The Third Quarter 2023 Stanley Black & Decker Earnings Conference Call was held, with Dennis Lange as the operator and Don Allan, Chris Nelson, and Pat Hallinan as speakers. The call discussed the company's third quarter results and other matters, with a Q&A session following. The speakers made forward-looking statements and directed listeners to cautionary statements about potential risks and uncertainties. The company's President and CEO, Don Allan, highlighted the successful advancement of their strategic business transformation in the third quarter.

The company has seen improvements in adjusted gross margin and earnings per share, as well as free cash flow, due to their focused execution. Their supply chain transformation has led to a healthier cost and inventory position, and their execution has improved. They plan to invest in innovation and market activation to capture long-term growth opportunities. Their strategy is to focus on best-in-class product innovation, cost efficiency, and share gain in their core markets. Despite challenges in the market, their U.S. retail point-of-sale for Tools and Outdoor products has shown growth compared to 2019 levels. The company is confident in their strategy, leadership team, and competitive position for successful transformation.

The company has stabilized its market share and is continuing to invest in market activation and field resources. Their Global Cost Reduction Program is on track to deliver $2 billion in savings by 2025. Adjusted gross margin has improved due to inventory optimization and supply chain transformation. The company expects further margin gains in 2024. They have reduced inventory by $1.7 billion since 2022 and generated $360 million in free cash flow in the third quarter. This has allowed them to increase their 2023 full year adjusted diluted EPS guidance. The CEO thanks the employees for their contribution to the company's success and is confident in the company's future growth, profitability, and shareholder returns.

The fourth paragraph of the article discusses the performance of the Industrial business, which saw a decline in revenue but an improvement in operating margin. The Engineered Fastening segment had organic revenue growth, while the Attachment Tool segment experienced declines due to customer destocking. The long-term growth potential for both segments is strong. The call is then passed to Chris Nelson to review the Tools and Outdoor performance, and he expresses his excitement for the future of the business after spending time with customers and the organization.

In the third quarter, the company's total revenue was down 5% due to lower demand in the consumer outdoor and DIY market. However, their Tools SPUs saw positive organic growth, excluding the Russian business exit. The company also saw improved operating margins due to reduced costs and increased demand for professional products. North America saw mid-single digit organic growth, with positive performance in the Tools segment and decline in Outdoor. The company's iconic brands, such as DEWALT, saw positive point-of-sale growth supported by promotions and sustained professional demand.

The European organic revenue was down 3%, but there were some bright spots in the U.K. and Nordics. The company is focusing on capturing professional share with DEWALT cordless tools. In emerging markets, there was mid-single-digit organic growth, excluding the impact of the Russia business exit. The hand tools business grew 2% organically, while power tools declined 2% due to Consumer Tools. The Outdoor segment saw a decline in organic revenue due to market demand choppiness. Despite this, the company is excited about the long-term opportunity and is bringing innovation to the Outdoor segment. The team's strong execution is focused on winning with customers and capturing growth margin and shareholder return opportunities. The company is evolving its trade offerings and expanding into Cordless Outdoor with a focus on professional trades and heavy-duty applications.

DEWALT has introduced several new products, including the TOUGHSYSTEM 2.0 Dual-Port Charger and the 60-volt MAX Single Stage Snow Blower, to enhance safety and performance on job sites. They are also investing in social responsibility efforts, such as the DEWALT Grow the Trades Grant and Trades Scholarship program, to address the trade skills gap. The company is focused on streamlining and simplifying their organization and prioritizing investments that benefit their end-users and channel customers.

The company has a four-part strategy to improve operations and supply chain, prioritize cash flow and inventory optimization, advance innovation and market penetration, and accelerate share gains. They will also continue to simplify their businesses and make portfolio decisions to maximize shareholder return. The company has seen strong transformation results and cost savings in the quarter.

The company has saved approximately $875 million since the start of their program and is on track to exceed their $1 billion savings goal for the year and reach $2 billion by 2025. Strategic sourcing initiatives have been the biggest contributor to these savings and will continue to drive improvement. The Operations Excellence program has also contributed to savings through increased productivity. The company is also working on reducing complexity and transitioning customers to replacement products. These actions will help improve gross margins and support organic growth investments. The company has reduced inventory by $300 million and generated $360 million in free cash flow in the third quarter.

In the past year, the company has successfully reduced inventory by $1.7 billion through improved supply chain conditions, strategic inventory management, and production curtailments. They expect further inventory reduction in the fourth quarter and plan to continue reducing inventory by $400 million to $500 million per year. This will contribute to their goal of achieving a free cash flow target of $600 million to $900 million. The company's focus on profitability has also resulted in improved adjusted gross margin rates, with a 290 basis point increase compared to the previous year. This is expected to continue in the fourth quarter and beyond, driven by the benefits of their supply chain transformation.

The company expects to see continued improvement in adjusted gross margin due to their supply chain transformation. They have revised their 2023 guidance for GAAP earnings per share and raised their adjusted earnings per share guidance. They are also maintaining their full year free cash flow target. The organic growth outlook for the year is unchanged, and they expect production to continue to normalize in the fourth quarter.

