Q3 2022 Stanley Black & Decker Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Welcome to the third quarter 2020.
Stanley Black <unk> Decker earnings Conference call. My name is Shannon and I will 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'll now turn the call over to the Vice President of Investor Relations Dennis Lange, Mr. Lang you may begin.
Yeah.
Thank you Shannon good morning, everyone and thanks for joining us for Stanley Black <unk> Decker's 2022 third quarter webcast on the webcast. In addition to myself, Don Allen, President and CEO , and Corbin Wall Berger, Vice President and interim CFO on 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 carbon will review, our 2022 third quarter results and various other matters followed by a Q&A session.
Distant with prior webcast, we're 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 on our current views such statements are based on assumptions of future events that may not prove to be accurate and as such they involve risk and uncertainty. It's therefore possible that the actual results may materially.
Really differ from any forward looking statements that we might make today, we direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent 34 Act filings I'll now turn the call over to our President and CEO Don Allen.
Thank you Dennis and good morning, everyone.
As you saw from today's release, we made tangible progress during the third quarter towards our strategy around focusing our business and transforming our supply chain.
We are building positive momentum as we deliver improved customer fill rates.
Floyd, a new organizational structure implemented cost controls and actively reduced our inventories.
In addition, we made significant progress reducing that.
Utilizing three 3 billion in proceeds from our strategic divestitures.
All key priorities, we set out heading into the third quarter.
All of this is not yet apparent in our financials.
But we are encouraged by a few items.
One our head count reductions are largely complete.
Two inventory is coming down.
Three cash generation was positive in September and we believe this can continue in the fourth quarter and next year.
And for gross margin will be the last to turn as we faced a high cost of Destocking, but we expect to be through that and pivot to better performance by the middle of next year, while the macroeconomic environment remains challenging, notably softer North America consumer and European markets combined with stubborn.
Cost inflation.
There were a relative bright spots with continued strength in professional construction and industrial customer demand.
As well as incremental progress unlocking global supply chain constraints.
Our actions to alleviate semiconductor constraints are progressing as expected.
And are contributing to results through our improved fill rates as well as slightly better organic revenue performance in Q3.
Third quarter revenue was $4 1 billion up 9% driven by our outdoor equipment acquisitions organic revenue declined 2%, which was an improvement over what we delivered in the first half.
Due to increased professional power tool supply and a solid performance by the industrial business is organic growth was up 14%.
Price realization sequentially improved 8% versus the prior year.
U S retail point of sale was relatively consistent with the levels, we saw exiting two Q <unk>.
Supported by price and professional demand, even as softer DIY consumer demand persistent <unk>.
Europe continues to operate in a challenging environment as a result of the broader macro.
The war in Ukraine, as well as the continued impacts from customer Destocking due to elevated channel inventories.
Our improved supply position has set us up for a strong merchandising support for the holidays across all major brands and categories.
With much of the product already shipped to our customers in September and October .
We have gained back some key I'll end caps and off shelf promotion areas. After 12 months of limited promotional activity.
During the third quarter, we successfully delivered $65 million in pre tax savings from our global cost initiatives and reduced our inventory by approximately $300 million.
In a few moments I will dive deeper into our progress related to the company's transformation plan announced in Q2.
Operating margin was six 2% in the third quarter pressured by input cost inflation, which was partially offset by customer price increases. Additionally, our margins were impacted from our inventory destock as we began the process of significantly reducing manufacturing production levels in June and during the third quarter.
This resulted in third quarter adjusted EPS of <unk> 76.
The divestitures of electronic security access technologies, and oil and gas businesses were successfully completed in the third quarter.
Which further focuses stanley black <unk>, deckers portfolio, and our leading tools and outdoor and industrial businesses.
Proceeds from the transaction supported 3.3 billion a sequential debt reduction.
These deals also concluded the strategic portfolio moves we have been executing over the last 12 months and further intensifies the operational execution focus of our company as we move forward.
In terms of financial guidance because of the ongoing changes to the demand environment the impact related to foreign exchange and incremental costs due to our more aggressive pullback on production to accelerate inventory destocking in the first half of 2023.
We are revising our 2022 adjusted diluted EPS range down to $4.15 up to $4.65.
And updating our free cash flow estimate to approximate 0.3 up to point $6 billion for the fourth quarter.
Which includes a substantial tax payment related to the gains in the business sales I previously mentioned our near term priority is cash generation at September marked a turning point with planned production curtailments beginning to meaningfully contribute to inventory reductions supporting positive cash generation in the month.
The decision to escalate and continued production curtailments in Q4 will clearly carry a negative P&L application as we incur the impact of our under absorption of fixed plant costs, while concurrently liquidating higher cost inventory from the balance sheet.
Although the immediate P&L impacts are significant and will be incurred in Q4 and likely in the early stages of 2023.
We believe proactively reducing inventory in a disciplined yet swift manner is the right strategy and.
And we'll put our business in a position to optimize growth and margin expansion going forward.
