas divestiture and an estimate of $150 million to $200 million and restructuring to support our cost reduction plans.
On the right side of this slide we've outlined the components of our adjusted EPS assumptions versus our prior estimate.
The slowing consumer demand and tools and outdoor along with moderated price expectations contributes to lower revenues and reduces EPS by $4 25.
Currency translation below the line items in second quarter performance impact EPS by another 55.
We explained that we expect the plant production curtailments to range to range from 50 to 70, a reduction as we minimize fixed and semi fixed costs. During this period, but do not completely avoid them.
Then the 2022 benefit from the cost savings initiatives that we previously described.
<unk> adds 80 to $1.
I want to spend a moment to recap the drivers of our cost savings plan simple.
Simplifying the corporate structure.
Reducing indirect spend optimizing organizational spans and layers and streamlining the operational footprint are expected to total $100 million to $200 million in savings over the remainder of 2022 with cumulative savings of $1 billion by the end of 2023.
We've also disclosed other below the line planning items for modeling purposes on this slide.
Turning to the segments tools and outdoor organic revenue is expected to decline mid to high single digits with margins down on a year over year basis pricing is expected to contribute high single digit growth for the back half and full year.
We believe there is a meaningful midterm opportunity to improve margins within the outdoor acquisitions over the coming years and this continues to be a significant priority for us.
We expect high single digit margins this year and we see the potential for low double digit margins over the coming years.
We're targeting the industrial segment to achieve high single digit to low double digit organic growth driven by innovation pricing and cyclical recoveries across much of the portfolio.
The industrial margin rate is expected to be pressured year over year, largely due to inflation and mix.
We're closely following the recoveries in auto and aerospace and still believe there to be a solid growth outlook in those markets.
Shifting more specifically to the third quarter, we expect adjusted EPS will approximate 13% of the full year.
This is comprised of relatively flat sequential tool sales, a slight sequential improvement for industrial and a seasonally lighter outdoor quarter as compared to the first half of the year.
Now turning to cash flow.
First half free cash flow, excluding the tax payments from the security sale is expected to approximate $1 1 billion to $1 5 billion supported.
Supported by our inventory and cost optimization actions the.
The divestiture related tax payment is expected to approximate $500 million to $600 million.
And therefore total free cash flow is expected to be $400 million to $1 billion in the second half.
Stanley Black <unk> Decker remains focused on disciplined capital allocation and our current priority for excess capital deployment will be debt repayment to support our strong investment grade credit ratings and our commitment to the continued return of value to our shareholders as reflected by the recently announced 55th consecutive.
<unk> annual dividend increase.
After we strengthened the balance sheet and the macro improves our plans for excess capital is to prioritize our share repurchase program.
And I'm sure. Many of you were thinking about what the normalized earnings power is for the company.
It will take until the first half of next year to work through our inventory Destocking plans and fully implement and realize the benefits from our cost reduction actions.
We believe the initiatives we've outlined today are sufficient to return to our 2019 earnings power on an annualized basis. Once we hit the second half of next year.
Does not assume any improvements to revenue.
Here's how you get there.
We believe Destocking is a three to four quarter process that will improve our gross margins by approximately three points as we move into and through the front half of next year.
And then.
The annualized benefit of our prioritization complexity reduction efforts and impacts from our indirect spend reductions are worth approximately $500 million by the end of 2023.
Finally.
The supply chain transformation can add another two to three points to gross margins as those savings are realized.
These are all items within our control and if we were to achieve them at a faster pace or realize improvements from revenue or input pricing, we will be prepared to accelerate investment in our core businesses as cap and capitalize on the growth.
Realized improvements from revenue or input pricing, we will be prepared to accelerate investment in our core businesses as capex and capitalize on the growth opportunities that Dan outlined.
With that I will now turn the call back over to Don to conclude with a summary of our prepared remarks Don.
Thank you Carmen.
No doubt we are operating in one of the most chunky carbon.
No doubt we are operating in one of the most challenging environments in recent history, which underscores the need to accelerate our strategic transformation that will carry the benefits of increasing agility and improving our responsiveness to customer demands.
Our portfolio transformation comes at an ideal time.
As it enables us to unlock significant value by rapidly pivoting the organizational structure and operating plan towards a more focused company centered around great franchises within our tools and outdoor and industrial businesses.
We have an aggressive cost program that we expect will yield $1 billion of savings by the end of next year.
And approaching a cumulative savings of $2 billion within three years.
This will allow us to accelerate investments in our core businesses as the demand environment clears.
