Q2 2023 Stanley Black & Decker Inc Earnings Call

Speaker 1: Welcome to the second quarter of the 2020 Stanley Black & 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 listening mode.

Speaker 1: Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to the Vice President of Investor Relations, Dennis Lang. Mr. Lang, you may begin.

Speaker 2: Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black and Becker's 2023 second quarter webcast.

Speaker 2: On the webcast, in addition to myself, is Don Allen, President and CEO , Pat Halonen, EVP and CFO . And joining us for Q&A this morning is Chris Nelson, COO, EVP and President of Tools and Outdoor.

Speaker 2: 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, Don and Pat will review our second quarter results and various other matters, followed by a Q&A session.

Speaker 2: Consistent with prior webcasts, we are going to be sticking with just one question per caller and as we normally do, we will be making some forward-looking statements during the call based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate and as such, they involve risk and uncertainty.

Speaker 2: It's therefore possible that the actual results may materially differ from any forward-looking statements that we may make today.

Speaker 2: We direct you to our cautionary statements in the 8K that we filed with our press release and in our most recent 34 Act filing. I'll now turn the call over to our President and CEO , Don Allen.

Speaker 3: Thank you, Dennis, and good morning, everyone.

Speaker 3: Stanley Black & Decker's second quarter performance represented strong execution across the organization, driving significant progress towards our business transformation objectives on multiple fronts.

Speaker 3: Before I get into the results, I'm extremely pleased to welcome Chris Nelson to our leadership team and we have him joining us on the call for Q&A today. Chris started in June as our Chief Operating Officer and President of our Tools and Outdoor Business. Chris is an experienced global business leader.

Speaker 3: with strong industry knowledge and a successful track record of implementing growth strategies.

Speaker 3: which have delivered customer-centric innovation and profitable market share expansion. I am excited to see Chris assume leadership of the tools and outdoor business. He is bringing new energy and perspective which will further position us for strong execution and faster profitable growth.

Speaker 3: centric innovation and profitable market share expansion. I am excited to see Chris assume leadership of the tools in outdoor business. He is bringing new energy and perspective which will further position us for strong execution and faster profitable growth. Welcome Chris!

Speaker 3: With this critical appointment, Stanley Black & Decker's senior leadership team is now in place. Together we will bring our shared vision to life, optimizing the company around our core businesses and strong portfolio of global brands as we execute our strategy to generate sustainable growth and margin expansion.

Speaker 3: As you will hear from Pat in a few moments, our Cost and Supply Chain Optimization Program is ahead of plan through the first six months of 2023 and building momentum. The compelling long-term growth opportunities in the markets we serve, combined with the progress we've made transforming our business, is a great opportunity for us to continue to grow.

Speaker 3: including our improved cost position, gives us the confidence to pursue further growth investments in the second half of this year.

Speaker 3: Deploying these growth investments as part of our $300 to $500 million target over the next three years is intended to accelerate market share gains.

Speaker 3: As we drive these investment priorities, we are also maintaining our commitment to return value to our shareholders.

Speaker 3: And to that end, our Board of Directors approved a modest increase to our quarterly cash dividend, amounting to 81 cents per share.

Speaker 3: Shifting now to our second quarter performance.

Speaker 3: we demonstrated that we are continuing to advance our transformation journey and ahead of the planned program.

Speaker 3: Specifically, we reduced inventory by nearly $400 million dollars in Q2.

Speaker 3: which brings our aggregate program to date reduction to 1.4 billion since mid-2022.

Speaker 3: Our global cost reduction program delivered $230 million of pre-tax run rate savings in the quarter.

Speaker 3: on track for the expected $1 billion in annualized savings by the end of this year.

Speaker 3: Adjusted gross margin for the quarter was 23.6 percent, a sequential improvement of 50 basis points.

Speaker 3: our second consecutive quarter of gross margin expansion.

Speaker 3: And all of these actions translated into $200 million dollars of free cash flow in Q2.

Speaker 3: Second quarter revenue was $4.2 billion.

Speaker 3: which was down versus the prior year due to lower consumer outdoor and DIY volume as rising interest rates have tempered consumer spending in addition to the negative year-over-year impact of the oil and gas divestiture completed last year.

