Hi, good morning, everybody. Thanks for joining us on day two. We're gonna keep things rolling with the team from Stanley Black & Decker. We have Stanley's new CFO, Patrick Hallinan, joining us, as well as a familiar face in investor relations. Everyone knows Dennis Lange. So, Patrick, if you want to just, you know, kind of give us some opening remarks. I know there's some slides online, maybe refer to. Folks at home can click along. But, you know, maybe give us the lay of the land first, and we'll dive into some Q&A.
Yeah. You know, I think, I've spent the morning here today, first time at this conference. A lot of the attendees probably know the company as well or better than I do at this point. But obviously, a company in the midst of a transition. You know, Don and the board streamlined the portfolio, focusing on two businesses, the tools and outdoor business. That's about 85% of our revenue, and industrials business, that's about 15% of our revenue. Put in motion a cost transformation about a year ago, and objective is to drive out of the business by the end of 2025, both to return the margin to where it should be, and will be, but also to create the room to invest for growth.
Cost transformation journey, we've delivered, you know, at this point in time, about $600 million of cost transformation since the program has started. We're running a bit ahead of schedule and have every confidence we're gonna get to that $2 billion. We've also been driving a lot of inventory out of the business, about $1 billion and $1.4 billion in the last year or so. And once we get to the end of this year, we probably still have another $1.5 billion of inventory to take out of the business. And, you know, as we get the balance sheet cleaned up and the cost structure in place, you're gonna see the focus on growth accelerate.
It's not that we ever lost that focus, but certainly, now that the supply chain is healed, and the margin structure allows you to invest appropriately in SG&A, we'll be on a growth journey from this point forward.
Excellent. Maybe just, if you could, give us a bit of an update of what you're seeing out there. Obviously, demand environment has been pretty rich and nuanced this year. I know for your own profitability and, you know, kind of the journey here, obviously, a lot of that more internally focused, but any observations externally in terms of customer demand or, you know, their own inventory levels or any categories you'd point out?
Yeah. I'll talk to first, demand and the demand environment and then the channel inventory environment. I would say, you know, consistent with the comments we made at the end of the second quarter and consistent with, I think, some of the big U.S. retailers at the end of their quarter, about a month later, you know, we've seen the pro very much engaged and probably stronger than we would have expected this year. And nothing has kind of wavered there. I'd say, you know, on the consumer side of things, we certainly have seen more price sensitivity at higher price points. And I think that's, you know, that's consistent with what the retailers are experienced.
I don't think there's been kind of a new wrinkle in demand since our second quarter remarks. You know, I... What I would say is we're expecting the macro to be about where it is. I mean, central banks seem poised to be biased towards defense, and that's where they've been. I'd say, given that posture, this year has been better than we might have otherwise thought from a, from just a pure avoidance of recession. We'll see if that still holds true, but I think we feel that the demand we're getting now is likely the demand we see for the balance of this year and into the front half of next year.
For us, channel inventories are in a reasonable, I'd say they're at the low end of what would be a normal range for us personally, and I'd say that that's true whether you're talking pro-centric channels or consumer-centric channels, whether you're talking the U.S. or other regions of the world. So we don't see a big channel inventory issue. We certainly have more inventory on our own balance sheet than we'd like to. Like I said, probably by the end of this year, to the tune of $1 billion-$1.5 billion. But we're gonna work that off slowly. You know, we're not going to be using price as a lever to get after that.
And we also have some production and distribution footprint changes that'll be taking place in the U.S. and elsewhere over the next year and a half, two years. The part of the pacing of that inventory will be to ensure service levels as we make those transitions.
Understood. I think as categories go, there's probably, you know, one category that folks have noticed a bit more volatility on, on the outdoor side. I know that's an area that was, you know, a little bit of a headwind in 2Q. A lot of that may be attributable to weather, at least early on, but any sort of normalization or, you know, inflection, deflection there to note?
