Q3 2023 Stanley Black & Decker Inc Earnings Call
Yeah.
Welcome to the third quarter 2023, Stanley Black <unk> Decker earnings Conference call.
Ms Shannon and I'll be your operator for today's call at this time all participants are in a listen only mode.
Later, we will conduct a question and answer session. Please note that this conference is being recorded.
I will now turn the call over to the Vice President of Investor Relations Dennis Lange, Mr. Lang you may begin.
Thank you Shannon good morning, everyone and thanks for joining us for Stanley Black <unk> Decker's 2023 third quarter webcast on the webcast. In addition to myself is Don Allen, President and CEO, Chris Nelson C O EVP and president of tools, and outdoor and Pat Hallinan EVP and CFO.
Our earnings release, which was issued earlier this morning, and a supplemental presentation, which we will refer to are available on the IR section of our website. A replay of this morning's webcast will also be available beginning at 11 a M. Today.
This morning, Don Chris and Pat will review, our 2023 third quarter results and various other matters followed by a Q&A session.
Consistent with prior webcast, we're gonna be sticking with just one question per caller and as we normally do we will be making some forward looking statements. During the call based on our current views such statements are based on assumptions of future events that may not prove to be accurate and as such they involve risk and uncertainty. It's therefore possible that the actual.
Results may materially differ from any forward looking statements that we may make today.
We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent 34 Act filings I'll now turn the call over to our President and CEO Don Allen.
Thank you Dennis and good morning, everyone Stanley Black <unk> Decker's third quarter performance reflects the continued successful advancement of our strategic business transformation.
Our focused execution resulted in improvements versus prior year, and adjusted gross margin and earnings per share as well as free cash flow.
Reflecting on our journey over the last five quarters, we have made significant progress one our cost and inventory position as healthier behind the momentum of our supply chain transformation and we are confident in our runway for this to continue.
Two our execution is stronger and the results now demonstrate the focus across the organization to enhance the customer experience and improve our financial position.
Three our performance to date provides a solid foundation for the additional investments we are launching an innovation in market activation to capture the compelling long term growth opportunities in the markets we serve.
For our view is that the markets will remain dynamic.
Our focus is on delivering best in class product innovation through our portfolio of World class brands.
<unk> cost efficiency measures within our control and driving share gain in our core markets.
All aimed to further improve margin earnings and cash flow.
While there are many important steps ahead of us on our journey.
I am confident that we have the right strategy, a highly capable and motivated leadership team and a strong competitive position to successfully execute our transformation.
Shifting now to our third quarter performance.
Revenue was $4 billion, which.
Which was down versus the prior year, primarily due to lower outdoor DIY volume.
The demand for our pro tools as well as automotive and aerospace fasteners remained healthy and demonstrated growth in the quarter.
Across our 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.
As we assess our competitive positions and demand trends, we believe that we are stabilizing our share position in a mixed market environment, while we continue to invest in market activation and field resources to drive future share gains.
Our global cost reduction program delivered $215 million of pretax run rate savings in the quarter.
On track for the expected $2 billion run rate savings by the end of 2025.
Adjusted gross margin rose to 27, 6%, a 400 basis points sequential improvement and 290 basis points favorable as compared to last year.
The benefits from our inventory optimization and supply chain transformation are now clearly being reflected in our performance.
As we navigate uncertain market conditions, we are continuing to focus on what is within our control to improve our margins.
Looking ahead to 2024, we expect additional sequential and year over year gross margin gains.
We delivered approximately $300 million of inventory reduction this quarter, which brings us to $1 $7 billion production since mid 2022.
When we started this journey.
This contributed to over $360 million of Q3 free cash flow generation, which supported our quarterly dividend and $285 million of debt reduction in the quarter.
Benefits from lower supply chain costs contributed to third quarter adjusted diluted EPS of $1 five.
Which was better than our plan our year to date performance supports increasing our 2023 full year adjusted diluted EPS guidance to a range of $1 10 up to $1 40.
Which would be up 25 at the midpoint.
I want to thank our 50000 plus employees around the world for their focus dedication and passion that contributed to another successful step forward in the third quarter.
Our progress is encouraging.
And I am confident that by executing our strategy, we are positioning the company to deliver higher levels of organic growth profitability and cash flow.
As well as strong long term shareholder returns.
Now shifting to our third quarter segment results.
I will discuss our industrial business performance and then pass it to Chris Nelson to review the tools and outdoor results.
Third quarter industrial revenue declined 4% versus last year.
As price realization and currency were more than offset by lower volume and a three point impact from our Q3 2022 oil and gas business divestiture.
We improved industrial's adjusted operating margin by 110 basis points versus prior year.
Driven by continued price realization and cost actions.
To deliver adjusted operating margin of 12, 2% in the quarter.
This represents strong execution and continued year over year margin expansion for our industrial team.
Within this segment engineered fastening organic revenues were up 6%, including aerospace growth of 29% and auto growth of 9% as we continue to capture the strong cyclical recoveries in these markets.
Which was partially offset by what occurred in industrial fastening.
Our attachment tool business experienced organic revenue declines primarily as a result of customer destocking to normalize their inventory levels.
The long term fundamentals for growth remains solid in all these businesses and we believe the temporary channel inventory destocking and attachment tools will be complete as we exit 2023.
I want to thank the industrial business for their strong execution. This is the fifth consecutive quarter of double digit adjusted operating margin for the segment. We are excited by the runway for growth share gains and operating leverage in these businesses.
I will now turn the call over to Chris to review, our tools and outdoor performance.
Thank you Don and good morning, everyone I'm now at the four and a half month Mark at Stanley Black <unk> Decker in this period has really reinforced my excitement about the future for this business I've spent my time with end users customers and our passionate and highly capable tools and outdoor organization, we have iconic brands such as the wall Craftsman Stanley and <unk>.
<unk>, a strong pipeline of innovation and customers and users who are eager for our newest products, we remain focused on capturing that opportunity.
We are rapidly making progress with our transformation the organization remains committed to supporting the necessary cost efficiencies as we prioritize the additional investments in innovation brand support and commercial resources that will be most impactful to reaccelerate growth and share gain in the market.
Now turning to the tools and outdoor third quarter performance total revenue was $3 4 billion down 5% organically versus prior year as a result of lower consumer outdoor and DIY market demand our tools SBU in aggregate were positive organically in the quarter, excluding the Russia business exit while outdoor was down 20.
3% consistent with our expectations.
Price for the segment was down two points in the period as we successfully regained margin accretive cordless promotions consistent with historical activity, we made substantial progress in improving adjusted operating margin to nine 3%. This was a sequential step up of 480 basis points and 250 basis points better than last year.
This improvement was driven by reduced sell through of high cost inventory supply chain transformation savings and reduced shipping cost, which were partially offset by lower organic revenue in terms of performance by region. North America was down mid single digits organically similar to the overall segment North America tools organic growth was positive while outdoor decor.
Client U S retail point of sale for the quarter remained above pre pandemic 2019 levels supported by strength in professional demand and price third quarter. Pos printer Walt was positive versus last year supported by promotions are pro inspired new product offerings and sustained professional demand.
Our European organic revenue was down 3% with bright spots for double digit organic growth in the U K and low single digit growth in the Nordics, we are leveraging targeted programs to capture professional share with the Walt cordless tools in emerging markets. We grew mid single digits organically, excluding the impact from the Russia.
Business exit, including this impact organic sales declined 4%.
Solid emerging markets performance was led by Latin America, which is now recorded four consecutive quarters of organic growth. We have seen notable strength in Brazil, particularly within the professional channels.
Moving to our strategic business unit performance, the hand tools business grew 2% organically versus prior year. This includes mid single digit organic growth in North America, and Latin America supported by expanded offerings at our retailers and strong new product sales.
Power tools declined 2% organically pressured by consumer tools pro driven momentum coupled with positive impacts from a healthier supply chain is supporting enhanced service levels and promotional opportunities transitioning to outdoor organic revenue declined due to market demand choppiness as the industry resets from the pandemic era.
This resulted in fewer shipments in the quarter as there are elevated inventory levels globally impacting replenishment cycles. Despite the current market environment. We are excited about the long term opportunity in bringing leading innovation to outdoor across our powerful brands.
I want to thank the team for their strong execution in the quarter as we continue to focus on winning with our customers and capturing this amazing growth margin and shareholder return opportunity.
Turning to the next slide I would like now to highlight a few examples of how we are evolving our trade focused offerings and cordless outdoor expansion.
With professional tradespeople and end user innovation top of mind, we recently launched the Dewalt 20 volt Max half inch high torque impact ranch. This is the industry's highest rated Max torque cordless impact wrench in its class ideal for use in heavy duty applications. We also introduced the world's first battery charger box.
The dual wall tough system 2.0, dual port Charger users now can protect store and charged to wall batteries and a durable weather resistant container to keep professionals productive despite rough job site conditions in outdoor as we gear up for winter to Walt has entered the snow category with the <unk>.
Volt Max single stage Snow blower powered by two flexible batteries. It is engineered to tackle tough demands and break down heavy wet our packs now.
Our pro inspired innovation roadmap will continue to introduce solutions across our categories that enhance safety on the job site will elevating power and performance.
Now changing gears into waltz, new involvement with our social responsibility efforts, we are working to close the trade skills gap in shaping the future of construction technology and the electrical and plumbing trades in the third quarter. We opened the 2023 to Walt grow the trades Grant and trade scholarship program. These initiatives <unk>.