Speaker 3: That said, demand remains solid for the professional side of the market, which represents roughly 70% of our tools business.

Speaker 3: As it relates to the end markets, the U.S. retail point of sale for our tools and outdoor products remained in a growth position this quarter versus 2019 levels.

Speaker 3: bolstered by price and healthy pro-demand.

Both tools and outdoor POS through the first four weeks of July is growing versus prior a potentially positive signal for the back half of 2023.

We are also encouraged by a stabilizing residential construction market.

despite the rising interest rate cycle.

U.S. home starts are running at a pace of 1.4 million units in June . A strong signal that demand for housing remains sound.

This is complemented by U.S. permits to build single-family homes rising to a one-year high.

and positive trends in housing completion.

Additionally, contractor backlog in the U.S. remains healthy for repair and remodel activity.

The European markets are experiencing similar trends with softer DIY markets balanced with a healthier level of construction activity and professionals with backlogs through the end of this year.

And then finally, our channel partners continue to be focused on optimizing inventory levels, and we expect that to be a modest headwind throughout 2023.

Across our industrial and markets, we are seeing continued strength in global automotive and aerospace.

So while the end markets across Stanley, Black & Decker remain relatively stable, with pockets of strength.

We are monitoring the demand environment and continue to plan for a range of outcomes, and will respond accordingly if we see current trends shift.

Operationally, we continue to be focused on the prioritization of inventory reduction and cash generation. With 2Q adjusted diluted EPS coming in at a loss of 11 cents, which was better than our plan.

Due to the solid progress we have made and our key financial goals in the first half, we are narrowing our 2023 full year adjusted diluted EPS guidance to a range of $0.70 up to $1.30.

and narrowing our free cash flow range to $600 to $900 million.

Pat will provide more color on this later in our presentation.

Now let me walk through the details of our business segment performance.

Beginning with tools and outdoor, total revenue was $3.5 billion.

down 5% organically versus prior year. Its favorable price realization was more than offset by volume decline. We continue to make progress on the tools and outdoor adjusted operating margin, which was 4.5%, up 150 basis points sequentially, driven by benefits from volume leverage and cost control.

versus prior year our operating margin rate was down as price realization was more than offset by selling through high-cost inventory.

planned production curtailment costs, and lower volume.

I would now like to provide some more detail on our various tools and outdoor geographies.

North America was down mid single digits organically.

weighted by lower consumer outdoor and DIY tool demand, as well as modest customer de-stocking.

Organic revenues were stronger sequentially as we lapped tougher comparables and saw benefits from better order fill rates with our customers while leveraging strength and professional demand. Our European revenue was down 1% organically, with bright spots in the UK and southern regions as they both posted high single-digit organic growth.

The emerging market's performance was down 3% organically. However, when you exclude the impact from our Russian business exit.

the remaining countries had high single-digit organic growth.

This was led by strong demand in Brazil, particularly within the professional channels.

Moving to our strategic business unit performance.

we experienced an outdoor organic revenue decline of 12%. As widely reported by many in this industry, the challenging start to the outdoor season persisted for the entire season.

and we did experience notable softness in POS.

and replenishment in the quarter, especially surrounding higher price point retail products.

The hand tools business was flat organically versus prior year and overcame softer DIY volume with international growth and certain category strength. Notably, DeWalt's stored solution growth, including the expanded Softline and TUF System 2.0 portfolio offerings introduced earlier this year.

Power tools declined 4% organically as softer consumer market demand persisted and customers remain cautious with inventory levels.

This result was notably better than the first quarter as we saw continued pro-momentum, coupled with positive impacts from a healthier supply chain, leading to better service levels and increased promotional opportunities, particularly with DeWalt and Craftsman.

Now shifting to our industrial business, which had 3% organic growth in the quarter.

The total segment revenue declined 5% versus 2 Q2 022 as price realization was more than offset by last year's oil and gas divestiture and currency.