Now I'd like to review, how we are moving forward to accelerate organic growth.
We have optimized the corporate structure focused our operating model and are transforming our supply chain to drive efficiency and fuel reinvestment.
As we deploy our new organization structure and operating model we.
We are elevating three key priorities to sharpen our focus one end user obsession and innovation to customer focus and three delivering operational and functional excellence.
These are built upon the non negotiable priorities and values that make up our culture.
Such as people focus on talent management.
Health and safety integrity compliance D E and I and ESG.
In the next three years, we expect to redeploy $300 million to $500 million to advance innovation across our iconic brands.
Accelerate electrification in our outdoor and engineered fastening businesses rapidly accelerate our end user market activation and create the supply chain of the future.
These investments will position the company for strong sustainable long term growth profitability consistent free cash flow generation and shareholder return.
We have a strong track record as the industry leader in breakthrough world's first innovations in our businesses.
From flex vote, two atomic and extreme to power stack, we will build upon this strength to deliver an even higher quality of core and breakthrough innovations with shorter development cycles and new technologies.
Electrification is a key growth driver across our tools and outdoor and engineered fastening businesses.
We plan to make incremental investments to accelerate our efforts.
<unk> on share gain opportunities and fortify our market leadership position as the technology continues to shift in adoption accelerates.
Market leadership includes more user activation at the front end of our businesses.
As we introduce our new products and innovation, we will bring more digital tools and capabilities as well as additional commercial resources to engage directly with our customers enhance interactions with our end users and drive market share gains lastly to fully leverage these investments we need to have a world class and more agile supply chain.
That brings us closer to our customers increases our flexibility in response to demand and enhances our customer service levels, all to drive greater growth for us and for our customers.
Aligned with these growth investments and as we execute this strategy, we will be focused on a few key success criteria.
One our powerful innovation engine will position us to grow organic revenue two to three times the market over the long term.
Our supply chain transformation is a key enabler to improve our customer service levels and operational efficiency to return gross margins back to the 35% plus level with customer fill rates greater than 95%.
Three we have a long track record of generating strong free cash flow and we'll continue to target a 100% free cash flow conversion to net income over the long term, while ensuring consistent annual performance.
We are now a more focused company executing a clear strategy with both immediate and near term tactical actions to deliver strong value for our shareholders over the long term.
Key to our success is and will continue to be market, leading innovation and I will now highlight a few exciting new launches on the next slide.
As the world's largest tool an outdoor company, we are continuing to push the bounds of our category offerings to serve the full spectrum of our makers and creators from the DIY consumer trade users and up to the most demanding pro.
We are expanding developed power stack with the launch of a new five amp hour battery.
This is the most powerful longest lasting 20 volt Max battery in its class and is compatible.
<unk> with our 300 tools strong dwell 20 volt systems power stack as the first pouch cell technology battery of its kind designed to deliver unparalleled power density to best serve our most demanding professional customers and is expected to deliver over $100 million of revenue in its first 12 months since launch.
Today, the five empower product is already in the European market and has received great reviews by our customers.
We are also continuing to advance our high powered dwarf flex fault line.
By the end of this year the portfolio reached 60 products across power tools and outdoor power equipment generating approximately $500 million of annual revenue and continuing to grow approaching nearly 70 products by the end of 2023. The developed flexible 15 Amp hour battery was introduced last year as a world's first it.
Aviation.
The wallet flex volt converts users, who are using corded small gas engine or pneumatic tools due to our high power need and they convert them over to battery power and it is one reason why three fourths of the default power tool revenue is cordless today.
Our flexible technology is also advancing innovation and sustainability across our industrial business, where customers desire to replace existing hydraulic tools with cordless solutions to increase portability and efficiency.
To that end the Stanley infrastructure team recently launched the first cordless automatic rail maintenance tool. The Rd 60 rail trail, which is powered by dwarf flexible.
These are just a few subset of examples where we are continuing to deliver industry, leading innovations to push the bounds of our categories and accelerate our success. Another key enabler to our strategy is generating cost savings by taking the complexity out of our businesses, while investing to accelerate our organic growth recovering gross margins and generate.
<unk> consistent strong free cash flow from an SG&A perspective, we are executing on our plan to rapidly optimize our organizational structure to become flatter and more agile the new structure is largely complete.
Including a leaner corporate team.
These actions will generate $300 million of annualized cost savings as targeted.
Rigor around indirect spend is in place initial savings of $40 million of realized in Q3.
And we are on pace to deliver approximately $200 million by the end of next year as we shared with many of you. We moved quickly to deploy this new structure. So the organization can focus on its priorities and execution.
We remain on track to deliver the cumulative savings of $500 million, we set out to achieve last quarter covering the simplification of the corporate structure the.
The reduction of indirect spend.
And the streamlining of spans and layers all by the end of 2023.
Pivoting to supply chain. We also activated this transformation with a sense of urgency.
Detailed planning and in some cases project execution is underway across all four pillars of the strategy.