Died nonprofits with the necessary resources to train Reskill and prepare Tomorrow's trades people buy directly supporting end user trade education. This is a great example of our broader commitment to invest $30 million to grow trade skills by 2027 now.
Now I'll turn the call back to Don Thanks, Chris I appreciate the energy and perspective that you have brought to the team and I are excited to continue our company's strategic business transformation with you as a key leader on our strong management team.
Turning to the next slide I would like to reinforce the focus areas across our company's transformation.
One streamlining and simplifying the organization as well as shifting resources to prioritize investments that we believe have a positive and more direct impact for our end users and various channel customers.
Two 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 then for continuing to advance innovation electrification and global market penetration to achieve organic revenue growth of two to three times the market.
We believe this strategy will ensure our best in class product innovation is maintained while we continue to meet or exceed the expectations of our end users and we dramatically improve the channel customer experience.
In parallel we will maximize cost opportunities within our control to fuel investment as we deliver our margin earnings and cash flow goals.
As our margins expand our focus is to accelerate share gains.
We are prioritizing innovation and market activation investments across our powerful brands and.
And targeting the best prospects to maximize share gain growth and return.
We continue to benefit from being a simpler more focused company across tools and outdoor and industrial and.
And we expect over the next 12 to 18 months, we will find opportunities for further simplification across our businesses.
As we evaluate where to invest in the best ways to maximize shareholder return, we will continue to take a pragmatic view of our portfolio of businesses. Our track record demonstrates we will act decisively when the time is right on those portfolio decisions.
I will now turn the call over to Pat to share the latest progress updates on our transformation.
Natural insights on the quarter and our revised outlook outlook for the year Pat.
Thank you Don and good morning, everyone.
We continue to generate strong transformation results and go forward momentum.
Our cost reduction program delivered approximately $215 million of pretax run rate cost savings in the quarter.
Our aggregate savings to approximately $875 million since program inception.
This positions us well to deliver or slightly exceed our 1 billion run rate savings target this year and to deliver 2 billion run rate savings by 2025.
As it relates to the supply chain transformation strategic sourcing initiatives remain the largest contributor to supply chain savings since program inception.
The early actions focused on strategic components and logistics as well as other areas.
We have now covered approximately two third of the targeted procurements battle, establishing a carryon savings trajectory consistent with that contemplated in the 2024 program target.
Our supply chain management and engineering teams will continue to drive sourcing improvement through 2025 and beyond.
Activating our operations Excellence program has also contributed significant savings this year.
In the plants, where this has been activated we are seeing increased productivity leveraging lean manufacturing principles.
Our footprint related projects are progressing on schedule with initial savings to begin this year.
As it relates to complexity reduction.
Our teams are assisting customers as they transition to replacement products with the goal of exiting 30000 skus by the end of 2023.
We are confident that our transformation can support the sustainable cost efficiency needed to return our adjusted gross margin to 35% or greater these actions are creating the flexibility to fund additional organic growth investments in our core business.
Turning to our inventory reduction in gross margin improvement.
We reduced inventory by approximately $300 million, bringing our year to date progress to approximately $880 million.
The third quarter inventory reduction supported the generation of approximately $360 million of free cash flow in the period.
Resulting in one of the strongest third quarter cash generations in the company's history.
We have reduced inventory by $1 $7 billion since the middle of 2022.
We achieved this through improved supply chain conditions stroke.
Strategic inventory management and the planned production curtailments initiated during the back half of 2022.
We expect modest inventory improvement in the fourth quarter, which would bring our full year 2023 inventory reduction to at or near our 23 objective of $1 billion as we prepare for next year's outdoor season and supply chain network changes.
Inventory reduction will be a major contributor to our full year free cash flow target of $600 million to $900 million looking to 2024 and beyond we expect the additional multi year inventory reduction opportunity to be at or above $1 billion. We.
We expect to pursue further inventory reduction at the pace of $400 million to $500 million per year.
We will balance our goal of inventory efficiency with ensuring sufficient working capital to navigate through upcoming manufacturing and distribution network changes without impacting service to customers.
We remain focused on increasing profitability and working capital improvement to generate free cash flow.
Our priority for capital deployment is to fund our long standing commitment to return value to shareholders through cash dividends and to further strengthen our balance sheet.
Shifting to profitability, we recorded adjusted gross margins of 27, 6% up 290 basis points versus prior year, and improving 400 basis points versus the second quarter.
This is the third consecutive quarter that we deliver sequential gross margin improvement.
Year over year expansion was driven by lower inventory destocking costs supply chain transformation benefits and reduced shipping costs, all of which more than offset the impact of lower organic revenues.
Moving.
<unk> forward, we expect continued adjusted gross margin rate expansion driven by the benefits of the supply chain transformation our.
Our guidance calls for adjusted gross margin to incrementally improve again in the fourth quarter.
Now that the high cost inventory has turned through the P&L, we expect to continue to deliver expanding adjusted gross margin.
Into the front half and full year 2024 supported by the success of our supply chain transformation.
Achieving adjusted gross margins approaching 28% in the third quarter was a significant milestone on our journey to restore 35 plus percent adjusted gross margin.
The momentum of our supply chain transformation is translating to sustainable upward progression in our margins and cash flow and we will provide resources to fund investment to accelerate long term organic revenue growth toward our goal of two to three times the market.
Now turning to our 2023 guidance.
Our expected GAAP earnings per share range has been revised to negative $1 45 to negative $1.
From negative $1 25 to negative 50 cents.
Primarily related to the third quarter noncash intangible impairment charge of $124 million.
GAAP earnings also include onetime charges, primarily from the global supply chain transformation and outdoor business integration.
The current pre tax estimate of.
Acquisition related and other charges is now $425 million to $450 million with approximately half of these expenses being noncash.
Based on the strength of the third quarter, we are raising our full year adjusted earnings per share guidance range to $1 10 to $1 40.
From our previous guidance range of 70 to $1 30.
We delivered a strong third quarter cash performance and are maintaining our full year free cash flow target of $600 million to $900 million.
We expect fourth quarter cash flow to be supported by positive cash earnings inventory reduction and the typical seasonal receivable reduction in tools and outdoor.
Operator: Welcome to the third quarter of 2023 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 a listening mode.
The organic growth outlook for the year is unchanged with the total company expect it to be down mid.
Mid single digits. This implies a revenue midpoint of $15 9 billion for the year and includes estimated risks for auto strikes and continued infrastructure customer destocking turning to important remaining elements of guidance.
Operator: Later, we will conduct a question and answer session. Please note that this conference is being recorded.
Dennis Lange: I will now turn the call over to the vice president of Investor Relations, Dennis Lange. Mr. Lange, you may begin. Thank you, Shannon. Good morning, everyone. And thanks for joining us for Stanley Black & Decker's 2023 third quarter webcast. On the webcast, in addition to myself, is Don Allen, president and CEO, Chris Nelson, CEO, EVP, and president of Tools and Outdoor, and Pat Hallinan, EVP and CFO. Our earnings release, which was issued earlier this morning, and supplemental presentation, which we will refer to, are available on the IR section of our website.
Dennis Lange: A replay of this morning's webcast will also be available, beginning at 11 a.m, today. This morning, Don, Chris, and Pat, will review our 2023 third quarter results and various other matters followed by a Q&A session. 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. It's therefore possible that the actual results may materialize really differ from any forward-looking statements that we may make today.
Our expectation is for production to continue to normalize in the fourth quarter.
We remain disciplined and flexible in our approach to invest to drive organic growth and share gains.
Our outlook assumes approximately $125 million of annualized innovation and market activation investment.
With a goal to ultimately deploy $300 million to $500 million over the next three years, we expect fourth quarter adjusted operating profit to approximate $290 million with adjusted gross margin to sequentially improve to the 28% zone.
Both at the midpoint of our guidance.
This continues the strong momentum from our cost reduction program, while prioritizing strategic investments in the business with that I will now pass the call back over to Don.
Thank you Pat we are pleased to report another quarter of progress on our journey of transforming Stanley Black <unk> Decker.
Consistent successful execution against our plan gives us the confidence to increase investments, which will accelerate organic growth.
Dennis Lange: We direct you to the cautionary statements in the 8K that we filed with our press release, and in our most recent 34 Act filing.
Hind our most powerful brands.
As we continue to focus on what we can control to be successful I am confident that we are creating a stronger and more focused company with our great people amazing brands and industry, leading end user inspired innovation.
Don Allen: I'll now turn the call over to our president and CEO, Don Allen. Thank you, Dennis, and good morning, everyone. Stanley Black and Decker's third quarter performance reflects the continued, successful advancement of our strategic business transformation. Our focused execution resulted in improvements versus prior year in adjusted gross margin and earnings per share, as well as free cash flow. Reflecting on our journey over the last five quarters, we have made significant progress. One, our cost and inventory position is healthier, behind the momentum of our supply chain transformation, and we are confident in the runway for this to continue.
We believe the outcome of our transformation will produce a sustainable market share gaining machine.
With that we are now ready for Q&A Dennis.
Great. Thanks, Dan Shannon, we can now start Q&A. Please thank you.
Thank you to ask a question you will need to press star one on your telephone.
We will then hear an automated message revising your hand is raised.
Withdraw your question. Please press star one again.
We ask that you please limit yourself to one question. Please stand by while we compile the Q&A roster.
Don Allen: Two, our execution is stronger, and the results now demonstrate the focus across the organization to enhance the customer experience and improve our financial position. Three, our performance today provides a solid foundation for the additional investments we are launching in innovation and market activation to capture the compelling long-term growth opportunities in the markets we serve. Four, our view is that the markets will remain dynamic. Our focus is on delivering best in class product innovation through our portfolio of world class brands, implementing cost efficiency measures within our control and driving share gain in our core market.