Yeah, I would say, you know, this, as this year has played out, our tools demand has probably been better than we would have anticipated and outdoor softer. And, you know, whether that's due to the weather in the first half of the year or whether that is due to a little bit of COVID hangover is hard to discern at this point with any kind of precision. I would certainly say you know, the winter season at the end of 2022 was softer than anticipated. Both 2022 and 2023 spring, summer, softer than anticipated. Again, I think part of that must be because it spans more than just any one couple of months period, more than weather. It must be a little bit of that COVID hangover.
I think, you know, we're prepared as we head into this winter for a little bit of that same dynamic to be playing out, where that consumer price sensitivity, you know, has the demand in the outdoor space dialed a little bit down from where we would otherwise desire. But hopefully, we exit 2023 with most of the post-COVID dynamics playing out, and we can get into 2024 and be kind of through kind of a COVID whipsaw on demand. But, you know, we're going to be, you know, gating our procurement and production with that in mind, both with the fact that channels seem to be poised to be conservative on inventory, and we're still trying to find our footing post-COVID.
Understood. If I think about the inventory destocking, even in internal inventory destocking that you're going through, how should I think about sort of this return to normalized production that we're approaching versus the remaining inventory you'd still like to bring down? Seems like it would be a headwind to margins at some level, but yeah, I guess there's a little bit of a definitional question, like what does normalized production mean? And where do we ultimately see kind of the uplift when destocking is thoroughly done?
Yeah. I think appropriately, Don and the team, over the last year, especially the back half of 2022 and the early part of 2023, where we really pushed production way down to address both, falling demand and the inventory that was on the balance sheet at the time. That, you know, when you're talking about many plants at 30% or sometimes even less than that level, off normal production levels, you know, that's a pretty dramatic effect. Definitely had an effect to the full year P&L this year. I think we're through most of that by the end of the first quarter.
I mean, I think next year, given where the macro is and given some of the outdoor dynamics, could we still have some softness in production, but nothing as dramatic as the second half of 2022 or the early part of 2023. And I don't see production curtailment as a main driver of the gross margin in 2024. I think the drivers of the gross margin in 2024 are: what's the macro? So are you getting kind of any volume leverage or not? What is deflation, and is our cost transformation on track? And so I still think getting into the low 30 percentile by the end of 2024 is very much in the cards, even if, you know, you have modest macro and even if you don't have a dramatic deflationary tailwind at your back.
I think, you know, we're, we're making that 35% gross margin by the end of 2025, largely a self-help journey that is not predicated on a big volume tailwind or a big deflationary tailwind. We're going into next year expecting, you know, still this kind of muddled macro environment where you have defensively postured central banks, you have a war in Ukraine, and those things are weighing on demand as they are right now.
Understood. On the cost savings, you mentioned, you know, things were going there a little bit better than expected. Any particular areas of success that you'd want to point out?
I think two areas have been particularly quick to returns and particularly powerful. Both strategic sourcing across our enterprise, but in particular in the tools and outdoors business. And then, you know, lean and continuous improvement inside our facilities across the enterprise, but you know, inclusive of and especially in the industrial business. Have been two of the more powerful levers. I think as the next two years play out, that's when we see not just those dynamics continue, but layered into it, the cost savings from taking out facilities, redundant facilities in both production and distribution.
Understood. I guess, you know, within that then, on the cost side, how should I think of maybe the other piece of that? So there's been, I'll call it, this acute cost environment for you guys. It really even predates the wave of inflation and supply chain crunch going all the way back to tariffs. Some of those things have probably relaxed and maybe improved, like transportation, but how should I think about kind of the overall cost picture over the last several years, or maybe the price- cost picture? Because you absorbed a lot of inflation, you did get some price, you did take some countermeasures, but are those still, you know, kind of a big kind of net headwind today or between, you know, deflation and countermeasures and price, have you largely offset?