As we look forward, we have a clear vision and we believe these actions will reshape our organization and elevate our focus on our customer and end user needs, enabling us to deliver strong shareholder value through long term growth and enhanced profitability.
With that we are now ready for Q&A Dennis Thanks, Tom Shannon, We can now open the call to Q&A. Please thank you.
Thank you to ask a question you will need to press star one on your telephone we ask that you. Please limit yourself to one question. Please standby, while we compile the Q&A roster.
Our first question comes from Jeff Sprague with vertical research partners. Your line is now open.
Thank you good morning.
I guess.
My one question would be picking up where kind of corbin close that.
Kind of earnings power question over time.
I just wanted to clarify.
Really how youre defining earnings power relative to 2019, obviously, we've got outdoor and security we've got a different share base.
Are you suggesting that.
Earnings power as shown by Etfs or some other metric is in line with 2019.
So maybe just give us a little more color on that and how you see that trajectory would play out through the quarters of 2023.
Yes, I'll start.
And then pass it over to Kroger and with a little more detail but.
Obviously, we've.
We've utilized 2019 as a base to compare things too because it was pre pandemic and so before all the.
Unusual activities of 2020 one.
Of a recession in early 'twenty, and then boom for three or four quarters and now things are starting to shift with.
Potentially a significant recession on the horizon.
We believe that we are kind of normalizing back to 2019 levels as a result of what we're seeing right now the earnings are not at that point, yet as you can see from the back half guidance, we're providing but if you start to think through the cost actions. We're taking some of the temporary pressure that we're going to experience.
<unk> in the back half as carbon described around inventory liquidation you start to build a path that gets you closer and closer to what the 2019 EPS was.
Which was about <unk>.
$7 25, roughly.
Yes, very different comparable as far as outdoor versus security.
But it does give you a kind of a guideline of what we're thinking about internally for kind of our initial objectives of where we want to take earnings and then obviously with a $2 billion.
Plan over a three year period.
And if we have a stable environment from a revenue perspective over that three year period or a growth environment over that three year period, which I would expect would occur.
You can see a path where earnings really start to improve in a more dramatic ways, we get through 'twenty, three and then into 'twenty for the core of any more color or details on that.
The only thing I would add is if you think about the second half of 2022 and then you annualize that that gets you a little over $3 and then if you take the $1 billion of incremental cost in 2023 that gets you a little over $4 and so you get it's another way to get back to what we did in 2019 to three plus four.
Over $7 a share.
Thank you. Our next question comes from Tim <unk> with Baird. Your line is open.
Hey, guys good morning.
I'd say kind of it's kind of a two parter, but I guess.
What gives you the confidence that this is really I guess, a market phenomenon versus something that's more kind of specific in.
As Youre thinking about these cost reductions could you just talk through how you're kind of protecting brand in R&D investments just to make sure.
There is no long.
Long lasting impact on some of the brand values.
Thanks, Tim for the question.
<unk>.
When I think about what's happening right now I mean, there's a lot of.
Information that we have data we have around Pos.
That's impacting clearly our business and our products. We also have conversations with many of our customers that we serve.
Also I've seen.
Some recent earnings releases from other companies that are in spaces, where we are as well as.
We're close to that type of category in the building product space.
So I feel like when you when you triangulate all that information.
Definitively says there is a slowing demand environment happening.
That is occurring and so we also are looking at it we've looked at all of our pricing as I mentioned versus our competitors and our price points are.
Pretty much at par with all our competitive products and all of the major key categories. So we don't see any big gaps, where we have premiums that are significant versus our competition.
No. It does not based on all of that fact, it doesn't feel like there's anything unique that's happening related to Stanley Black <unk> Decker that it is truly more of a market.
Phenomena that that's <unk>.
Laying out which makes sense because a lot of the products that we're providing.
There is some discretion associated with those products in certain buying decisions versus some of the other building products that are necessary to build a home.
Whether thats lumber or whether Thats <unk>.
Installation.
Windows doors, there's still a fair amount of backlog that exists in the pro market.
And although we're starting to see signs that maybe that backlog is dwindling a little bit and the orders going in there are not as strong as they have been in the last year.
However, there is a fair amount of backlog to continue probably a strong pro performance for another six to nine months, but when you get to the discretionary decisions on tools and some of the other categories that I mentioned, you can start to see where we begin to become the tip of a spear of a downturn and that's really what I believe we are seeing right now.
On the cost side. Thank.
Thank you for asking that question.