Our first question comes from the line of Julian Mitchell of Barclays. Your line is now open.
Hi.
Good morning.
Great to hear.
Update from Chris on the momentum in the tools business.
Maybe my question just around <unk>.
Slide nine and some of the commentary there on margins.
So I guess.
One is just it looks like the gross margins up sequentially in Q4, but sort of operating margin.
Somewhat so maybe just any sort of moving parts within that worth calling out and then you talk about the gross margin moving higher.
Don Allen: All aim to further improve margin, earnings, and cash flow. While there are many important steps ahead of us on our journey, I am confident that we have the right strategy, a highly capable and motivated leadership team, and a strong competitive position to successfully execute our transfer.
Sequentially into the first half of next year.
So you put that in context for us in terms of what does that tell us about the confidence in that sort of four to $5 of EPS number that you've mentioned in the past as perhaps some kind of framework.
Next year. Thank you.
Thanks for that.
Yes.
Long multiple questions there Julien.
Good questions because there are things that we're very focused on as far as our margin rate improvement, we're really pleased with what occurred in Q3.
Don Allen: , Chris Ritchie, David MacGregor, David MacGregor, David MacGregor, David MacGregor for our tools and outdoor products remain in a growth position this quarter versus 2019 levels. As we assess our competitive positions and demand trends, we believe that we are stabilizing our share position in a mixed market environment, while we continue to invest in market activation and field resources to drive future share gains. Our global cost reduction program delivered $215 million of pre-tax run rate savings in the quarter, on track for the expected $2 billion run rate savings by the end of 2025.
And what we believe will play out in Q4, and I'm going to ask Pat to give us more color on your questions around margin and then tying it into the four to $5 for next year, we still feel that that is a good range.
Potential outcome for us.
I will give a little more color on that as well.
Hey, Julien our focus is going to remain margins and cash generation until we're back to the operating model that.
<unk> has traditionally had.
Se gross margins you saw.
Both the facts the facts of the program driving cost savings we expected.
Don Allen: Adjust the gross margin rose to 27.6%, a 400 basis point sequential improvement, and 290 basis points favorable as compared to last year. The benefits from our inventory optimization and supply chain transformation are now clearly being reflected in our performance. As we navigate uncertain market conditions, we are continuing to focus on what is within our control to improve our margin. Looking ahead to 2024, we expect additional sequential and year-over-year gross margin gain.
To the tune.
100 to 150 basis points of margin improvement in the quarter.
Deflation also help in the quarter, mostly from shipping coming off the balance sheet of another 100 to 150 basis points and then.
Rotter high cost inventory coming off the balance sheet.
Around 300 basis points and that was.
Our expectation, it's great to see the teams working hard together to deliver the program on cadence, but absolutely had been telegraphing to investors.
Don Allen: We delivered approximately $300 million of inventory reduction this quarter, which brings us to $1.7 billion reduction since mid-2022 when we started this journey. This contributed to over $360 million of Q3 free cash flow generation, which supported our quarterly dividend and $285 million of debt reduction in the quarter. Benefits from lower supply chain costs contributed to third quarter adjusted deluded EPS of $1.5, which was better than our plan. Our year-to-date performance supports increasing our 2023 full-year adjusted deluded EPS guidance to a range of $1.10 up to $1.40, which would be up 25 cents at the midpoint.
We could see the rate at which high cost inventory was coming off the balance sheet.
That came well within our expectations and drove the important gross margin expansion from.
From here, we have a pathway.
235%, obviously the pathway going forward, it's not going to be perfectly linear, but it's certainly going to be more in the range of 50 to 100 basis points a quarter on gross margin.
As our operating margin question that had more to do with just.
It was about 200 plus million less revenue in this quarter and that was really the driver of the operating margin difference as we continue to invest in the business.
Don Allen: I want to thank our 50,000-plus employees around the world for their focus, dedication, and passion that contributed to another successful step forward in the third quarter. Our progress is encouraging, and I am confident that by executing our strategy, we are positioning the company to deliver higher levels of organic growth, profitability, and cash flow, as well as strong long-term shareholder returns.
And we're going to go forward, both in the fourth quarter and as we head into a dynamic 24 focused on continued gross margin expansion and cash generation.
Are going to be investing for growth.
And that's part of what we're doing in the fourth quarter and that's what we're going to plan to do in 24, as well, but we'll be mindful of the macro environment.
Don Allen: Now shifting to our third quarter segment results, I will discuss our industrial business performance and then pass it to Chris Nelson to review the tools and outdoor results. Third quarter industrial revenue declined 4% versus last year, as price realization and currency were more than offset by lower volume and a three-point impact from our Q3 2022 oil and gas business divestiture. We improved industrial-adjusted operating margin by 110 basis points versus prior year, given by continued price realization and cost to deliver adjusted operating margin of 12.2% in the quarter.
And what that means for cash delivery and Delevering along that route.
And the four to five.
I would say.
Given the performance of the business in the back half of the year in a dynamic market.
Yes, I would still say, we see the 4% to five as a reasonable range.
Certainly it's dependent on the macro and deflation versus inflationary environment.
I would say that the Florida five anticipates a stay.
<unk> are improving macro.
Don Allen: This represents strong execution and continued year-over-year margin expansion for our industrial team. Within the segment, engineered fasting organic revenues were up 6%, including aerospace growth of 29% and auto growth of 9%. As we continue to capture the strong cyclical recoveries in these markets, which was partially offset by what occurred in industrial fastening. Our attachment tool business experienced organic revenue decline primarily as a result of customer destocking to normalize their inventory levels. The long-term fundamentals for growth remain solid in all these businesses, and we believe the temporary channel inventory destocking and attachment tools will be complete as we exit 2023.
If you're at the stable side of the macro and you're probably on the lower side of the range and if you are at.
An improving macro you kind of go towards the higher side of that range.
Thank you.
Next question comes from the line of Tim <unk> with Baird. Your line is now open.
Okay.
Tim Rose your line is now open please check your mute button.
Our next question.
Comes from the line of Jeff Sprague with vertical research partners. Your line is now open.
Thank you good morning, everyone and Hello, Chris Good to hear your voice again.
Don Allen: I want to thank the industrial business for their strong execution. This is the fifth consecutive quarter of double digit adjusted operating margin for the segment. We are excited by the runway for growth, share gain and operating leverage in these businesses.
The.
I guess, maybe a little bit of a multi parter also but just kind of thinking about.
As you pivot from just kind of outright cost reduction to reinvesting for growth and alike.
Chris Nelson: I will now turn the call over to Chris to review our tools and outdoor performance. Thank you, Don, and good morning, everyone. I am now at the four and a half month mark at Stanley Black & Decker, and this period has really reinforced my excitement about the future for this business. I have spent my time with end users, customers, and our passionate and highly capable tools and outdoor organization. We have iconic brands such as DeWalt, Craftsman, Stanley, and Cuggedet, a strong pipeline of innovation, and customers and users who are eager for our newest products.
Does all of their most most of this reinvestment happen inside of Cogs in the gross margin discussion how much of it ends up kind of in selling sales force things that youre doing on kind of developing the trades that you mentioned.
And maybe just as part of that selling related question, maybe just a little bit more color on what youre seeing on promotion and just kind of the general pricing environment in the market.
Chris Nelson: We remain focused on capturing that opportunity. We are rapidly making progress with our transformation. The organization remains committed to supporting the necessary cost efficiencies as we prioritize the additional investments in innovation, brand support, and commercial resources that will be most impactful to re-accelerate growth and share gain in the market.
Hi, Jeff.
I'll ask Chris to give a little more color on that.
It clearly is going to be heavily weighted to SG&A in selling resources and activities.
Thank you, Chris and opportunity to give you a little more color on that Chris Yes, Jeff.
Thanks, a lot it's nice hearing from you again.
I'd say is that per Don's comments as we think about how we're going to move forward and I would say have focused investments in the business in the areas that we believe will drive the most leverage.
Chris Nelson: Now, turning to the tools and outdoor third quarter performance. Total revenue was $3.4 billion, down 5% organically, versus prior year, as a result of lower consumer outdoor and DIY market demand. Our tools, SPUs, and aggregate were positive organically in the quarter, excluding the rest of business exit, while outdoor was down 23% consistent with our expectations. Price for the segment was down two points in the period, as we successfully regained margin accretive cordless promotions consistent with historical activity.
Making sure that we see.
Which brands, we want to invest in and what levers we want to pull there and obviously.
We've seen the strength in the pro.
There was we did as far as near term look.
Was it positive was a positive story in the quarter and we need to keep on.
Yes.
Okay, Eric gathering steam with that what I'd say is that as far as in the investment buckets.
Chris Nelson: We made substantial progress in improving adjusted operating margin to 9.3%. This was a sequential step up of 480 basis points and 250 basis points better than last year. This improvement was driven by reduced sell-through of high cost inventory, supply chain transformation savings, and reduced shipping costs which were partially offset by lower organic revenue. In terms of performance by region, North America was down mid-signal digits organically. Similar to the overall segment, North America's tools organic growth was positive, while outdoor declined.
We're thinking we could have the most leverage certainly having the right products.
For the professional end user is a is a is a large emphasis for us.
We referenced a few of the launches that we have in the near term we are going to continue to double down on those types of investments for the pro end user because of the strength of the brand as well as what we see in the marketplace. Similarly, we want to make sure that we have the right commercial resources in the right markets on the ground with our customers working.