The speaker, Don Allan, reports on the progress of Stanley Black & Decker's transformation and their focus on increasing investments to accelerate organic growth. He believes this will lead to sustainable market share gains. During the Q&A session, Julian Mitchell asks about the margins mentioned on slide nine, specifically the sequential increase in gross margin but decrease in operating margin. Don explains that there are no major factors causing this difference and expects gross margin to continue to improve in the first half of next year.

Don Allan and Pat Hallinan respond to Julian's question about the confidence in the $4 to $5 EPS estimate for next year. They mention that they are focused on improving margin rates and are pleased with the progress in Q3 and expected progress in Q4. Pat explains that the gross margins saw improvements due to cost savings, deflation, and high cost inventory coming off the balance sheet. They have a pathway to 35% gross margin and expect a gradual improvement of 50-100 basis points per quarter going forward.

The company's operating margin question was related to a $200 million decrease in revenue in the current quarter, which affected the difference in operating margin. The company plans to continue investing in the business in the fourth quarter and in 2024 for growth and gross margin expansion. They will consider the macro environment and its impact on cash delivery and de-levering. The expected range for the year is $4 to $5, depending on the stability or improvement of the macro. The next question was from Tim Wojs with Baird, but there was no response. The following question was from Jeff Sprague with Vertical Research Partners, who asked about the company's shift from cost reduction to reinvesting for growth and if this would primarily happen within COGS and gross margin.

The company is planning to invest heavily in sales and marketing efforts, particularly in the professional end-user market. They will focus on developing the right products and resources to grow their brand and work closely with customers to drive growth. This will be the main area of investment for the company in the near future.

The company had a strong third quarter, driven by traditional levels of promotion and new launches. They plan to continue this growth through a mix of promotions and organic opportunities. The updated guidance reflects this growth and the company's focus on investing in growth. The EPS guidance for the fourth quarter remains the same, but the free cash flow guidance has been raised.

The company's sales met expectations and drove strong EPS due to gross margin performance and careful management of SG&A. There was a shift in SG&A from the third quarter to the fourth quarter, and the topline is expected to be slightly softer due to trends in certain areas and a potential strike. The company is confident in its margin and cash generation, but is also investing for growth in the fourth quarter. Free cash flow is largely generated by working capital dynamics and is expected to stay on track for the year and quarter.

Don Allan, speaking on behalf of the company, responded to a question about projected gross margin improvement for 2024. He stated that the company is aiming for a full year gross margin of around 30%, with an exit rate above 30%. He also mentioned that the macroeconomic environment is holding up stronger than expected, and the company is seeing a shift in consumer behavior from buying goods to services. More details will be provided in January.

The speaker discusses their expectations for the company's topline in the next year, mentioning the impact of consumer behavior on volume and the stabilization of the outdoor business post-COVID. They then answer a question about the write-down of Irwin and Troy-Bilt brands, explaining that it is part of their simplification strategy and that they will focus on their three main brands going forward.

The company plans to utilize its brands like Irwin, LENOX, and Troy-Bilt in a more simplified way, leading to an adjustment in the valuation of their balance sheet. The macro outlook for next year is mixed and dynamic, with pockets of strength in some businesses and weakness in others. The company is focused on gaining market share and investing for that purpose, despite challenges such as the semiconductor shortage in late 2021 and 2022. They are closely monitoring the Fed's actions and believe a stable environment will allow for growth.

The company is focused on gaining market share and believes that their recent investments will allow them to grow above the market, even if the market is negative. They aim to grow 2-3 times the market in the long term. The market has shifted in terms of construction activity, but the company does not see any significant changes in their business model.

Stanley Black & Decker has a strong presence in various markets, including North America, Europe, and emerging markets, which allows them to meet the needs of their end-users through different channels. They are well-positioned for the future as e-commerce continues to grow, and have invested in e-commerce platforms to address the effects of the pandemic. They will continue to invest in this area to meet the needs of their customers. When it comes to investing $125 million, they track the returns in terms of market growth and evidence of success.

Don Allan, the speaker, explains that the company's long-term goal is to have productive investments in SG&A (selling, general, and administrative expenses) that make up 19% of net sales. The company wants to see a return of more than five times the amount invested in SG&A, with a gross margin above the company's average. The focus is currently on reenergizing the engineering and innovation engine, as well as activating marketing investments to drive growth for the company's biggest brands. Chris Nelson adds that the company is also looking at reallocating existing dollars towards priority brands and initiatives, as well as ensuring the right resources are in place to drive returns.

The company is looking at the overall spending and not just the incremental spending to ensure they are getting good returns. The next question is about pricing, and the company responds that they are still within their guidance and that the only difference was some promotional activity. They do not see any changes in the competitive dynamics related to pricing.

The speaker discusses the stability in pricing and their focus on promotional efforts and launching new products to supplement and grow margins. They also mention that they expect to stay at normalized production levels throughout 2024 and plan to optimize inventory in the next two to three years.

The speaker is discussing the production normalization and one-time costs in the company's Outdoor business. They expect production to be normalized by 2024 and will adjust to market realities. The one-time costs have affected gross profit margin but will be resolved by the end of the year. The company is aiming for a 28% gross margin in the coming year. The speaker thanks everyone for their time and invites further questions. The call has now ended.

This summary was generated with AI and may contain some inaccuracies.