We've been very thoughtful about how we're going to do this so of the $2 billion $1 5 billion will be very focused on supply chain transformation I went through all the details of that.
That's not touching brand thats not touching engineers touching sales organization. So that leaves you with the $500 million of SG&A $200 million of that is the corporate simplification.
We're really just taking out a lot of the complexity of our corporate organization. We're no longer a diversified industrial company. We are primarily a tools and outdoor company with an excellent industrial business alongside of it as well makes us a very simpler company then we can be more streamlined more efficient.
And effective.
And then we have a significant indirect spend component, which is not people related.
And then there is the what I would call the optimization of spans and layers, which is about $100 million.
And that is really looking at that structure of how our businesses are organized.
And how many layers do we need what's the span of control and really trying to optimize that and that that really for the most part will avoid.
The R&D organization, the sales organization or digital marketing organization and really be more focused on the leadership team and the management of the businesses and also simplifying the processes processes that they utilize.
To make decisions throughout the day and the week.
As they drive the business I feel pretty confident that we're very much focused on making sure we do not impact the organizations that you mentioned.
Thank you. Our next question comes from Nigel Coe with Wolfe Research. Your line is now open.
Okay.
Thanks, Good morning, everyone.
I think I'll go back to 'twenty three good morning.
Hopefully 'twenty three it seems like a long way away, but just going back to the comments you made about sort of.
Getting back to normalized earnings.
Kind of number.
You said six to $7 when you layer in.
The cost savings initiatives and things of that.
Number one is that is that the right way to read that.
And then just around that so the mathematics, so you've seen any benefit.
Benefit whatsoever from raw material deflation coming through obviously your kind of input cost you laid out in April .
All of those those levels back in April but is that part of your supply chain savings and I'm, assuming that the 23 buyback is off the table at this point.
That as well.
Yes, I would say that.
When we go through that.
Those questions are when you think why don't we start with the buyback.
We will get to the buyback as soon as we can but its carbon said, we are focused on inventory reduction getting our cash flow performance to higher levels.
Early significant performance in the back half of this year as we both described.
Another strong performance next year, it will be expected for cash flow and we'll be focused on that will also be focused on getting our debt levels down to where we want them to be where we've had them historically related to debt to EBITDA ratios.
When we feel like we're in good position to do that we will do the buyback that could be in 'twenty three or it could be a little bit later time will tell we'll see how things play out.
The.
Corporate maybe you can take the.
A question on the 6% to $7 23, and provide a little more granularity and clarification of that yeah, you bet Nigel.
The way that I was thinking about it was if you take the run rate for the second half of 2022.
Which is about $1 15 to annualize that that becomes about $3 on an annual basis of an EPS base and then if you add the $4, which is the $800 million of additional cost savings that we plan to get in 2023 Thats four so the three plus four get you to $7, which is close to what the 19 base.
It's just another way to think about two.
2019, being a baseline for earnings going forward.
Yes, so the other part of <unk> question was about commodity trends so.
Yes, we had a high in the March April timeframe.
We have seen commodities pullback significantly except for lithium lithium is still holding in pretty strong because theres still a high demand for batteries across many industries.
But a lot of those spot prices have dropped back to levels that are close to closer to where they were at the beginning of the year.
So we are aggressively pursuing that opportunity, it's unlikely to have an impact on 2022.
Just because of where we are with inventory.
At this stage in trying to really liquidate a large portion of our inventory but.
But as we go into 'twenty, three we have not factored that into our transformation savings. So that's an opportunity that we want to pursue it.
If these spot levels are maintained where they are that.
Clearly it could be a significant opportunity that would improve the performance that we're talking about that could potentially play out for 2023.
But as the year goes on and we get more progress in that area and we begin to see the impact of that.
The later stages of 'twenty two as we start to plan for 'twenty three will provide more color, but that is an opportunity that's out there that we will be pursuing.
It has really reached a level of significance from a spot rate differential versus where it was in April .
Thank you. Our next question comes from Michael Rehaut with Jpmorgan. Your line is now open.
Thanks.
Morning, and thanks for taking my question.
I guess I wanted to focus.
You had kind of alluded to.
Your competitive positioning earlier done.
I know you've put a lot of blood and analysis into into that.
As you look into the back half.
I think there was a part where you said you are still considering surgical price increases.
And I'm just kind of curious.
As you look at how the.
Retail sales.
Backdrop softening given the level of competition that's out there.
Whats the ability to hold on to price in the current environment.
And as you look into 'twenty three.