I will now cover some noteworthy progress in the quarter.
Regarding the SKU rationalization, we have approved and initiated action and approximately 50000, skus, which represents roughly half of the targeted reduction.
We expect the remaining SKU reductions to occur from now through the end of 2023.
Second within the strategic sourcing initiatives.
We're activating quick wins that are already generating savings in tandem we are defining the wave one implementation plan for 'twenty 'twenty, three which covers about a third of the addressable spend.
Lastly, we are being thoughtful as we progressed the facility consolidation and distribution optimization to ensure we plan effectively for successful execution with our teams and for our customers even as we work with speed.
We have completed the feasibility analysis and are now finalizing detailed planning with.
With implementation targeted to begin in 2023.
Additionally, we expect to take initial actions to begin the optimization of our distribution network in the fourth quarter.
We have gained some significant early traction and are on pace to deliver the savings targeted for 2022.
And we'll continue to build momentum as we enter 2023.
I will now pass it to Corbin, who will take you through more detailed commentary on the third quarter performance, including gross margin and inventory levels as well as the latest guidance on how we expect to close out 2022.
Thank you Don and good morning, everyone. Let me walk through the details of our third quarter business segment performance.
Beginning with tools and outdoor revenue grew 10% to $3 $5 billion as the M. T D and excel outdoor acquisitions contributed nearly $600 million of revenue or approximately 18% growth and price realization contributed 7%.
These factors were partially offset by a 12% decline in volume and a negative 3% impact from currency.
On an organic basis, we were down low single digits and emerging markets in North America and down 12% in Europe .
U S retail point of sale was supported by professional demand and remained consistent with levels exiting the second quarter of 2022.
Aggregate weeks of inventory in these channels remain below 2019 levels.
The European results were impacted by retail market pressure due to high levels of customer inventory and inflation as recessionary concerns and the warrant Ukraine continued to weigh on consumer spending, particularly in the northern region adjusted operating margin for the segment was 6.8%.
Excluding charges in acquisitions margin was 140 basis points better at eight 2%, however, still below that 15.5% level from the same period last year as the benefit from price realization was more than offset by commodity inflation higher supply chain costs production curtailment.
Costs and lower volume.
Consistent with normal seasonality the M T D and excel outdoor businesses deliver only about 40% of full year volume in the back half at operating margins substantially below the annual average as margins in the first half of the year are typically bolstered by peak outdoor seasonal volume leverage.
Cross the North American channels organic sales in retail and e-commerce were down versus 2021 levels with moderate strength in commercial and industrial however, as compared to a pre pandemic 2019 baseline organic sales performance was up double digits across these channels.
Turning to the strategic business units within our tools and outdoor segment.
Power tools declined organically by 2%. This modest decline reflects an improvement versus the front half performance as were seeing better semi conductor supply, which helped to raise customer fill rates and contributed to positive organic growth in North America.
Looking ahead, we expect further progress in the fourth quarter and are serving a normalized merchandising and promotional schedule for our professional products with our customers hand tools declined organically by 7% driven by retail consumer demand softness in European customer Destock. These factors were.
Partially offset by strength among professional oriented customers in the U S commercial and industrial channels as well as successful new product launches and our craftsman plastic storage.
The outdoor business declined 12% on a pro forma organic basis total revenue was impacted by moderated consumer demand like many other discretionary retail categories and lower orders as our retailers are also working down inventory.
The outdoor team is progressing on our platform integration initiatives and we have a host of new outdoor innovation across our brands and categories in the pipeline to be launched by the 'twenty twenty-three season, now shifting to industrial which had a great quarter, leveraging the cyclical recovery with 14% organic.
Growth and margin expansion back to the double digits.
Segment revenue increased 5% versus last year as nine points of price realization, coupled with five points of volume were partially offset by six points from currency headwinds and three points from the oil and gas divestiture, which closed in August .
The team leveraged this growth and our price increases to overcome commodity inflation and deliver adjusted operating margin of 11.1% up sequentially 180 basis points, and a 340 basis points versus last year.
Yeah.
Looking within this segment engineered fastening organic revenues were up 15% led by aerospace growth of 28% auto growth of 22% and 4% growth in general industrial fasteners. The Arrow fasteners business continues to navigate a dynamic supply environment for our customers and it's also.
Leveraging tailwind related to the recovery in auto manufacturing.
Our industrial fastener business is continuing to outperform the industrial production index and is maintaining a healthy backlog, which is up 7% versus last year.
Yeah.
Aerospace fasteners delivered its fifth consecutive quarter of sequential revenue improvement. This business continues to focus on capturing the emerging recoveries in both narrow body and wide body OEM production.
[noise] infrastructure organic revenues were up 12% driven by 19% growth in attachment tools, which is partially offset by the oil and gas divestiture in the latter half of the quarter orders from our dealer channel partners are beginning to slow yet our backlog remains robust and year to date OEM orders are up versus last year.
<unk>.