We improved adjusted operating margin by 370 basis points versus prior year, including continued price realization and cost actions to deliver adjusted operating margin of 13%. This represents strong execution and a great financial outcome this quarter for our industrial team. Within the segment, engineered fastening organic revenues were up 8%.

including aerospace growth of 31% and auto growth of 15%.

as we captured cyclical rebound.

in these markets along with share games.

This favorable performance was partially offset by industrial fastening and attachment tools' organic revenue declines, primarily as a result of customers' de-stocking to optimize their inventory levels.

While long-term fundamentals for growth remain solid, we believe temporary channel inventory reductions will continue to impact these industrial businesses in the second half of the year as well.

In summary, the team continues to navigate market conditions with several pockets of strength and a few areas of pressure while we continue to improve our margins.

I want to thank the entire Stanley Black & Decker organization for your focus and our key priorities.

The progress to date is very encouraging and energizing as we take the next several steps of our business transformational journey.

to date is very encouraging and energizing as we take the next several steps of our business transformational journey. Coming to the next slide.

I would like to underscore the importance of the strategy that we launched a year ago to transform Stanley Black & Decker to accelerate market share gains and drive consistent organic growth.

Our teams around the world are gaining traction and executing on our primary areas of focus.

One, streamlining and simplifying the organization.

as well as shifting resources to prioritize investments that we believe have a positive impact and more direct impact for our end users and various channel customers.

2. Accelerating the operations and supply chain transformation to return adjusted gross margins to historical 35% plus levels.

while improving fill rates to better match inventory with customer demand.

Three, prioritizing cash flow generation and inventory optimization.

And four, continuing to advance innovation, electrification, and global market penetration to achieve organic growth of two to three times the market. Our business transformation is our path to continuing to enhance our customer and end-user experiences.

while delivering on our financial commitment and enabling the pursuit of strategic growth investments behind our iconic brands, innovation engine, electrification, and commercial activation.

Key investments in innovation coupled with market activation are being accelerated to maximize the impact of our product launches with our global customers and end users.

For example, our fully integrated craftsman campaign was built to drive traffic to our key refill partners.

and send repeat purchases and engage new users.

To date, we've shown strong initial results, breaking through the industry clutter.

Since the campaign launched in the second quarter, we've driven both online and offline traffic to retail and demonstrated improved tools point-of-sale run rate versus the prior year to support brand market share growth. We're excited to see continued positive momentum from this exciting Craftsman brand campaign.

We are also leveraging the strength of our DEWALT brand with a pro-inspired product roadmap to expand core innovation as we release enhanced product offerings to improve the end-user experience.

We recently launched two new DeWalt sealed head ratchets.

The 20 volt max XR as well as the extreme 12 volt max option, delivering power, versatility and durability.

Engineered with the professional in mind, particularly automotive, electrical, and mechanical tradespeople.

The innovative design meets the needs of pros across industries on any job site.

The new DEWALT 20V MAX XR brushless cordless rivet tools were also introduced this quarter.

designed for precision fastening and prefabrication, assembly, HVAC, roofing, and automotive applications.

These tools have features such as onboard nose piece storage and a mandrel collector to catch rivets after each shot.

Lastly, we introduced a new DeWalt 25 foot LED tape measure, a great example of core innovation within our Tuff Series product line.

Our engineering team continues to advance our innovation roadmap with best-in-class products and solutions for our end users as we electrify and enhance safety on the job site.

as well as push the bounds of power and performance across our categories.

Let me now turn the call over to Pat to share the latest progress updates on our transformation.

financial insights on the quarter, and our latest outlook.

Thank you and good morning everyone.

As Don mentioned, we made meaningful progress on our transformation in the corridor and first half of the year.

Our cost reduction program is on track to deliver.

$1 billion, a pre-tax, run rate savings in 2023, and is modestly ahead of plan year to date.

our simplification and prioritization efforts, coupled with our supply chain transformation.

delivered $230 million dollars of run rate savings in the second quarter.

totaling $460 million year-to-date and $660 million since program inception.

Approximately half of our 2023 savings were manufacturing costs related and as such we'll begin to see these benefits turned through inventory.

off the balance sheet and onto the P&L starting in the second half and continuing to build in 2024.