Yeah, and Dennis, you correct me if I misspeak here. I want to say, you know, cumulatively, you know, including kind of our outlook for this year, you'd say a three-, four-year cumulative cost inflation in the $2 billion-$2.25 billion, and kind of pricing to offset that in the $1.5 billion-$1.7 billion range. So you still have cost ahead of price. You know, I'd say part of the cost journey we're on now, from 2023 through 2025, to take the $2 billion of cost out of the business, part of that is an acknowledgment of we're not likely to be pushing meaningfully new price through the system. And so it's cost structure change, and it's structural cost structure change that re-heals the margin back up towards 35%.
I don't think, you know, while we've seen some very nice transportation savings, both ocean and ground, some of that was in our guidance and some of that, you know, has been in the guidance updates we made this year. We've seen on the margin some metals. We haven't seen a broad-based collapse in commodities. You know, I don't expect that to be the case unless there's a broad-based change to the macro. I think, you know, some things like copper and resins have been kind of surprisingly resilient through this part of the process. So, you know, we're expecting, as we go through the balance of this year and as we go into next year, just modest deflation. It's not a tailwind we're expecting. We're going to use self-help to reclaim the margin, and we don't expect big pricing dynamics up or down.
Got it. So sticking with kind of the cost side of the equation in, in the journey there, nearshoring is something you guys were, were doing before it was popular, and before we had all these new fancy terms for it, like friendshoring and Jerseyshoring or whatever else we need to do. How has that calculus evolved over time? Clearly, you know, more supply chain inflation probably drives, you know, more creative actions on, on nearshoring, but technology's probably changed or improved. Like, has your strategy around that really evolved as a function of, you know, what maybe that backdrop has changed since you started doing this, you know, gosh, what, seven, eight years ago now?
Yeah. You know, I don't know that I have all the history of the journey. I think, you know, as I've gotten up to speed in my five or so months, you know, my understanding is we moved, you know, somewhere in the neighborhood of 5%-10% of the volume from China to NAFTA, mostly Mexico. And we have a roadmap to continue that, especially in the next year, around more outdoor and power tools in Mexico. You know, I look at that as that's a de-risking of the supply chain, and also, as you do more of it, you get the working capital benefits that come with it.
But the pace at which it's moving is really the pace at which we can stand up and create the quality and capability of engineering capacity in Mexico, and the supplier network in, in Mexico and, and southern U.S., to replicate the strength of those things that were built over two or three decades in China. And so I, I think that pace will continue, but I think the pace will be modest, in that it's going to go at the pace at which you build up the engineering capability and the pace at which you build up the supplier network, which is, you know, it's a measured pace. I think you'd-- from a pure risk management perspective, you'd like it to be faster than it is.
But if you just swung production over here and then got exposed to lower quality suppliers not supporting you in the way you can rely on, that's just a different form of risk. So, you know, I think we're kind of moving it at the pace at which engineering and supplier capability transitions.
Now, since some of the supplier pieces of that are at least somewhat beyond your control, like, how much are you able to really influence that? Obviously, saying: Hey, there's a bunch of business waiting for you at the end of this road once you ramp up capacity. Is that—has it been a challenge or a more complicated discussion to help stand that up? Like, do you have to help provide them, you know, some amount of either, you know, guaranteed business or help them with their capitalization? How, how does that discussion work?
It's certainly... You know, fortunately, you do have somewhat of an automotive base to build off of, in certain commodity sectors. But you do end up, much the way you do when you do strategic sourcing. You do a bit of supplier development because you're trying to create, in the realm of strategic sourcing, competition, and you're trying to get more equal competition and strong competition among suppliers. In places like Mexico, where you just don't have that, you end up with a supplier development capability that comes usually from your procurement org. And you're sometimes having to get them up learning curves, and that's why it takes time. And then, to your point, work with them to ship volumes in a guaranteed basis over time. But it's a gradual process.
I'm less close to it at Stanley in my five months, but in my prior life, that's what we were doing. We had started to build a separate supplier development capability in Mexico to do just that.