I'll now spend a few moments covering our gross margin and inventory performance and expectations.
Third quarter gross margins continued to be pressured by several points as we navigated the impacts from inflation and temporary impacts from under absorption of fixed costs related to our planned production curtailments.
This is a strategic choice as we prioritize cash flow generation through inventory reductions, we're making progress with our inventory reductions, which totaled nearly $300 million in the third quarter, we expect to make further progress in the fourth quarter, which will translate into positive cash flow while these curtain.
Ailments put temporary pressure on our margins they are necessary as we get our days of inventory back closer to historical levels.
With this goal in mind, we made the strategic choice to extend our planned production curtailments versus our original plan to ensure we make continued progress through the middle of next year.
Back in July we assumed our production levels will begin to normalize at year end. However, we're now planning to maintain low production levels through the first quarter of 2023.
This puts additional pressure on our gross margins and depresses payables for the near term with the tradeoff in capturing our cash generation opportunity as inventory continues to decline. These items also impact our total cash generation forecast for 2022, as we incorporate assumptions for lower working capital reductions.
Including the previously mentioned impact of payables and a lower earnings base. However, the cash flow generation for the company is gaining momentum we generated positive free cash flow in the month of September and we believe this will continue for the fourth quarter. Our capital deployment priority is debt reduction as we look to get to.
Our targeted two times debt to EBITDA level.
In the third quarter, we reduced debt by approximately $3.3 billion utilizing the cash from our divestitures.
We expect to achieve further reductions to our debt levels as we generate cash flow in the fourth quarter and in 2023.
Turning to gross margins, we believe that this quarter and the first quarter of 2023 should represent the trough as production curtailments and higher cost inventory liquidations are most impactful over the next six months pressuring margins to the low twenty's. The destock impact is expected to alleviate beginning in this.
Second quarter of 2023 with gross margins recovering into the high Twenty's before any of the benefits from our supply chain transformation.
As you heard from Don we expect that the supply chain transformation savings will start to accrue as we move through the year and bill to approximately $500 million by the end of 'twenty 'twenty, three which will provide further support for the improved gross margins into the thirty's on the journey towards 35% plus gross margins.
In 2025, we believe our focus on inventory reduction cash generation and balance sheet health are prudent as we work in parallel on structural supply chain savings to improve our gross margins in 2023 and beyond.
I'll now walk through what this means for our 2022 guidance for full year 2022, we expect low double digit total revenue growth for the company.
We're updating our adjusted earnings per share full year guidance to a range of $4.15 to $4.65.
On a GAAP basis, we expect the earnings per share range to be 10 cents to 80 cents inclusive of one time charges. The current estimate for pre tax charges in 2022 is approximately $755 million to $795 million.
On the right side of this slide we've outlined the key assumption changes to our adjusted EPS versus our prior estimate.
Lower fourth quarter revenue, primarily driven by European retail market pressure due to high levels of customer inventory and inflation reduces EPS by 30 cents.
Foreign currency translation pressure further reduces EPS by 23 cents or.
Our strategic choice to prioritize inventory reduction and free cash flow generation is accompanied by higher production curtailment costs and inventory destocking costs, which are estimated to be 82 cents of a reduction than the 2022 tax impact from lower earnings is expected to increase EPS by <unk>.
<unk> five cents.
Bringing the revised midpoint to $4.40.
We're continuing to expect $150 million to $200 million of gross savings to be achieved in 2022 from our transformation programs of which $65 million was realized in the third quarter.
We have also disclosed other below the line planning items for modeling purposes on the slide turning to the segments tools and outdoor is expected to realize a mid to high single digit organic revenue decline margins continued to be down versus prior year as a result of inflation acquisition mix and volume deals.
Average, we're continuing to focus on the outdoor acquisition synergy realization as a lever to improve margins within this business unit over the coming years.
The industrial segment organic revenue growth expectation remains unchanged at high single to low double digits. The.
The industrial margin rate is expected to continue to improve sequentially. However, it will be pressured year over year, largely due to inflation and mix turning to cash flow. The fourth quarter free cash flow is expected to approximate $300 million to $600 million, which will support our strong commitment and track record for returning value.
To our shareholders via cash dividends as well as further debt reduction.
As we look into 'twenty twenty-three, we've positioned the company with $1 billion of annualized cost savings, which Dan covered earlier.
We're also aggressively working to capture the opportunities of recent spot market pullbacks on many of our commodities such as metals and resins transportation as well as others.
These input savings could benefit us next year. After our planned Destocking. We believe we are taking the appropriate actions, which are in our control to position the company to navigate a variety of demand environments and contribute to gross margin accretion.
Once our visibility improves we will also invest for share gain by advancing our innovation electrification and end user activation with that I will now turn the call back over to Don to conclude with a summary of our prepared remarks.
Thank you Carmen.
So in summary, a lot of progress was made in our first 90 days and these benefits will become even more apparent within the financials in the coming quarters.
Our head count reductions are largely complete.