Our organization is bringing our vision for the supply chain of the future to life with persistent, sustainable progress.

Strategic sourcing is a major contributor of 2023 savings and is ahead of plan.

We have the capabilities in place.

to ensure changes are executed successfully.

and we are currently activating additional RFPs to secure further savings.

The momentum behind the SPD operating model along with lean manufacturing practices.

yielding sustainable productivity efficiencies such as alleviating manufacturing bottlenecks.

well as reducing process waste and production downtime.

This will become an important source of savings in the coming months and quarters.

Our manufacturing and logistics network optimization remains on track as we work to improve the efficiency and utilization of the asset base.

This interim tax benefit will reverse and we expect our full year tax rate to be relatively consistent with prior guidance. In parallel, we are also narrowing our full year adjusted earnings per share guidance range, to $0.70 to $1.30 from a previous guidance range of $0.02. We are keeping the $1 midpoint consistent with the prior guidance framework. Versus our previous expectation, we have assumed modestly lower organic growth offset by better gross margin. At the midpoint, this results in an improved full year adjusted operating profit in margin.

This stronger operating performance is offset by an approximate 25 cent impact from higher interest and other expenses below the line of which 40% to 50% is interest rate driven.

We are narrowing our full year free cash flow range to $600 million to $900 million from 500 million to $1 billion. We expect second half cash flow to be supported by positive net income.

Incorporating the software outlook in outdoor as well as expectations for continued DIY softness and channel inventory conservatism We are expecting to regain cordless power tool promotions in the second half reflecting our improved supply position and as such pricing is assumed to be relatively flat to slightly negative Consistent with these activities. We continue to see the pro tool user holding strong and at this point

We believe the range of outcome for volume covers some variability for the US consumer and DIY demand, balanced with the potential for stronger professional demand in the back half. In industrial, we expect flat to low single digit organic growth on a foyer basis, supported by cyclical rebounds in aerospace and auto. This is modestly lower than our prior outlook as we incorporate an assumption for continued customer destocking, an attachment tool, and industrial fastening. Production normalization and the pace of growth investments will both be flexed based on demand. We are planning for production to normalize in the fourth quarter, recognizing the lower volume.

We remain disciplined and flexible in our approach to reinvesting to drive organic growth. Our focus is to deliver on our financial expectations while utilizing gross margin improvements to fund growth investment. Our outlook assumes approximately 125 million dollars of annualized investment with a goal to ultimately deploy 300 to 500 million over the next three years. Clearly our willingness to invest increases as we progress along our gross margin expansion trajectory. We expect second half adjusted operating margins to be in the mid to high single digits.

as our cost efficiencies offset volume pressures. Turning to the important remaining elements of guidance, the expectation for the third quarter would be a sequential improvement in operating profit, primarily from the benefits of our cost reduction initiatives and a lesser impact from destocking. Adjusted EPS for the third quarter is planned to be approximately 80% of the full year adjusted EPS amount.

And due to losses within the first half, the back half adjusted EPS will be more than 100% of the full year total adjusted EPS.

And due to losses within the first half, the back half adjusted EPS will be more than 100% of the full year total adjusted EPS. So in summary.

We are exiting the first half with strong momentum across our cost savings and cash generation initiatives. With some of the more significant impacts from our inventory reductions now in the rearview mirror, we are focusing on driving the items within our control to deliver further margin improvement and to fund investment.

We continue to manage the business with the long-term in mind and we believe we have the right strategy in place to successfully navigate our path forward as we remain focused on driving above market organic growth with margin expansion and enhanced shareholder returns.

With that, I will now pass the call back over to Don. Thank you, Pat. We are pleased to report another quarter of meaningful progress related to our transformation journey.

Successful execution against our plan gives us the confidence to increase our focus on reinvestment toward faster growth as we fuel our team with more resources to unleash the power of our amazing brands, strengthen the innovation machine, and stimulate demand with enhanced end-user activation.

We believe our actions to reshape, focus, and streamline our organization, as well as reinvest in our core businesses, will enable us to deliver significant shareholder value over the long term via robust organic growth and enhanced profitability.