You had mentioned that a lot of the cost savings.
Not necessarily come at the expense.
The front forwarding.
The front facing part of the business.
But.
To the extent that we are in this.
Reverted or more normalized demand backdrop, which is much less than this past 18 months.
How do you need to perhaps.
More on the business and plow some of those cost savings.
Back into the company either through some targeted price.
Reductions or areas of investment in terms of marketing or R&D.
Yes, I think Michael.
Good question as you think about the dynamics, we're navigating here I guess I'll start with <unk>.
We've done three rounds of price I mentioned in my presentation that our price points are very consistent with our competitor price points and in virtually every category. So we feel like the current price environment.
<unk> is a level playing field from that perspective.
We did mentioned surgical price increases as an opportunity in the back half but.
That is very modest that's not a large number we're pursuing.
Carbon also mentioned, we're not doing around four price because of the dynamics. We just described around commodity prices and slowing demand that's playing out as well.
We also have to remember there was a big part of our front end inflationary period last year.
Where we didn't have price recovery for the first six to nine months in some cases of that cycle.
So as this is the tail of the cycle plays out where we start to experience deflation.
We tend to hold onto the price through the cycle.
As that tail plays out.
And then once we're starting to capture significant benefits in our P&L from commodity deflation.
We began to look at.
Where our margins where do weigh on our margins to go whereas the pricing versus the market do we need to make some surgical changes based on that.
And we have a very robust team and process that we've created over the last two years.
<unk> is 100% dedicated to this work in this type of analysis that allows us to be very fluid and agile.
But I always remind people of.
Theres a significant gap, we had at the beginning of the cycle, where we had very little recovery of inflation versus price and.
And at the tail there will be a period of time, where we have the benefit of higher prices as commodity inflation inflation is receding or we're having deflation in this particular case, that's the way it has historically paid out.
It's most likely the way this is going to play out that doesn't mean, there won't be occasional surgical promotional things that happen.
Versus those list prices to drive higher levels of volume or performance in certain categories.
Things will happen, but in a general playing field, that's likely how the price versus commodity deflation will play out over the next 12 to 18 months.
Thank you.
Our next question comes from Julian Mitchell with Barclays. Your line is now open.
Hi, good morning.
Thank you.
I just wanted to sort of circle back onto the margin outlook, just to try and understand what sort of operating margin trajectory.
Dialing in for the back half.
Any major ramp up in Q4 there.
So as we think about sort of early 'twenty, three which you've alluded to a few times do we expect that sort of similar margin rate first half of next year to the second half of this year.
Trying to get a bit more color.
Around that sort.
The confidence that once those savings.
Cost actions are realized you can really retain those in your margins and not have to pause for a moment.
Yes.
And then pass it over to carbon for a little more detail.
There is nothing unusual in the margins between the two quarters in the back half of this year.
So theres no dramatically low number in Q3 and dramatically high number in Q4.
Relatively consistent overall for the company.
Orben talked about what we expect to do with gross margins of the company as we go into next year and getting into the low <unk>.
With a roadmap for the longer term, a 35 plus percent.
We believe that's a model that works very effectively for this portfolio of businesses and products.
And it's something that.
If you look at history.
You have a history that would demonstrate that but really the model that I described when I lay.
<unk> out kind of the strategy of where we need to go and the focus on investing in innovation investing in commercial leadership investing in our supply chain et cetera, et cetera, all of those different areas.
Consistent investment model will allow for not only strong growth two to three times the market growth, but also allows for higher levels of profitability.
One of the benefits of having.
The pro market and the pro brand like the Walt in particular, but some of our other niche brands, such as <unk> com and provost our programs as well obviously on the outdoor side, we've got some great brands.
With hustler from from the <unk> acquisition Cub cadet to Walt as well in that category those channels.
And always have had high levels of profitability and so that gives us confidence as well because we're looking to continue to shift, especially on the outdoor side more and more into the pro category, where the higher levels of profitability are.
But corbin, maybe you could give a little bit of color on Julian the only thing else I would add is that if you think about going into 2023, the benefits that we'll start to see from a gross margin standpoint from the supply chain transformation and then from an SG&A standpoint from the other cost reduction that we laid out those will be pretty even throughout the course of 2023.
You'll start to see both gross margin and operating income margin slowly start to improve throughout the year.
Thank you. This concludes the question and answer session I would now like to hand, the conference back over to Dennis Lange 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 any further questions. Thank you.
This.
Today's conference call. Thank you for participating you may now disconnect.
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