Chris Nelson: US retail point of sale for the quarter remained above pre-pandemic 2019 levels, supported by strength in professional demand and price. Third quarter POS for DeWalt was positive versus last year, supported by promotions, our pro-inspired new product offerings and sustained professional demand. Our European organic revenue was down 3 percent with bright spots from double digit organic growth in the UK and low single digit growth in the Nordics. We are leveraging targeted programs to capture professional share with the Walt cordless tools.
With them on ways that we can grow together, because we really think that there's some great opportunities in the area and that area. So.
Thats, where really out of the gate the emphasis is going to lie as far as your other question on <unk>.
Where we see.
What we saw the promotional activities.
Yes.
We did reference that we're going to be back and returning to traditional levels of promotion and we did that in Q3 and started our quarter out strong and we're happy to be back in that that promotional.
Chris Nelson: In emerging markets, we grew mid single digits organically, excluding the impact from the Russia business exit, including this impact organic sales declined 4 percent. Solid emerging markets performance was led by Latin America which has now recorded 4 consecutive quarters of organic growth. We have seen notable strengths in Brazil, particularly within the professional channels. Moving to our strategic business unit performance, the hand tools business grew 2 percent organically versus prior year. This includes mid single digit organic growth in North America and Latin America, supported by expanded offerings at our retailers and strong new product sales.
Mindset, because it is an important part of the business and we think it is healthy and accretive for the business going forward. Now. We also are certainly going to supplement that with the new launches and we're going to lean into the new launches going into the back half of the year to continue that growth, but all in all we are seeing the.
In Q3 are our sell through was in line with our expectations as far as pricing.
We see.
Discipline in the marketplace as far as no no deep discounting and we're going to make sure and continue in our healthy and traditional promotional mix, but then like I said also be driving growth organically through leaning into the opportunities that we see with the pro.
Chris Nelson: Power tools declined 2 percent organically, pressured by consumer tools. Pro-driven momentum coupled with positive impacts from a healthier supply chain is supporting enhanced service levels and promotional opportunities. Transitioning to outdoor organic revenue declined due to market demand chopperness as the industry resets from the pandemic era. This resulted in fewer shipments from the quarter as there are elevated inventory levels globally impacting replenishment cycles. Despite the current market environment, we are excited about the long term opportunity and bringing leading innovation to outdoor across our powerful brands.
Thank you.
Our next question comes from the line of Michael Rehaut with Jpmorgan. Your line is now open.
Thanks, Good morning, everyone I appreciate it.
Just wanted to kind of understand some of the puts and takes on the updated guidance.
If I may.
Kind of what really ineffective drove the upside in the third quarter and it seems like on.
Chris Nelson: I want to thank the team for their strong execution in the quarter as we continue to focus on winning with our customers and capturing this amazing growth margin and share who hold the return opportunity.
On an EPS basis year in effect reiterating.
The implied fourth quarter guide.
You referenced investing in growth I don't know if thats something that maybe perhaps you are increasing in the fourth quarter relative to prior expectations, but would love to understand that dynamic of what drove the <unk> upside and why you're reiterating <unk>.
Chris Nelson: Turning to the next slide, I would like now to highlight a few examples of how we are evolving our trade focused offerings and cordless outdoor expansion. With professional tradespeople and end user innovation top of mind, we recently launched the DeWalt 20 volt max half inch high torque impact wrench. This is the industry's highest rated max torque cordless impact wrench in its class ideal for use in heavy duty applications. We also introduced the world's first battery charger box, the DeWalt tough system 2.0 dual port charger.
And also.
To that point.
The reiteration of the free cash flow guidance.
<unk> key the raising of the EPS guidance.
What's the bridge there as well thank you.
Yes, Mike good morning.
Chris Nelson: Users now can protect store and charge DeWalt batteries in a durable weather resistant container to keep professionals productive despite rough job site conditions. In outdoor as we gear up for winter, DeWalt has entered the snow category with the 60 volt max single stage snow blower powered by two flexible batteries. It is engineered to tackle tough demands and breakdown heavy wet or packed snow. Our pro inspired innovation roadmap will continue to introduce solutions across our categories that enhance safety on the job site while elevating power and performance.
Third quarter was a strong quarter for us are our sales came in roughly as we were expecting.
And we drove the EPS b on the strength of gross margin performance and SG&A management.
The gross margin is a factor of the program running a bit ahead of both for both pace and absolute dollar generation and that drove strength in the quarter from a gross margin perspective.
Our teams are managing.
SG&A thoughtfully in the macro environment also as Chris and team came on board and it's been part of the quarter kind of revisiting current and future year priorities.
Chris Nelson: Now changing years to DeWalt's new involvement with our social responsibility efforts. We are working to close the trade skills gap and shaping the future of construction technology and the electrical and plumbing trades. In the third quarter, we opened the 2023 DeWalt grow the trades grant and trade scholarship program. These initiatives provide nonprofits with the necessary resources to train, reskill and prepare tomorrow's trades people by directly supporting end user trade education. This is a great example of our broader commitment to invest $30 million to grow trade skills by 2027.
Yes.
It's probably a bit of SG&A that will shift from the third quarter to the fourth quarter that helped out.
Third quarter net net as we head into the fourth quarter.
The top line is probably a bit softer probably to the tune of around 100 ish million or so.
Versus the expectations, we would have had a quarter ago. Most of that is baking in the trends and outdoors and attachment tools that we saw in the third quarter and also an expectation that.
Don Allen: Now I'll turn the call back to Don. Thanks, Chris. I appreciate the energy and perspective that you have brought to the team and I'm excited to continue our company's strategic business transformation with you as a key leader on our strong management team.
Unsettled UAW strike with at least two of the big auto manufacturers could pose some headwinds to our fastening business. So a softness in the fourth quarter at the top line slightly.
Don Allen: Turning to the next slide, I would like to reinforce the focus areas across our company's transformation. It's a positive and more direct impact for our end users and various channel customers. Two, 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 demands. Three, prioritizing cash flow generation and inventory optimization. And then four, continuing to advance innovation, electrification and global market penetration to achieve organic revenue growth of two to three times the market.
It is one of the reasons that the guidance in absolute terms in the fourth quarter is there and then we are investing as I mentioned, some will be a little bit of a shift of SG&A from the third quarter to the fourth quarter, but we're at a point, where we're confident in our margin.
And cash generation trajectory and we need to start investing for growth and we're doing that in the fourth quarter and those two things together.
Keep the EPS amount.
The amount constant in the fourth quarter.
And then on free cash flow much of this year's free cash free cash flow is generated by by working capital dynamics.
And much of those dynamics are continuing to play out according to plan and forecast.
Don Allen: We believe the strategy will ensure our best in class product innovation is maintained, but we continue to meet or exceed the expectations of our end users and we dramatically improve the channel customer experience. In parallel, we will maximize cost opportunities within our control to fuel investment as we deliver our margin earnings and cash flow goals. As our margins expand, our focus is to accelerate share gains. We are prioritizing innovation and market activation investments across our powerful brand and targeting the best prospects to maximize share gain growth and return. We continue to benefit from being a simpler, more focused company across tools and outdoor and industrial.
And Thats largely why the free cash flow guide stays what it is for the year in the quarter.
Thank you.
Our next question is from the line of Tim <unk> with Baird. Your line is now open.
Tim was your line is open please check your mute button.
Our next question comes from the line of.
Chris Snyder with UBS. Your line is now open.
Thank you I wanted to just follow up on the prior commentary of about 50 to 100 bps of quarterly gross margin improvement.
Don Allen: And we expect over the next 12, 18 months, we will find opportunities for further simplification. As we evaluate where to invest in the best ways to maximize shareholder return, we will continue to take a pragmatic view of our portfolio of businesses. Our track record demonstrates we will act decisively when the time is right on those portfolio decisions.
It seems that would imply 24 exiting up.
Around 300 basis points year on year at the midpoint.
So obviously very strong growth next year can you just maybe talk a little bit about what that assumes from both a macro and volume standpoint, and also from a cost input standpoint, I guess metal and freight.
Pat Hallinan: I will now turn the call over to Pat to share the latest progress updates on our transformation financial insights on the quarter and our revised outlook outlook for the year. Thank you, Don, and good morning, everyone. We continue to generate strong transformation results and go forward momentum. Our cost reduction program delivered approximately $250 million of pre-tax run rate cost savings in the quarter, bringing our aggregate savings to approximately $875 million since program inception.
Thank you Scott.
Yes.
<unk>.
We will give detailed 2004 guidance at the end of the year when we do our fourth quarter.
I can point you in a few directions, especially around the gross margin because it's such an important point of our progress and where our focused energy as you I think on a full year basis for 'twenty four we would expect full year gross margins around 30, potentially a little bit higher than 30%.
Pat Hallinan: This positions us well to deliver or slightly exceed our 1 billion run rate savings target this year and to deliver 2 billion run rate savings by 2025. As it relates to the supply chain transformation, strategic sourcing initiatives remain the largest contributor to supply chain savings in program inception. The early actions focused on strategic components and logistics, as well as other rates. We have now covered approximately two-thirds of the targeted procurement spend establishing a carrion savings trajectory consistent with that contemplated in the 2024 program target.
Obviously that means exiting above 30% because we come in somewhere in the 28 ish range.
And so I think you have it right. It is an exit rate that's going to be somewhere in the low thirties will update.
What degree that is in.
January.
I think when you talk about the macro.
The macro while there is certainly a dynamic environment.