I am proud to be alongside the best people, the best brands, and the most powerful innovation engine in our industry.

As we continue to focus on what we can control to be successful, I am confident that we are recreating a significant market share gaining machine.

As we continue to focus on what we can control to be successful, I am confident that we are recreating a significant market share gaining machine. With that, we are now ready for Q&A, Dennis.

Great, thanks Don. Shannon, we can now start Q&A please. Thank you.

To ask a question, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again.

We ask that you please limit yourself to one question. Please stand by while we compile the Q&A roster.

Our first question comes from the line of Tim Woge with Baird. Your line is now open. Your line is now open.

Hey, guys, good morning. At risk of being yelled at, I'm going to try to ask a two-parter. So I guess the first question, just as you're looking at gross margins, you know, kind of first half to second half, if Pat, maybe you could give us some color on the bridge in terms of.

how you go from kind of low 23s in the first half to that 27 to 29 in the back half, how much of that is production versus some of the cost savings that you're seeing there. And then I guess second, since we've got Chris on the call, maybe just hoping to get a little bit of his kind of early thoughts and observations as he's gotten into the business. Yeah, I'll start.

Tim with gross margin. It's a meaningful step up, but it's an important part of our journey. And we're confident in delivering it for the back half of this year. A big chunk of it is the roll off of high cost inventory. I'd say the bridge from

roughly at 23, 24 up to 28 ish number is about 100 points of production curtailment fading away slightly.

and the balance is a mix of both cost savings generated by our transformation and a dissipation of the high cost inventory of the past, probably equal parts of each in that regard.

This is Chris. Tim, thanks for the question. And I just wanted to start by saying how honored I am to join Don and the entire Stanley Black and Decker leadership team to help bring the company's long-term strategic vision of accelerated organic growth to life. As you well know, Don and the team have made...

Meeting full progress on this ambitious plan, and I'm just grateful for the opportunity to help drive the company's transformation forward.

As I've come on board, as you might expect, it's been a lot of taking time to learn and listen and I got to say it's been quite a whirlwind thus far in the first six-ish weeks. Been seven factories spent at least a day with every major business unit going through market trends, the products, the product roadmaps for the future.

been to all the key design centers in North America and had several key customer meetings. And through this process, what I'd say is that three real key observations and opportunities stand out. First is the long-term commercial opportunities exist due to the impressive strength of...

Stanley Black Indecker's brands and products. Simply put, our customers really, really like our products in our brands and want to grow with us. And that's something that cannot be underestimated for the future. It secondly is that the innovation engine within Stanley Black Indecker is amazing. And I do believe it is a differentiating capability.

our ability to start with work with the end user, to understand their environment, as well as the issues that they are trying to solve, and then rapidly be able to turn that into the design and implementation of products and solutions to help our customers solve their problems and become more efficient.

and supply chain transformation. You know, there are obviously real benefits accruing through the P&L and Pat referenced those earlier.

As importantly, I can see the foundation that is being put in place that will make this a sustainable and long-term opportunity for the company. And it's also clear that there's ample future runway and that we're in the early innings of the transformation and that the future savings will be able to be reinvested back in the business to continue to fuel growth as well as margin expansion.

as far as the opportunity for long-term value creation within Stanley Black & Decker. Thank you. Our next question comes from the line of Julian Mitchell with Barclays, your line is now open. Hi, good morning and welcome to Chris.

but just wanted to check on any color you could give on the bridge from this year as a whole into next. And I suppose, you know, if we look at your second half guidance for this year, it's about, you know, including some sort of outdoor seasonality assumption. It's maybe 350 of annualized EPS based off your second half guide at the midpoint. You had talked about a five.

And sort of related to that, you know, it looks like your inventories will still be well above historical norms at the end of December , but you talk about production normalization during Q4. So just wanted to sort of square that away when thinking about next year. Thank you.

Thank you for the questions and I'll kick it off and then pass it over to Pat for a little more detail as far as our perspective on next year. We have talked about in previous calls a $4-$5 range for 2024 for EPS.