Inventory is now coming down.
Cash generation was positive in September and we believe this will continue in the fourth quarter and next year.
Gross margin will be the last to turn as we face the high cost of Destocking.
So we expect to be through that and pivot to better performance by the middle of next year.
And we will continue to focus on debt reduction further strengthening the balance sheet.
All as we continue our commitment to return value to our shareholders through cash dividends.
As we move forward, we have a clear strategy vision and execution plan and.
And we are laser focused on optimizing what is within our control.
The macroeconomic environment will definitely continue to be choppy and 'twenty twenty-three will clearly bring new challenges.
However, we believe our actions to reshape focus and streamline our organization as well as reinvest in our core businesses will enable us to deliver strong shareholder value over the long term via robust organic growth and enhanced profitability.
With that we are now ready for Q&A Dennis.
Okay. Thanks, Shannon, we can now open the call to Q&A. Please.
Yes.
Thank you to ask a question you will need to press star one to one on your telephone.
We ask that you please limit yourself to one question. Please standby, while we compile the Q&A roster.
Yeah.
Our.
First question comes from the line of Julian Mitchell with Barclays. Your line is now open.
Thank you good morning.
For my question.
I'd just like to circle back to slide nine which is very helpful.
And completely agree with the effort to get cash flow up even if it means near near term earnings are down, but I guess two related questions on that one is.
You know the free cash flow was still negative 500 in Q3, you've got the plus four to 500 in Q4, so really just trying to test the conviction in that tailwind on free cash given that it was I think worse than expected in the third quarter and then.
Secondly.
When you look at that.
Gross margin chart sort of bottoming in Q1 next year.
Just wondering what youre, assuming for the macro on that point, because I guess the risk would be that.
As you keep trying to lower inventories of macro roles and they stay kind of stubbornly high so xtra under production.
Is needed so just trying to test sort of what are you assuming on the macro on the on the pro channel early next year when looking at that gross margin recovery slope.
Thank you Julien for your question.
So we will give you a little more color.
Parts to that but.
Yes, I think through that.
You are right with your opening comments. This is really a heavy focus on cash flow right now and I I was very pleased to see that we generated solid cash flow in the month of September .
Our conviction in related to the fourth quarter. It was very strong I feel like that we've done all the right things to ensure that our inventory continues to go down.
We took additional steps in the third quarter to lower production, even further which is obviously, having a bigger impact on Q4 versus Q3.
Made that decision as we started to get a little more insight into.
What we needed to produce in the first half of next year, what the inventory levels were going to be and we looked at a variety of different scenarios growth scenarios flat scenarios and declining scenarios and we utilize all of those scenarios to help that we feel is the best decision, we can make related to production at this stage.
The chart is a depiction.
At a high level of what we believed the gross margin rates will be when you blend all those different Saturday always together and you look at all the possible outcomes.
Could there be a scenario, where we have a deeper decline in revenue and we have to pull back production. Even further yes that could play out.
Over 2023, but we'll see how that.
So, let's see how things evolve as we get deeper into the end of this year into early next year.
The focus for US, though continues to be as I mentioned at the start of this commentary our top priority is cash flow.
We believe there's $1 $5 billion of inventory that still needs to be liquidated.
Look at history, and even say that number might be as high as $2 billion. So it's somewhere in that range of $1 $5 billion to $2 billion.
We're going to aggressively pursue that there will be some pain or margins in the short term as we go through this transition and the pain might be even a little more challenging if we if we see further topline deterioration in 2023.
That being said it is the absolute right thing to do and I think we all agree with that.
The second thing is we need to really aggressively pursue and we have been pursuing what's happening with commodity deflation and freight deflation, we see that as a big opportunity to potentially offset maybe some of these pressures we might see in a declining revenue environment in that particular situation, but either way we need to pursue those opportunities.
These because they are becoming significant you have declines since April in commodity prices. There 30, 40, even 50% in some cases.
And there is an opportunity that we have been actively pursuing for the last several months that we will continue to pursue and yes. It will not hit our P&L into the later stages of 2023.
Post the liquidation of a large chunk of this inventory, but we have to make that come to life. That's another that's a lever that can help us maybe offset some of the pressure we might see at the top line if that does play out in.
And the third thing I'd say is we have.
A robust supply chain transformation plan.
It will create $1 $5 billion of value as we both mentioned in our opening commentary over the next three years.
That is significant we see opportunities within product platforming strategic sourcing facility consolidation and then operational excellence that are significant that add up to that opportunity and we will begin to achieve some of those benefits in 2023, and then further enhance those and benefit.
In 2024, all of those levers are there and available for us to pursue.
To ensure that we have healthy cash flow in 2023, and we continue to make progress in the back half of the year and improving our gross margin rate.
Thank you.
Our next question comes from the line of Tim Walsh with Baird. Your line is now open.
Hey, Hey, guys good morning.