It's probably given all that's going on in the world.
Held in a bit stronger than we would expect and a lot of what's going on our business is kind of the resetting of inventories and channel this year.
Pat Hallinan: Our supply chain management and engineering teams will continue to drive sourcing improvement through 2025 and beyond. Activating our operations excellence program has also contributed significant savings this year. In the plant, where this has been activated, we are seeing increased productivity leveraging lean manufacturing principles. Our footprint-related projects are progressing on schedule with initial savings to begin this year. As a relate to complexity reduction, our teams are assisting customers as a transition to replacement products with the goal of exiting 30,000 skews by the end of 2023.
The resetting of the outdoor business post COVID-19 and a little bit of the shift that consumers have.
Buying goods to buying services and so I think the top line next year, we're expecting a similar stable ish type macro environment with some.
Dynamic elements around it.
But it's really going to depend on our volume next year is really going to depend on.
The consumer has stabilized and the rebalanced between goods and services and has the outdoor business stabilized post COVID-19.
Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Your line is now open.
Pat Hallinan: We are confident that our transformation can support the sustainable cost efficiency needed to return our adjusted gross margins to 35 percent of greater. These actions are creating the flexibility to fund additional organic growth investments in our core business.
Oh, hi, Thanks, Good morning, Thanks for the question it.
It seems like everyone's getting in three or four questions into one question John keeps it a bit simpler.
But maybe not who knows.
Pat Hallinan: Turning to our inventory reduction in gross margin improvement. We reduced inventory by approximately $300 million, bringing our year-to-date progress to approximately $880 million. The third quarter inventory reduction supported the generation of approximately $360 million of free cash flow in the period, resulting in one of the strongest third quarter cash generations in the company's history. We have reduced inventory by $1.7 billion since the middle of 2022. We achieved this through improved supply chain conditions, strategic inventory management, and the planned production curtailments initiated during the back half of 2022.
And then sort of a flat macro.
The inventory destock, especially.
And the attachments.
And obviously you have to.
Even in a stable macro do you think you can grow top line and that kind of setup and then maybe you could follow on questions. Within the question is what does the write down that Irwin.
Troy Bill tell us.
About those.
Those brands I mean is this part of the SKU.
The initiative any any kind of insights into what's driving those right now.
Yes, I think.
I'll start with the brand question and navigate to the the.
The macro question relating to next year, and then thoughts about.
Could we grow our top line.
Pat Hallinan: We expect modest inventory improvement in the fourth quarter, which would bring our full year 2023 inventory reduction to at or near our 23 objective of $1 billion as we prepare for next year's outdoor season and supply chain network changes. Inventory reduction will be a major contributor to our full year free cash flow target of $600 to $900 million. Looking to 2024 and beyond, we expect the additional multi-year inventory reduction opportunity to be at or above $1 billion.
Erwin and Troy.
<unk>.
A very good brands and they are outstanding brands in our portfolio, but as we have continued to focus on the simplification of our company, there's a lot of aspects of that and the aspects of <unk>.
We do business with our customers and our suppliers, how we work internally in a more efficient and effective way, but theres also looking at the simplification of the brands, we have and how we go to market and where we can effectively utilize them. The most.
We clearly have.
Three very powerful brands that are incredibly important to our strategy and dewalt Craftsman and Stanley and those will be.
Pat Hallinan: We expect to pursue further inventory reduction at the pace of 400 to $500 million per year. We will balance our goal of inventory efficiency with ensuring sufficient working capital to navigate through upcoming manufacturing and distribution network changes without impacting service to customers. We remain focused on increasing profitability and working capital improvement to generate free cash flow. Our priority for capital deployment is to fund our long-standing commitment to return value to shareholders to cash dividends and to further strengthen our balance sheet.
Points for that strategy going forward, but as you get into the next tier brands like our win or lose.
So Troy built et cetera.
We will utilize them effectively but we'll utilize them in a more simplified way and you're really seeing the impacts of that.
The adjustment to the valuation of what was on our balance sheet, it's really nothing more than that.
It's a little bit of the SKU rationalization impact in there, but I think it's more of the <unk>.
Strategic way, we're going to utilize it going forward.
Pat Hallinan: Shifting to profitability. We recorded adjusted gross margins of 27.6% up to 290 basis points versus prior year and improving 400 basis points versus the second quarter. This is the third consecutive quarter that we delivered the Quential Gross Margin Improvement. Year over year expansion was driven by lower inventory de-stocking costs, supply chain transformation benefits, and reduced shipping costs, all of which more than offset the impact of lower organic revenues. Moving forward, we expect continued adjusted gross margin rate expansion driven by the benefits of the supply chain transformation.
At the.
The macro for next Jeremy I think Pat gave a really good answers to.
Yes things are not.
Mixed and it's dynamic and that's the way. It is today and then what kind of going into next year thinking thats going to be similar to that we have pockets of strengths. Thank our professional tool business.
There are weak points and outdoor and consumer trends.
We got strength in aerospace and auto.
Fastener and industrial businesses.
We have some destocking happening in some other portions of our industrial business it probably will be behind us as we go into next year.
So we think it's going to be mix like that throughout most of next year could things get worse, possibly could things be better, yes, thats possible too I think we're all watching the fed to see what it does related to interest rates. If interest rates do not continue to rise then I think we feel that there will be a stable environment.
Pat Hallinan: Our guidance calls for adjusted gross margin to incrementally improve again in the fourth quarter. Now that the high cost inventory has turned through the PNL, we expect to continue to deliver expanding adjusted gross margin into the front half and full year 2024 supported by the success of our supply chain transformation. Achieving adjusted gross margins approaching 28% in the third quarter was a significant milestone on our journey to restore 35% adjusted gross margin. The momentum of our supply chain transformation is translating to sustainable upward progression in our margins and cash flow and will provide resources to fund investment to accelerate long term organic revenue growth toward our goal.
Yes.
We can manage through that it would be somewhat consistent to this and if it is stable can we grow.
We are investing for the main objective and reason two is to focus and gain market share.
And we've had a long history of gaining market share at Stanley Black <unk> Decker and we went through a period of time in particular in late 'twenty, one and 'twenty, two where we felt the impact of the shortage of semiconductors it really.
Put us in a position, where we actually lost some market share and we've been pretty Frank and clear about that but we are positioning ourselves again to get back to gaining share and we believe we've stabilized a lot of that at this stage and these investments that Chris referred to and Pat and their commentary alright things that we believe will allow us to grow.
Pat Hallinan: Now turning to our 2023 guidance, our expected gap earnings per share range has been revised to negative $1.45 to negative $1.25 to negative $0.50, primarily related to the third quarter non-cash intangibles impairment charge of $124 million. Gap earnings also include one time charges primarily from the global supply chain transformation and outdoor business integration. The current pre-tax estimate of acquisition related and other charges is now $425 to $450 million with approximately half of these expenses being non-cash.
Above the market whatever the market is and if the market is negative.
We won't be slated as much negative.
<unk> stable or neutral will probably grow a little bit and that's really the goal and objective that we're going after and overtime.
He'd like to as we've said would be able to say that we can grow somewhere between two to three times the market.
Sure.
Thank you.
Our next question comes from the line of Rob Wertheimer with Melius Research. Your line is now open.
Thank you I'd actually like to start where you just ended on.
Market share in trends there and my question I guess, specifically, there's been obviously a change in the mix of construction in North America, where you have larger projects Mega projects, whatever maybe housing is holding in there a little bit curious if there are any margin or market share or go to market impacts from that.
Pat Hallinan: Based on the strength of the third quarter, we are raising our full year adjusted earnings per share guidance range to $1.10 to $1.40 from a previous guidance range of $0.70 to $1.30. We delivered a strong third quarter cash performance and are maintaining our full year pre-cash flow target of $600 to $900 million. We expect fourth quarter cash flow to be supported by positive cash earnings, inventory reduction and the typical seasonal receivables reduction in tools and outdoor.
Maybe you have more pro maybe to have more.
I need high reliability, maybe not I'm, just curious about whether that has any impact on your business. Thank you.
Thanks, Rob.
Think.
We're probably we're using the word dynamic, but I think it's an appropriate word to describe the current market situation because theres a lot of different shifts happening there is.
Pat Hallinan: The organic growth outlook for the year is unchanged with the total company expected to be down mid-single digits. This implies a revenue midpoint of $15.9 billion for the year and includes estimated risks for auto strikes and continued infrastructure customer destocking.
Certainly a great deal of construction activity, but it's shifted quite a bit from what it was two.
18 to 24 months ago, where it was very heavily residential focused and commercial focus to some extent and then we went to the pandemic and the commercial activity has slowed down.
We continue to see different types of shifts we do not see radical shifts in our business model, though our how we go to market at this stage.
Pat Hallinan: Turning to important remaining elements of guidance, our expectation is for production to continue normalizing the fourth quarter. We remain disciplined and flexible in our approach to invest to drive organic growth and share gain. Williams. Our outlook assumes approximately $125 million of annualized innovation and market activation investment with a goal to ultimately deploy $300 to $500 million over the next three years. We expect fourth quarter adjusted operating profit to approximate $290 million with adjusted gross margin to sequentially improve to the 28% zone, both at the midpoint of our guidance. This continues the strong momentum from our cost reduction program while prioritizing strategic investments in the business.
One of the really great things about Stanley Black <unk> Decker is that we.
Over the years.
<unk> been very focused on what are the right channels to the end user the professional that ultimately is the ones the individuals that use our tools and.
Of that history, and then those channels that we have very strong presence in.