Given what we're seeing in the back half and what we're currently projecting for revenues, the improvement in the gross margins, we're making some investments in SGNA that will plant some seeds for future share gain activity. We do think we're positioning ourselves to be in that four to five dollars for next year, depending on a couple of factors. Does the revenue maintain itself or grow?

you know, following on that opening question, you know, we can really already see on our balance sheet and already in our savings rhythm the gross margin levels that we're projecting for the back half of this year. So those, you know, those rates of gross margin delivery are for the most part on our balance sheet already for this year. And then your question around how do we step that into next year, you know, think of every one of the next.

a few years going through the end of 2025 as 500 incremental million dollars of COG savings off of our revenue base. We're talking 200 to 300 basis points a calendar year of gross margin improvement.

We continue to track on our long-term cost transformation. And so we finish this year at 28-ish percent gross margin in the back half of the year. You can kind of expect that 200 plus basis point level of gross margin improvement to be carried into next year. And that's the kind of momentum you should be expecting the next couple of years.

But you're correct to point out that by the time we get to the end of this year, our absolute inventory dollars at the end of this year will be in the $5 billion-ish range, which is around the 155 days-ish range, which is higher than our long-term history.

inventory levels, which have obviously changed since we acquired an outdoors business from the legacy Stanley Black and Becker levels, but still below 155, we'll continue to make progress and we'll talk about that more specifically when we give guidance for next year, but we will continue to make progress and be working towards

a level that is below 150 across a multi, or rather below 140 across a multi-year time horizon. You know, next year our progress will be balanced against some of our network changes. We are bringing online some new DCs next year and a new DC footprint altogether.

So while we'll make some progress next year, it'll be balanced against some of the long-term decisions we're making to improve service and cost in our DC footprint. Thank you. Our next question comes from the line of Nigel Coe with Wolf Research. Your line is open.

Thanks, good morning. I'll try and make this question a bit punchier. Thanks Chris. And Chris, welcome. Good to see you. So the EPS, 80 cents for three, well, 80 cents roughly for 3k midpoints and so I think it implies 4k down.

So just wondering how we should think about that gross margin cadence between 3Q and 4Q. I thought that maybe some of the cost benefits would benefit 4Q more than 3Q. So just maybe just run through that. And then the comment about pricing flat to slightly negative, is that for the whole corporation?

or is that just specifically for an outdoor segment? Yeah Nigel, I'd say all you're seeing in 3Q EPS to 4Q is really just a normal seasonal cadence, right? We tend to ship in in the third quarter.

a lot of the product that is sold through the holiday season. So it's just a normal cadence that you would see from one quarter to the next. From a gross margin perspective, they'll roughly be even across quarters if not the fourth quarter being slightly higher.

the margin journey will be on the right momentum track, and all you're seeing in EPS dollars is seasonality. I think in terms of pricing, 85% of our business is tools and outdoor, and all you're seeing in pricing is the fact that this year...

we're back to a normal seasonal promotional cadence, especially around the Black Friday timeframe, without new kind of gross price increases offsetting that reintroduction, I should say, of a normal promotional cadence. So it's just the dynamic of us reentering a normal promotional cadence that will potentially take us.

below flat pricing, but it should be a real, you know, small marginal amount. That's all you're seeing with both of those dynamics. And just a reminder recognizing that as we launch new products.

at new price points throughout the year, you know, the impact of the higher price versus the previous product that it's replacing does not flow through that price line, but it does flow through your margins. So you don't necessarily see the full impact of pricing decisions and processes that we have across the company because of that.

Thank you. Our next question comes from the line of Michael Rehut with J.P. Morgan. Your line is now open. Your line is now open.

Thanks. Good morning, everyone, and welcome, Chris.

Thanks. Good morning, everyone, and welcome, Chris.