Maybe if you can just talk a little bit on about some of the some of the improvements in some of the market facing metrics that you kind of talked about on the call in terms of where our fill rates today versus where they might have been you know kind of early part of this year and what the progress on that looks like and then just as you are.
Talking with your customers.
How are they kind of thinking about promotional activity in pricing as you move into 'twenty three.
Yes, thanks, Tim for that question.
I'm pleased with the team's progress in fill rates over the last 90 days, it's not it's not 95% or above so we still have more opportunity in front of us, but depending on the product category, we've made anywhere from three.
300 basis point improvement to 600 basis point improvement in the.
The last 90 days and so that's a great.
Accomplishment by the team in a very short period of time now a large part of it is triggered by.
The supply.
Constraint that we were dealing with in semiconductors that now is pretty much behind us at this stage and therefore, we feel like we can really focus on making sure that we're meeting the demand that our customers have.
Another metric that we've looked at is what is.
The on shelf percentage of all of our products within our major customers and those numbers are actually very good 95 plus percent. When you look at our products on the shelves those products are on the shelves. So we have very little out of stock situations at this point in time.
The third thing that I looked at is we actually did a really sizable promotion.
Set of shipments to many customers in September and here in the month of October .
Substantial amount of promotional activity is something that we haven't seen.
Well over a year and so we're very pleased to be able to get back kind.
Kind of at the end cap get into some of the off shelf areas within our major customers and begin to really drive some of that promotional activity and share gain.
In those particular circumstances. So all three of those things are what we're looking at to really say, hey, we're making progress and we're getting back to a nice mix of core business and promotional activity, which is really what makes the tools in the outdoor business successful over the midterm and the long term as.
As far as 2023 at this point our customers are very excited about the upcoming.
Ear and the opportunity they see they still believe that professional will continued to be strong.
As I mentioned earlier, we are preparing variety of different scenarios.
That could be a healthy environment or it could be a significant decline that we have to manage through and so therefore, we think given the amount of inventory. We have we have the ability to meet the needs of the customers both core and promotional activities and hence why we continue to cut back production to ensure that we.
We do actually lower levels of inventory over the next 12 months.
Thank you.
Next question comes from the line of Nigel Coe with Wolfe Research. Your line is now open.
Thanks, Good morning, guys.
A couple as well.
So Don a question on inventory you might be shocked by that.
So obviously no surprise, but I'm just wondering if maybe you could quantify the you know the actual you've called out the 82 cents of incremental production penalty to the guide, but where does that stand for the full year I mean, how much are you absorbing maybe all analyzed basis. So we can try and gauge the opportunity.
It does eventually normalize and then and then secondly at this kind of second part of that question is you talked about promotional activity, which obviously is part and parcel of the business, but do you have to promote and discounts to ship that inventory over the next couple of quarters.
Yes, thanks Nigel.
Yes, I would say that.
We've seen obviously, a pretty significant impact on our margins this year.
Due to basically heavy pullback in production and we've done it probably almost we had to make three to four different adjustments as the year has gone on.
We got into late May and June we had to make an adjustment based on what we're seeing with the slower consumer demand we did it again.
The early July timeframe to prepare for a back half and then we did we were doing it again here in the late stages of third quarter or into the fourth quarter for the early part of ESG next year. So.
Impact to the P&L is probably around $400 million, it's a pretty substantial number for us in 2022, so that would equate to well over $2 of EPS.
Probably higher than that given our tax rate is very low. So it is substantial and so that in my view, obviously as a temporary situation that we have to navigate through and really figure out what that impact would be as things start to come back in a positive way.
What was the second question.
You'll have folks discounting discounting, yes on the inventory so.
Right now I think we're being very balanced in our approach and how we liquidate liquidate inventory we're looking at promotional activities. We're looking at alternative channels.
The interesting part of the situation is that this is not old inventory. This is inventory that's been created in the last 15 to 18 months.
That is very healthy.
Inventory that we should be able to sell at reasonable price points. The question as time, how long do we want to take for the liquidation that occurs so I think we're going to strike the right balance between.
Pursuing.
Promotional discount activities and really just pursuing it more through normal core activity and normal price points.
Thank you. Our next question comes from the line of Nicole to Blaze with Deutsche Bank. Your line is now open.
Yes, thanks, good morning, guys.
Good morning.
Just maybe we could talk a little bit about pricing I think that's also an important variable as we all kind of think through the puts and takes for 2023, so with demand now moving into negative territory and now that we are seeing some refreshing declines in commodity prices. What's the conviction that you guys can can stick.
The price increases that you've taken so far and maybe what is your view of what's going on from a competitive perspective as well.
Yes, I think.
When I look when I think about this situation obviously is something that's very unusual.
We can't go back in time and look at.
Anything in Stanley Black <unk> Decker and say, we had a period of time, where we had 10% to 12% price increases.
And there hasnt been part of any history here within the company at least recent history and so therefore, you have to look at it a little bit differently that being said we are.
I'll have to remember there has been a period of time, leading up to this where we had no price increase of any substance and we were incurring substantial impact in our P&L from the inflation back in 2021.