And not only North America, but the European markets as well as emerging markets around the globe.
We have their presence to be able to ensure that we're meeting the need of the end user and.
If the end user is shifting too.
E Commerce, we have the ability to just have that many e-commerce as well.
Or if they continue to want to go to the traditional distributor that they spend time with we sell through that channel. So I think we are positioned well for whatever may happen in the future clearly.
Don Allen: With that, I will now pass the call back over to Don. Thank you Pat. We are pleased to report another quarter of progress on our journey of transforming Stanley Black & Decker. Consistent successful execution against our plan gives us the confidence to increase investments which will accelerate organic growth behind our most powerful brand. As we continue to focus on what we can control to be successful, I am confident that we are creating a stronger and more focused company with our great people, amazing brand and industry leading end user inspired innovation. We believe the outcome of our transformation will produce a sustainable market share gaining machine.
There will be a shift.
Continued shift over time, where more and more people focus on E. Commerce activity, we positioned ourselves well over the last decade to be able to continue to address that I think youll see more of that shifting as you get into some of these commercial and industrial channels with larger distributors as they built some e-commerce platforms.
During the pandemic to deal with a period of time, where people didn't want to get close to each other.
And we've been able to adjust that as well. So we're going to continue to do that it will probably be an area that we will invest in overtime to make sure that we meet those needs of the channel.
Dennis Lange: 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 111 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 111 again. We ask that you please limit yourself to one question. Please stand by when we compile the Q&A roster.
Thank you.
Next question comes from the line of Joe O'dea with Wells Fargo. Your line is now open.
Hi, good morning, Thanks for taking my question.
Hey, I wanted to ask on the sort of returns targets around investment spend and so when you think about investing $125 million. How do you think about the returns there and tracking them and so both from.
Julian Mitchell: Our first question comes from the line of Julian Mitchell of Barclays. Your line is open. Hi. Good morning and great to hear that update from Chris on the momentum in the tools business. Maybe my question just around slide 9 and some of the commentary there on margins. One is just it looks like the gross margins up sequentially in Q4 but sort of operating margin down somewhat so maybe just any sort of moving parts within that worth calling out.
The market outgrowth as.
Well as <unk>.
The evidence of that so when you spend $125 million.
Do you go about.
Tracking that it's actually achieving.
The targeted outcomes.
Yes, Joe.
I would say is long term.
We want to have very productive.
Investments in SG&A, that's mostly where these investments were talking to you all are centered.
Our long term financial algorithm, probably has SG&A somewhere around that 19 ish percent.
Julian Mitchell: Then you talk about the gross margin moving higher sequentially into the first half of next year. So now you put that in context for us in terms of what does that tell us about the confidence in that sort of four to five dollars of EPS number that you have mentioned in the past is perhaps some kind of framework for earnings next year. Thank you.
Net sales and so long term every time you put a dollar into <unk>.
SG&A you need to be getting more than five of those out of the top line at a gross margin that's at or above our fleet average.
That's certainly as we go into these investments.
Very much the intent.
Pat Hallinan: Thanks for the long multiple questions there Julian but they're good questions because they're things that we're very focused on as far as our margin rate improvement. We're really pleased with what occurred in Q3 and what we believe will play out in Q4 and I'm going to ask Pat to give us more color on your questions around margin and then tying it into the four to five dollars for next year. You know we still feel that that is a good range and potential outcome for us and Pat will give a little more color on that as well.
The pace at which that happens obviously can differ depending on where you are in your to certain competitive dynamics of which investments youre, making at a given point in time, but thats our financial algorithm.
Right now and maybe Chris if you want to add some things to this but our focus right now is on.
Re energizing.
Engineering and innovation engine and then.
Re energizing.
The activation around our preexisting marketing investments at around that innovation. Those two together are probably 80% to 90% of the.
Pat Hallinan: Pat. Yeah. Yeah Julian our focus is going to remain margins and cash generation until we're back to the operating model that businesses traditionally had. I'd say gross margins you saw both effects, the effects of the program driving the cost savings we expected you know to the tune of you know 100 to 150 basis points of margin improvement in the quarter you know deflation also a help in the quarter mostly from shipping coming off the balance sheet of another 100 to 150 basis points and then broader high cost inventory coming off the balance sheet of around 300 basis points and that was Thanks.
The investment.
Or spend that we're that we're making and it's all to get.
The growth.
The biggest brands.
Getting back to above market growth I don't know, if there's anything you'd want to add to that Chris no I just think that the.
The comment that Dan made about the three to three.
Flagship brands that we have and it's not only about net incremental investment, but it's also taking a look and see how we can reallocate existing dollars towards those three priority brands and the key initiatives that we see with the pro end user as well as making sure that we have the right commercial resource.
Pat Hallinan: Our expectation, it's great to see the teams working hard together to deliver the program on Cadence, but as we had been telegraphing to investors, you know, we could see the rate at which high cost inventory was coming off the balance sheet, and that came well within our expectations and drove the important gross margin expansion. You know, from here we have a pathway to 35 percent. Obviously, the pathway going forward, it's not going to be perfectly linear, but it's certainly going to be more on the range of 50 to 100 basis points of quarter on gross margin.
<unk> in place.
To be driving those returns as well so we're thinking of looking at the entirety of the spend and not just the net incremental and then driving that into measurable initiatives to be able to make sure that we're getting the types of returns above fleet average that Pat referenced.
Thank you.
Our next question comes from the line of Nicole <unk> with Deutsche Bank. Your line is now open.
Yeah. Thanks, good morning, guys.
Good morning.
Just wanted to ask one on pricing. So I think originally you guys were kind of expecting flat to slightly down in the quarter for tools, obviously, a little bit weaker than that just maybe a little bit more color on that from a competitive perspective, and your thought process on pricing into <unk> and perhaps thoughts around 2024. Thank you.
Pat Hallinan: You know, as your operating margin question, that had more to do with just, you know, it was about 200 plus million less revenue in this quarter, and that was really the driver of the operating margin difference as we continue to invest in the business. And, you know, we're going to go forward both in the fourth quarter, and as we head into a dynamic 24 focused on continued gross margin expansion and cash generation, you know, we are going to be investing for growth.
Yes, Nicole.
Purely from a from a guidance and actuals perspective.
I'd say very much within the bounds I'd say, the only dynamic that played out a bit differently in the quarter.
Pat Hallinan: And, you know, that's part of what we're doing in the fourth quarter, and that's what we're going to plan to do in 24 as well, but we'll be mindful of the macro environment. And, you know, what that means for cash delivery and delivering along that route. And the four to five, you know, I would say, you know, given the performance of the business in the back half of the year in a dynamic market, you know, I would still say we see the four to five as a reasonable range.
Is that.
The promotional mix around margin accretive power tools was a bit higher which was net net accretive to the P&L you saw the gross margin performance in the quarter.
Just as you reconcile and provide out.
The actual color on pricing was a little bit more than we would've expect but I think thats kind of on the margin.
Just how promotional activity unfolds in the quarter.
But.
Chris May want to add to this I don't think we see any kind of change to the competitive dynamics inclusive of the pricing related to the competitive dynamics no.
Pat Hallinan: Certainly, it's dependent on the macro and the deflation versus inflationary environment. You know, I would say that the four to five anticipates a stable or improving macro. You know, if you're at the stable side of the macro, you're probably on the lower side of the range, and if you're at an improving macro, you kind of go towards the higher side of that range. Thank you.
<unk> said earlier I think we see fairly good stability in the pricing and not a lot of competitive deep discounting in our R. Just to reiterate our focus is to be.
<unk> involved in the promotional aspect of the business because we think it is important to have those key brands and products out in front of our end users and our customers and we intend to continue at kind of those traditional levels, but more importantly, we are looking through our innovations and how we think about launching new products to be able to continue to supplement.
Tim Wojs: Our next question comes from the line of 10 woes with Baird.
Tim Wojs: Your line is now open. 10 woes, your line is now open. Please check your mute button. Thank you.
And grow those margins as well.
Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is now open.
Jeff Sprague: Our next question comes from the line of Jeff Sprague with vertical research partners. Your line is now open. Thank you.
Thanks, Good morning, guys.
Good morning.
So.
You talked about getting a normalized production in the fourth quarter I am curious.
Chris Nelson: Good morning, everyone. Hello, Chris. Good to hear your voice again. The, I guess, maybe a little bit of a multi-parter also, but just kind of thinking about as you pivot from just, you know, kind of outright cost reduction to reinvesting for growth and the like. Does all are must most of this reinvestment happen inside of cogs and the gross margin discussion? How much of it ends up kind of in selling sales force, you know, things that you're doing on kind of developing the trades that you mentioned.
Maybe two part question do you expect to stay at normalized production throughout 2024, and then as you kind of think about maybe some of the one time hits to your profitability in 2023.
Can you quantify whether it's the inventory piece the production piece.
How much does that help the bridge for 2024.
Yes, I'll, let Pat give a little more color on that but we are pleased that we've gotten to a more stable manufacturing level here in the fourth quarter and at this point of view of next year is if we assume that you have.
Chris Nelson: And maybe just as part of that selling related question, maybe just a little bit more color on what you're seeing on promotion and just kind of the general pricing environment in the market. Thank you. Yeah, Jeff, I'll ask Chris to give a little more color on that. It clearly is going to be heavily weighted to SGNA and selling resources and activities, but let's give Chris an opportunity to give you a little more color on that.
The environment that Pat described around the four to $5 of EPS that if we're in that range because of where the macro is we would expect it to continue to be stable. We will continue to focus on optimizing inventory next year. So maybe give a little more color on that yes, I think Joe.