I wanted to dial in a little bit more into the change in...

your organic growth outlook for tools and outdoors. I think you kind of said it was driven by several different factors, software outlook and outdoor, DIY, a weakness channel inventory conservatism. I was hoping if you could kind of bucket those drivers in terms of what's driving the mag, you know.

the difference, if you can kind of tie it to the difference, I guess it's maybe three or 4% of a change. And also, if the POS turning positive,

if that was kind of part of your prior guidance, because you said it could be a potentially positive signal for the back half, if that continues, would that drive any upsides to the guidance? Yeah, Mike, we obviously had to think of a few moving parts as we outline.

the back half of the year. And so I think where I'd start is our primary objective this year is to deliver margin improvement, working capital reduction in cash, obviously. And we want to keep competing in the marketplace. And the second quarter had many dynamics going on.

subsegments of our industrial business channel conservancy on, conservatism on inventory. So all those things were dynamics that played out. We anticipated them in the second quarter and that's why when we gave guidance at the end of the first quarter we softened up our revenue expectations on the second quarter. And they played out about as we expected in the quarter. And we thought it best given the fact that those dynamics have kind of stabilized and stayed with us for the most part to play those out in the back half of the year. And that's the adjustment you saw. So almost all the adjustment in the back half of the year.

in our infrastructure business. And I'd say they've all been kind of equal drivers of us, you know, taking a couple hundred million dollars out of our back half sales forecast. But I'd say the good news is we feel like right now, absent a new macro change, our demand environment has stabilized. And that demand environment has stabilized and we're on a strong pro.

and really strong aero and automotive in our industrial business. And I don't think there's any kind of new dynamic with the DIY consumer. You know, our intent is up for when student loan repayments start around October , but absent that bringing a new macro dynamic into the picture, we feel like our demand outlook.

has stabilized and we're feeling good about our back half. And then your Don referenced there have been some bright spots. Things like power to a POS at the very end of the quarter. And we'll see. Things may emerge I think throughout this year given the Fed actions.

I'd say the broader demand environment has actually surprised us in the sense that it hasn't been more challenging. And so hopefully those positive trends continue and if they do they present upside.

Thank you. Our next question comes from the line of Chris Snyder with UBS. Your line is now open. Thank you. I wanted to follow up on the earlier commentary on the bridge into 2024. And I understand if you annualized the back half, you're at $3.00 UPS, but the back half is the season.

gross margin up, maybe in the low 30s versus the high 20s. That's obviously a very significant EPS tailwind. And it feels like that would more than offset the incremental step up in gross investment. So can you just maybe slide some more color on that? Thank you.

Well, I think what I articulated and Pat added some detail to it, more robust detail to it.

You know, it's a pretty good summary of where we think we are at this point. And you could build a bullish case that the numbers should be higher for next year, but you do have to factor in the fact that we really want to make sure that we continue to invest in certain key things in our company. We have to get more resources out in the field closer to our end users.

We need to have more engineering resources and key pockets to drive additional innovation opportunities. We've talked about electrification. We want to continue to do that in certain categories that are changing very rapidly. We have to continue to invest in that space.

There's more investing we need to do on the digital marketing front, around social media and the activities that we do with our products to really make our end users as fully aware as to the great innovation machine that we have and what we're putting in the marketplace. Those are things that we have to continue to invest in.

And so we want to strike the right balance in 2024 of, you know, earnings in the sense and cash flow of what's the opportunity for growth as we look at the markets and evaluate that later this year going into 2024. We have a good sense of what's going to happen with growth margins as Pat articulated.

And then the other wild card is really how much do we want to invest to really plant more seeds for share gain opportunities in the future. That's an important part of our business model that's going to ensure that we're successful for the next several decades and we want to make sure we do it in the right way and the right level of balance and that's why we think

As you think about next year, that range of four to five probably makes sense. If we change our perspective because of market conditions or how much we want to invest, we'll provide that as soon as possible. But I think it's the right way to think about next year at this stage.

Thank you. Our next question comes from the line of Nicole DeBlais for Deutsche Bank. Your line is now open.

Yeah, thanks. Good morning, guys.

Maybe just a couple follow-ups from prior questions that were asked. So on pricing, can you just characterize the competitive environment that you're seeing, anything concerning out there? And then with respect to the channel inventory dynamics in the tools business, I think you guys talked about some channel adjustments this quarter. Is the expectation that that kind of continues into the back half? Where are your inventories versus where you would like them to be in the channel? That would be great. Thank you. Sure. So I'll take the pricing question. I'll pass the channel inventory question over to Pat. You know, I think where we are is we're seeing a lot of different things occurring around deflation.

in the freight space. So I think when we look at freight, we've all seen freight costs have gone down dramatically. We're experiencing that. We're seeing that benefit in our P&L. And we'll continue to try to leverage that opportunity as much as possible. On the metal side in commodity space, we're seeing, you know, a little bit of indication that things are starting to pull back as far as commodity prices.