And so we can't forget that we have to recognize that that's a dynamic that we went through and then when the tail end of this happens and we're recovering the commodity deflation that we're now experiencing which actually won't hit our P&L until the later stages of 2023.
We have to be vigilant with the price increases and recognize that.
Just because of the commodity indices have changed it does not mean, we can lower our prices because we have the high cost inventory in our system that has to flow through and be sold to our customers and eventually the end users.
Over some period of time, which is probably at least nine to 12 months at a minimum.
And therefore, I think the tail, we will continue to be disciplined about this.
These are looking at what's happening with our competitors in the market at this stage, we feel like our price points are very consistent with their price points across virtually every category. So we don't see anything unusual happening there and we do we do know there are some competitors that are still putting some price increases into the market even today.
So theres going to be a tail here that we're going to have to navigate through I believe the impact of deflation.
And what happens with price over the next two years will still be a substantial positive Stanley Black <unk> Decker's P&L.
Thank you.
Our next question comes from the line of Chris Snyder with UBS. Your line is now open.
Thank you.
So I just wanted to.
It's more about the decision to have higher production curtailments at first what the company expected three months ago because.
Demand is trending as expected.
First the July update.
Does this reflect a softer outlook on demand into 2020, or just more urgency around bringing working capital down and generating cash maybe after that working capital wind down going to come through as expected in the September quarter. Thank you.
Thank you.
Maybe carbon you can provide that because I gave some color on that yes no question.
I think that our R.
Our view in North America, it's pretty consistent as we were seeing levels of demand that we're consistent with how we exited the second quarter, obviously, we're seeing weaker demand in Europe , but the production curtailments are really to your point about generating cash and that's really what's been driving it.
As John said, we've been through three or four of these and as we look at at the desire to get the inventory out.
There are a few ways to do it but.
Quickest way for us.
Reduce our production, which we have done throughout the last three or four months.
Yes, I think I'll just add to that.
No.
I made some comments in response to the first question.
We have looked at a variety of different scenarios and one of the scenarios as a <unk>.
Continued retraction in demand.
As the housing market continues to slow and potentially construction slows down for a period of time.
And therefore, we're factoring that into our decision as well so it's a combination of what Corbin said, but it's also looking at what we think are potential scenarios for next year.
And being thoughtful about what our production should be today, we have to remember that our supply chain.
It's fairly lengthy so things that we're producing today.
Selling something we produce this month, we're probably selling in the month of March and April of next year and so that's really the decision, we're making and we're trying to strike the right balance in reducing the inventory is carbon was describing and being proactive and aggressive about that to continue to drive a healthy cash flow performance going forward.
And then two making sure we meet the needs of our customers and that have a retraction in our fill rates and I think based on the decision. We've made around production. We are striking the proper balance in that particular area.
<unk>.
Thank you.
Our next question comes from the line of Michael Rehaut with Jpmorgan. Your line is now open.
Thanks, Good morning, everyone. Good morning, good morning.
Just wanted to try and get a sense.
Obviously, a lot of near term disruption.
And.
Just trying to I guess in two ways number one.
Kind of zero in on.
The next couple of quarters.
I guess <unk>.
For example, going to be low single digits.
Tools and storage.
Sure.
Net margin level is what you would consider to be relative.
Relatively temporary.
Primarily I think driven by the inventory reductions.
And how much is.
Kind of a reset.
Versus expectations 90 days ago, and I guess, ultimately where I'm going with this is.
I think.
In slide nine you are talking about a high twenties.
Gross margin.
By the end of the year potentially it could.
The opportunity for low thirty's, but it does look like that is a little bit of a reset.
Is that also 90 days ago.
And.
What type of headwinds are you seeing today.
Compared to getting to I believe you kind of threw out like that $7 per share run rate.
By the end of 2023, it looks like there's a few more moving pieces or headwinds that.
I might take that number down by $1 two EBIT.
Well so.
There was a lot in that Michael.
I'll start with that.
First question you had around.
Fourth quarter margins and how much they may they may be being impacted by these.
The pullback in production decision the impact in the fourth quarter at about five points or 500 basis points. So it's substantial clearly.
So we're also dealing with.
No.
Last stages are the middle stages of the high cost inventory from the big inflation waves that we've had there in our inventory now and that we're starting to sell that through so that's another factor that's pushing down margins.
That will take time to work through because when even when you get 90% or 100% price recovery.
When you go through these actions.
You still have an impact on your margin rate that substantial and in this case the differential on our margin rate is about 300 basis points just from the.
The difference of inflation dollar and price dollar because its not a one for one offset the only way you can offset it completely and your margin rate is going to be if you get like a 120, 130% recovery on inflation through price and so you've got a bit of a double impact that's impacting the margins right now in Q4.
Sure and so I think thats something that we just have to be thoughtful about as we analyze the view of Q4.
We're not going to give us a ton of color on <unk> III.