We certainly feel like we have opportunity to get inventory much leaner right probably to the tune of.
Chris Nelson: Chris? Yeah, Jeff, thanks a lot, it's nice hearing from you again. And what I would say is that, you know, Perdon's comments is we think about how we're going to move forward and I would say have focused investments in the business and the areas that that we believe will drive the most leverage. You know, making sure that we see which brands we want to invest in and, you know, what levers we want to pull there.
$1 billion to 1 billion and a half.
Over the next two years to three years at a pace of $4 to $500 million a year I think as it relates to the production normalization you asked about and as it relates to kind of one time items in the cost structure I'd say for the most part 'twenty four we expect production to be normal.
Chris Nelson: And, you know, obviously, you know, we've seen the strength of the pro and, you know, there was, we did, you know, as far as near term look, you know, the wall was a positive, was a positive store in the quarter. We need to keep on gathering, gathering steam with that. What I'd say is that, is far as in the investment buckets and where we're thinking we could have the most leverage, certainly having the right products for the professional end user is a is a is a large emphasis for us.
<unk>, obviously, as we and the rest of the outdoor industry.
Find the new kind of post Covid outdoor base, we will be mindful of the production levels in our outdoor space.
That's that's kind of $2 billion ish.
$13 $14 billion <unk> business, So I think those production schedules will be.
Tied to the market realities, we see an outdoor but broadly speaking.
Chris Nelson: You know, we we reference a few of the launches that we have in the near term, and we are going to continue to double down on those types of investments for the pro and user because of the strength of the brand as well as what we see in the marketplace. Similarly, you know, we want to make sure that we have the right commercial resources. In the right markets on the ground with our customers, working with them on ways that we can grow together because we really think that there's some great opportunities in the area in that area.
In this fourth quarter and as we head into 'twenty four.
Tools production has normalized I think as you talk about the one time cost.
Those are kind of seeing in our gross profit as we exit the fourth quarter of this year. So during this year you've seen a cost of about 400 basis points in total 300 of which was roughly high cost inventory and one of which 100 basis points of which was.
Chris Nelson: So, you know, that that's where really out of the gate, the emphasis is going to lie, as far as your other question on, you know, where we see, you know, what we saw the promotional activities. You know, we're we did reference that we're going to be back in returning to, you know, traditional levels of promotion, and we did that in Q3, and it started our quarter out strong and we're happy to be back in that that promotional mindset because it is an important part of the business and we think it is healthy and creative for the business going forward.
Kind of under absorption of fixed cost that has played out within 23.
And youre seeing that in the gross profit margin that almost 28% in the third quarter, and we will probably be at or above and in the fourth quarter, and so thats kind of behind us.
And we're building off of that 28 plus percent.
Margin next year as we head into 'twenty four and the program continues.
Chris Nelson: Now, we also are certainly going to supplement that with the new launches and we're going to lean into the new launches going in the back half of the year to continue that growth, but all in all, we're seeing the, you know, in Q3, our our sell through was in line with our expectations. And as far as pricing, we see, you know, discipline in the marketplace as far as no, no deep discounting and we're going to, you know, make sure and continue in our healthy and traditional promotional mix. But then, like I said, also be driving growth organically through leading into the opportunities that we see with the pro. Thank you.
Thank you I would now like to hand, the call back over to Dennis Lange 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 participating you may now disconnect.
Yeah.
Okay.
Yeah.
Michael Rehaut: Our next question comes from the line of Michael Rehut with JP Morgan. Your line is now open. Thanks. Good morning, everyone. Appreciate it.
Yeah.
Okay.
[music].
Okay.
Pat Hallinan: I just wanted to kind of understand some of the puts and takes on the updated guidance, if I may, you know, kind of what really in effect drove the upside in the third quarter and it seems like, you know, on an EPS basis, you're in effect reiterating the implied fourth quarter guide. I think you referenced investing in growth. I don't know if that's something that maybe perhaps you're increasing in the fourth quarter relative to prior expectations.
Okay.
[music].
Yes.
Pat Hallinan: But we'd love to understand that dynamic of what drove the 3Q upside and why you're reiterating 4Q. And also to that point, you know, the reiteration of the free cash flow guidance relative to the, you know, raising a BPS guidance, what's the bridge there as well. Okay. Thank you.
Pat Hallinan: Yeah, Mike Good morning. You know, third quarter is a strong quarter for us. Our sales came in roughly as we were expecting, and we drove the EPSB on the strength of Gross Margin performance and SGNA management. You know, the Gross Margin is a factor of the program running a bit ahead of both pace and absolute dollar generation, and that drove strength in the quarter from a Gross Margin perspective. You know, our teams are managing SGNA thoughtfully in the macro environment.
Pat Hallinan: Also, as you know, as Chris and team came on board, and I spent part of the quarter kind of revisiting current and future year priorities. You know, there was probably a bit of SGNA that will shift from the third quarter to the fourth quarter that helped out the third quarter net net as we had into the fourth quarter. You know, the top line is probably bit softer probably to the tune of around a hundredish million or so versus the expectations we would have had a quarter ago.
Pat Hallinan: So, you know, most of that is baking in the trends in outdoors and attachment tools that we saw on the third quarter, and also an expectation that, you know, unsettled UAW strike with at least two of the big auto manufacturers could pose some headwind to our fastening business. So, a softness in the fourth quarter at the top line slightly is one of the reasons that the guidance and absolute terms in the fourth quarter is there.
Pat Hallinan: And then we are investing, as I mentioned, some will be a little bit of a shift of SGNA from the third quarter to the fourth quarter. But we're at a point where we're confident in our margin and cash generation trajectory. We need to start investing for growth and we are doing that in the fourth quarter. And those two things together, you know, keep the EPS amount constant in the fourth quarter.
Pat Hallinan: And then on free cash flow, much of this year's free cash flow is generated by working capital dynamics. And much of those dynamics are continuing to play out according to plan and forecast. And that's, you know, that's largely why the free cash flow guide stays what it is for the year in the quarter. Thank you.
Tim Wojs: Our next question is from the line of Tim Woes with Baird. Your line is now open. Tim Woes, your line is open.
Tim Wojs: Please check your mute button.
Chris Snyder: 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 prior commentary of about 50 to 100 bits of quarterly gross margin improvement. It seems that it would apply 24 exiting up around 300 basis points a year on the air at the midpoint. So obviously very strong growth next year. Can you just maybe talk a little bit about what that assumes from both a macro and volumes standpoint. And also from a cost input standpoint, you know, I guess metal and prey, you know, maybe thank you for that.
Pat Hallinan: Yeah, I, you know, we'll give detailed 24 guidance at the end of the year when we do our fourth quarter, you know, but I, I can point in a few directions, especially around the gross margin because it's such an important point of our progress and where our focused energy is. I think on a full year basis for 24 we would expect full year gross margins around 30, potentially a little bit higher than 30%.
Pat Hallinan: Obviously that means exiting above 30% because we come in somewhere in the 28th range. And so I think you have it right it is an exit rate that's going to be somewhere in the low 30s will update, you know, to what degree that is in January. I think when you talk about the macro, you know, as the macro, you know, while there's certainly a dynamic environment, it's probably given all that's going on in the world, held in a bit stronger than we would expect.
Pat Hallinan: And a lot of what's going on our business is kind of the resetting of inventories and channels this year, the resetting of the outdoor business post COVID and a little bit of the shift that consumers have from buying goods to buying services. And so I think the top line next year we're expecting a similar stabilist type macro environment with some, you know, dynamic elements around it, but it's really going to depend on our volume next year is really going to depend on as the consumer stabilized in the rebounds between goods and services and has the outdoor business stabilized post COVID. Thank you.
Nigel Coe: Our next question comes from the line of Nigel Coe with Wolf Research. Your line is now open. Oh, hi. Thanks. Good morning. Thanks for the question. And since everyone's getting in through four questions and one question, I'll try and keep it a little bit simpler. But maybe not who knows.
Don Allen: I'm just thinking, you know, in a sort of flat macro, you know, given the image of these dogs, especially in the attachments and obviously outdoor, even in stable macro, do you think you can grow top line in that kind of setup. And then maybe my following question within the question is, you know, what does the write down at Irwin and, you know, Troy built tell us about those about those brands mean is this part of the SKU reduction initiative, any any kind of like insights into into what's right in those right now.
Don Allen: Yeah, I think, you know, the I'll start with the brand question and navigate to the macro question related to next year and thoughts about could we grow our top line. The, you know, Irwin and Troy built brands that are very good brands and they're outstanding brands in our portfolio. But as we have continued to focus on the simplification of our company, there's a lot of aspects of that is the aspects of how we do business with our customers and our suppliers, how we work internally in a more efficient and effective way.
Don Allen: But there's also, you know, looking at the simplification of the brands we have and how we go to market and where we can effectively utilize them the most. We clearly have, you know, three very powerful brands that are incredibly important to our strategy into Walt craftsmen and Stanley and those will be, you know, focal points for that strategy going forward. But as you get into the next tier of brands like Irwin or Linux or Troy built, et cetera, we will utilize them effectively, but we'll utilize them in a more simplified way.
Don Allen: And then you really see the impact of that with the adjustment to the valuation of what was on our balance sheet. It's really nothing more than that. There's a little bit of the ski rationalization impact in there, but I think it's more of the strategic way we're going to utilize it going forward. Looking at the macro for next year, I think Pat Cavan really good answer is to our view is you know things are not they're kind of mixed in its dynamic and that's the way it is today and then we're kind of going into next year thinking it's going to be similar to that we have pockets of strength like our professional tool business.