But also we have to recognize that we probably won't see much of that benefit here in 2023, just given the level of inventory we have on our books. And that'll get hung up in the inventory, and we'll read through eventually in 2024. So the question then becomes, what does that mean to pricing? And so what adjustments do we need to make? What's happening in the market? And at this point, we feel like our pricing is where it needs to be versus market conditions and the competitors. We tend to want to be, especially with brands like the WALT, at a premium versus many of our competitors.

And we feel like right now the pricing position is in a healthy place. And so we don't see any need for any adjustments associated with that. If deflation becomes a bigger number as we go into 2024, we will continue to look at that and evaluate that. However, we do have to remember that as we went through this...

historical inflationary cycle, we did not get 100% price recovery on that. It took many quarters for the pricing actions to get into our customers and so we experienced a lot of margin pain in that transition period. And so there has to be a tail at the back end associated with this deflationary cycle, whatever it is.

And we're going to work with our customers in a balanced way to do the right thing for ourselves, our company, and for them. And we'll continue to take that approach, as we've done in the past, and we think it's the right approach for this particular cycle.

Pat, you want to talk about where we are with channel inventory and where we're going? Yeah, Nicole, channel inventory, you know, we look at our current level of channel inventories relative to history. You know, we're very much at or right around normal levels of channel inventory.

And so I think if there wasn't macro uncertainty or if short-term rates weren't as high as they are, we would be biased to stay where we are or to the upside. But I think because of the rate picture in particular with our channel partners paying much more in short-term rates.

to support their inventory, and the fact that there is macro uncertainty, their bias is to keep things low and if not, to try to find new lows. We don't think there's big moves out there ahead of us, you know, something very modest, and I would say our back half guidance.

anticipates somewhere in the neighborhood of, you know, 50 to 100 million dollars of inventory reduction in our guidance as, you know, we've talked here today. And we think that's a pretty good number for the back half of the year. I mean, obviously it could range outside of that if the macro environment changes, but that's what we've considered for the back half of the year.

Thank you. Our next question comes from the line of Adam Bumgarten with Zelman & Associates. Your line is now open. Your line is now open.

Hey, good morning. Can you just talk about how demand trended throughout the quarter into July ? It seems like it built throughout the quarter and the July commentary is pretty encouraging. Just give me some additional color there would be helpful.

Well, I think, you know, the markets are...

do have some volatility to them. However, when you step back and look at the trends that have been emerging in the first six months.

of 2023, we all know it was a very challenging outdoor season.

and everyone in the industry experienced it, we experienced it too.

the higher price ticket items as I mentioned in my presentation continue to be a pressure point. There is no doubt that the outdoor business went through a bubble during the pandemic and there was a lot of

purchasing activity because people were at home and we're starting to see the back end effect of that here in 20. We experienced some of the last year. We're experiencing more here again in 23, and then we'll see what 24 brings in the future. The trends in POS continued to be positive and I said that in my comments. July has been a good start to the quarter. At this point, it's not something that we've seen before.

as we go throughout the summer, and we'll see where things are trending. But the consumer continues to shift a lot of money away from home improvement, and we just have to make sure that we continue to monitor that and see what happens. So I look at it as an opportunity and a positive that, you know, hopefully evolves as the back half plays out, but I don't want to get too excited about three or four weeks of activity at this stage.

I would now like to hand the conference back over to Dennis Lang for closing remarks.

Shannon, thanks. We'd like to thank everyone again for their time and participation on the call. Obviously, please contact me if you have further questions. Thank you. This concludes today's conference call. Thank you for joining. You may now disconnect.

their time and participation on the call. Obviously, please contact me if you have further questions. Thank you. This concludes today's conference call. Thank you for joining. You may now disconnect.