Trying to do is help people understand that.
There is a path to get our gross margins back to the high Twenty's and eventually to 35%.
The path is really about.
Eliminating some of these temporary things because these things are temporary in the sense of <unk>.
Pulling back on production will eventually get back to more normal level of production because we're going through a period of time. That's whatever this recession is going to be and how long it's going to last but if you just kind of put that in the rearview mirror and focus post the recession.
We are going to be back to normal levels of production, we're going to have transformed our supply chain. We will have pursued all the commodity deflation that's out there and yes could there be a partial price offset to that yes, there could be but at the end of the day all of these different things are going to have them be.
These are levers that drive our margin back to those levels as far as what we guided back in July .
You know what we're doing now it has nothing to do with guidance in July we have new view.
2023, and so we're adjusting our manufacturing and that I talked about the different scenarios, we looked at as a result of that.
We're getting closer to the to that 2023, so it gives us the opportunity to adjust our manufacturing at this point.
And then we also want to be more aggressive and focused on generating more cash flow and reduce our inventory in the short and midterm and thats really whats driving the temporary impact to our gross margins I understand.
Understand nobody likes the gross margins, where they are I don't like them, where they are either.
But I feel like we're pulling all the right level is it levers that are in our control that are going to get our gross margins back to where they need to be but it's going to be a multi year period of time for that to happen.
Thank you.
Our next question comes from the line of Adam Bumgardner with Zelman and Associates. Your line is now open.
Hey, good morning, everyone I'm, just wondering if you could run through some of the point of sale trends that you saw in U S retail throughout the quarter and maybe into October if you saw any deceleration it sounded like it was relatively stable, but any nuance would be helpful. As we enter the fourth quarter.
Sure you want to think that Goldman.
Yes.
As we said earlier, we really did not see a big difference in the third quarter from what we exited in the second quarter. So.
In some ways, particularly around power tools, they've held up pretty well and towards obviously it was down a little bit but in general I think the Pos sales in the U S have held up somewhat surprisingly well through the third quarter hard to tell what's going to happen in the fourth quarter and next year as Don mentioned.
In the third quarter, we were relatively on a relative basis pleased with what we saw.
Yes.
Thank you our last question comes from David Macgregor with Longbow Research. Your line is now open.
Yes. Good morning can you hear me okay.
Good morning.
Yeah. Good morning, Yeah, I think we've got a pretty good handle on inventory gross margins at this point. So thanks for all the discussion let me just ask you about the outdoor acquisitions and I'm talking about slower consumer demand and the seasonal patterns.
I guess, we understand its probably comes as a surprise to anyone.
The seasonal pattern was consistent or is there something changing there and just talk about margin contribution expectations. The progress on integration and how do you avoid not being distracted by everything you are focusing on with inventory gross margins keep an appropriate level of focus on the integration and achievement of value from this deal.
Well, that's a great question, we've actually integrated.
Our folded in the integration process of MTBE and excel into the transformation plan and algorithms and rigors that we have around that.
We spend a lot of time every day every week focusing on these different things that we're talking about over the last hour.
And so.
We have created a set of processes and rhythms that allow us to really.
Policies different things make decisions related to a variety of different items and folding in the integration of <unk> into that it's actually been a bit of an efficiency for us to make sure that we don't lose sight of the importance of those acquisitions and effectively integrating them.
And so the Stanley Black <unk> Decker operating system I think when I think about the outdoor business soon yes.
It was a rough <unk>.
Door season, this year for sure.
Due to weather, primarily and then there was a bit of a consumer impact at the tail end of it as well.
As consumers started shifting their dollars to other areas.
That being said you know as you talk to our customers there as usual, they're very bullish about the upcoming outdoor season in early next year.
I think it'll be a good season, if the weather cooperates again I think we've planned for a variety of different scenarios that could play out.
Whether it's a flat scenario in that scenario are down scenario will be determined but our production levels have been.
Focused on those different scenarios and because we are producing product in the fourth quarter for the upcoming season.
So.
It's difficult to know where that season is going to go but.
Listen to our customers, they're very excited about it.
We're taking a balanced point of view on it to make sure that we effectively meet the needs of our customers and ensure that we don't get stuck with a lot of extra inventory.
It's something unusual plays out maybe.
Maybe carbon you might want to talk a little bit about.
Where we are with <unk>.
The margin profile of how the integration is going and provide a little more color on that.
The integration I think has gone very well and the colleagues that joined from MTBE and XL have been fantastic and it's great to have them as part of the team and they are very integrated right now.
The seasonal weakness that we saw in the spring and summer, obviously margin rates or hit probably more than we expected because of that the weaker season. However, as we go forward, we don't our view Hasnt changed and where we think the business can get to over time.
We're generally very strong on hitting our synergy targets and getting the margins of our acquisitions to where we want and we feel the same for both MTV and <unk> on this one.
Thank you I would now like to hand, the conference back over to Dennis Lange for 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 you have any further questions. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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