Don Allen: We're wrapping in some other portions of our industrial business that probably will be behind us that we go into next year. So we think it's going to be mixed like that you know throughout most of next year could things get worse possibly could things be better yes that's possible too. I think we're all watching the fed to see what it does related to interest rates if interest rates do not continue to rise then I think we feel like there will be a stable environment that we can manage to do that will be somewhat consistent to this.
Don Allen: And if it is stable can we grow well you know we're we are investing for the main objective and reason to is to focus and gain market market share. And we've had a long history of gaining market share Stanley Black & Decker and we went to appear to time in particular in late 21 and 22 where we felt the impact of the shortage of semiconductors that really put us in a position where we actually lost the market share.
Don Allen: And we've been pretty frank and clear about that but we are positioning ourselves again to get back to gaining share and we believe we stabilize a lot of that at this stage. And these investments that Chris referred to and Pat in their commentary are things that we believe will allow us to grow above the market whatever the market is. And if the market is negative we won't be slight as much negative if it's stable or neutral we'll probably grow a little bit and that's really the goal and objective that we're going after and over time we'd like to as we've said be able to say that we can grow somewhere between two to three times the market.
Don Allen: Thank you.
Rob Wertheimer: Our next question comes from the line of Rob Werthermer with Melius Research. Your line is now open. Thank you.
Rob Wertheimer: I'd actually like to start where you just ended on on market share and trends there and my question I guess specifically is there's been obviously a change in the mix of construction in North America where you have you know larger projects, mega projects, whatever. Maybe housing is holding in there. I'm a little bit curious if there are any margin or market share or go to market impacts from that. You know maybe have more pro maybe have more you know high need high reliability maybe not just curious about whether that has any impact on your business.
Rob Wertheimer: Thank you. Thanks Rob. Yeah I think you know that we're probably over using the word dynamic but I think it's an appropriate word to describe the current market situation. Because there's a lot of different shifts happening there's you know there's certainly a great deal of construction activity but it's shifted quite a bit from what it was. You know 1824 months ago where it was very heavily residential focused and commercial focused to some extent and then we went to the pandemic and the commercial activity slowed down.
Rob Wertheimer: So we continue to see different types of shifts we do not see radical shifts in our business model though or how we go to market at this stage. One of the really great things about Stanley Black and Decker is that we we have over the years, who has been very focused on what are the right channels to the end user, the professional that ultimately is the one the individuals that use our tools.
Rob Wertheimer: And because of that history and then those channels that we have very strong presence in not only North America but the European markets as well as emerging markets around the globe. We have that presence to be able to ensure that we're meeting the need of the end user. And if the end user is shifting to e-commerce, we have the ability to serve them and e-commerce as well. Or if they continue to want to go to the traditional distributor that they've spent time with, we sell to that channel.
Rob Wertheimer: So I think we are positioned well for whatever may happen in the future. Clearly there will be a shift, continued shift over time where more and more people focus on e-commerce activity. We position ourselves well over the last decade to be able to continue to address that. I think you'll see more of that shifting as you get into some of these commercial and industrial channels with larger distributors as they've built some e-commerce platforms during the pandemic to deal with a period of time where people didn't want to get close to each other.
Rob Wertheimer: And we've been able to address that as well. So we're going to continue to do that. It will probably be an area that we will invest in over time to make sure that we meet those needs of the channel. Thank you.
Joe O'Day: Our next question comes from the line of Joe O'Day with Wells Fargo. Your line is now open. Hi, good morning. Thanks for taking my question. I wanted to ask on the sort of returns targets around investment spend. And so when you think about investing $125 million, how do you think about the returns there and tracking them? And so both from the market outgrowth as well as the evidence of that. So when you spend $125 million, how do you go about tracking that it's actually achieving the target outcomes?
Joe O'Day: Yeah, Joe, you know what I would say is, you know, long term. We want to have very productive investments in SG&A. That's mostly where these investments we're talking to you are centered and, you know, our long term financial algorithm probably has SG&A somewhere around that 19% of net sales. And so long term, every time you put a dollar into SG&A, you need to be getting more than five of those out of the top line at a gross margin.
Joe O'Day: That's that are above our fleet average. And that's certainly as we go into these investments, very, very much the intent, you know, the pace at which that happens obviously can differ depending on where you are in your certain competitive dynamics of which investments you're making at a given point in time. But that's our financial algorithm, you know, right now and you know, maybe Christmas want to add some things to this. But you know, our focus right now is on reenergizing the engineering and innovation engine and then reenergizing the activation around our pre-existing marketing investments and around that innovation.
Joe O'Day: You know, those two together are probably 80 to 90% of the investment perspend that we're making. And it's all to get the growth of the biggest brands getting back to above market growth. I don't know if there's anything you want to add to that question. No, I just think that the comment that Don made about, you know, the three, the three. Flagship Brands that we have and it's not only about net incremental investment but it's also taking a look and seeing how we can reallocate existing dollars towards those three priority brands and the key initiatives that we see with the pro end user as well as making sure that we have the right commercial resources in place to be driving those returns as well.
Joe O'Day: So we're thinking at looking at the entirety of the spend and not just the net incremental and then driving that into measurable initiatives to be able to make sure that we're getting the types of returns above fleet average that Pat referenced.
Pat Hallinan: Thank you.
Nicole DeBlase: Our next question comes from the line of Nicole DeBlase with Deutsche Bank. You'll want to snow open. Yeah, thanks.
Pat Hallinan: Good morning, guys. Morning. I just wanted to ask one on pricing. So I think originally you guys were kind of expecting flat to slightly down in the quarter for tools, obviously a little bit weaker than that. Just maybe a little bit more color on this from a competitive perspective and your thought process on pricing into 4Q and perhaps thought around 2024. Thank you. So I bet. And Nicole, I'm purely from a guidance and actual perspective.
Pat Hallinan: I say very much within the bounds. I say the only dynamic that played out a bit differently in the quarter is the promotional mix around margin of creative power tools was a bit higher, which was net net and creative to the PNL. You saw the gross margin performance in the quarter just as you reconcile and provide out the actual color and pricing was a little bit more than we would have expect.
Pat Hallinan: But I think that's kind of on the margin of just how promotional activity unfolds in the quarter. But I, you know, and Chris, may want to add to this, I don't think we see any kind of change to the competitive dynamics, inclusive of the pricing related to the competitive dynamics. No, as I said earlier, I think we're we see fairly good stability in the pricing and not a lot of competitive deep discounting and are just to reiterate.
Pat Hallinan: Our focus is to be, you know, healthily involved in the promotional aspect of the business because we think it's important to have those key brands and products out in front of our end users and our customers. And we intend to continue at kind of those traditional levels, but more importantly, we are looking through our innovations and how we think about launching new products to be able to continue to supplement and grow those margins as well. Thank you.
Joe Ritchie: Our next question comes from the line of Joe Richie with Goldman Sachs. Your line is now open. Thanks. Good morning, guys. Good morning. So so you talked about getting a normalized production in the fourth quarter.
Pat Hallinan: I'm curious to maybe two part question, do you expect to stay at normalized production throughout 2024? And then as you kind of think about, you know, maybe some of the one time, you know, hits to your profitability in 2023, what can you quantify, whether it's the inventory piece, the production piece, how much does that help the bridge for 2024? Yeah, I'll let Pat kill a little more color on that. But, you know, we are pleased that we've got to a more stable manufacturing level here in the fourth quarter.
Pat Hallinan: And at this point, the view of next year is if we assume that you have an environment that Pat described around the four to five dollars of EPS, that if we're in that range because of where the macro is, we would expect it to continue to be stable. We will continue to focus on optimizing inventory next year.
Pat Hallinan: So Pat, maybe give a little more color on that. Yeah, you know, I think Joe, you know, we certainly feel like we have opportunity to get inventory much leaner, right? Probably to the tune of a billion to a billion and a half over the next two to three years at a pace of four to five hundred million a year. I think as it relates to the production normalization you asked about. And as it relates to kind of one time either in the cost structure, I'd say, you know, for the most part, 24, we expect production to be normalized.
Pat Hallinan: Obviously, as we and the rest of the outdoor industry, you know, find the new kind of post-kick COVID outdoor base, you know, will be mindful of the production levels in our outdoor space. You know, but that's, you know, that's kind of two billion of, you know, a 13, 14 billion dollar TNO business. So I think, you know, those production schedules will, you know, be tied to the market realities. We see an outdoor, but broadly speaking in this fourth quarter.
Pat Hallinan: And as we head into 24 tools, production has normalized. I think as you talk about the one time cost, you know, those you're kind of seeing in our gross profit as we exit the fourth quarter of this year. So, you know, during this year, you've seen a cost of about 400 basis points in total, you know, 300 of which was roughly high cost inventory and one of which 100 basis points of which was kind of under absorption of fixed cost.
Pat Hallinan: That has played out within 23 and you're seeing that in the gross profit margin that almost hit 28% in the third quarter and will probably be at or above in the in the fourth quarter. And so that's kind of behind us. And, you know, we're building off of that 28 plus percent gross margin next year as we head into 24 in the program continues.
Dennis Lange: Thank you.
Dennis Lange: I would now like to hand the call back over to Dennis Lang for closing remarks. Janet, thanks. We'd like to thank everyone again for their time and participation on the call.
Dennis Lange: Obviously, please contact me if you have further questions. Thank you.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you very much.