Understood. Maybe pivoting over to growth. I have a few kind of different areas I want to discuss in that regard. Maybe just starting with the macro overlay there. You mentioned that the pro was a little stronger. I feel like I always try to put in context as I'm talking to folks that, you know, houses don't necessarily buy tools that contractors do, and we certainly don't have an excess of contractors or folks that are going to be leaving the industry based on lack of, you know, lack of activity for them to work on. How do I think about just sort of the growth algorithm or growth potential in the pro categories, just given that contractor won't go down? They'll probably continue to go up, maybe limited, you know, by the number of warm bodies.
How do you think about, you know, kind of that model as it influences the way you look at demand?
Yeah. Yeah. I, you know, I, I think we feel like, 2024 macro aside, which I think, you know, we're going to be in 2024, sorting through central bank, war, and oil inflation. But, you know, the medium longer term growth trajectory, given to your point, that you have an under supply of housing, you have reshoring of either production and/or distribution more in North America, and you have some infrastructure build. I think we feel like there's very helpful tailwinds over the medium long term. You know, then, you know, those macros then also get supported by, as battery technology has allowed more applications of higher powered tools, that allows battery-oriented tools to, you know, displace things that were driven by air compressor or other forms of energy. So there's that avenue.
And then for us, you know, we, we spent, you know, some years prior to the past, very focused on a diversified industrial inorganic strategy. And we have to get back to some of our traditional focus of driving innovation, of driving field sales, service and support, and focus on brand level organic growth, as opposed to a lot of M&A and a lot of integration M&A. So I think when we talk about Stanley Black & Decker growth 2024 and beyond, we're, we're gonna be talking about the macro, we're gonna be talking about innovation, including expanding where battery gets used in power tools, and then we're gonna be talking about getting back to some of our traditional operating models and brand growth models.
Are there initial targets for share gain that are clearly out in front of the rest, whether it's, you know, specific channels, customers, you know, product categories, and anything that really stands out as a day one initiative there?
Yeah, I would say, you know, we have many, many brands in our portfolio, but I anticipate as Chris Nelson, who's been on board as the head of our tools and outdoors business, works with Don, works with the board, of continuing Don's focus on, let's be much more focused, and let's be much more streamlined. You can see probably Chris and the tools and outdoor team pick, you know, four-six of the biggest brands and really focus the innovation and the brand building and the field support on those, four-six biggest brands across both tools and outdoors. And so I'd say, you know, it's gonna be brand-led and innovation-led growth.
Some of it will be an expansion of where battery plays, and some of it's just gonna be a reinvigoration of brands that maybe didn't get the attention over the last three to five years as we were doing so much M&A and integration work.
Understood. I guess, what does innovation look like in the tools business these days? I think in outdoor, it's sort of a clear, like, kinda, you know, gas to battery. But, you know, if I think about the major changes to Stanley's line card over the last several years, clearly FLEXVOLT was, you know, very game changing. You kinda cut the cord on a bigger piece of the portfolio. What are the big opportunities from here? It seems like batteries just get, you know, smaller, lighter, more powerful. That's, those are all good, but they sound more incremental. Is there anything, I guess, more game changing that folks should think about as an opportunity if, you know, if the technology were to come along?
Yeah, I'll start, and then, maybe you can add to it because you have a broader runway of where the innovation is played. But, you know, as I've been here in five months and I've gotten through a couple innovation sessions with the tools and outdoor team, I'd still say there's more room to run of where batteries can be impactful, whether they're replacing gas or compressors, and in pro tools and, you know, both, you know, areas like concrete and areas like handheld outdoor products that are beyond, you know, things like blowers and trimmers, where, you know, the battery's been playing out. But, you know, you're getting to the point where you have, you know, battery-powered chainsaws that can beat the top line, engine-driven chainsaws.
And you're getting to the point where you have concrete tools and nailers that are, you know, outperforming compressor-driven equivalents. And so I think there's still more runway to go from that. And then, you know, we also have an opportunity inside our own portfolio to increasingly platform. So when we're going about driving some level of innovation, you know, how do you also drive the level of platforming that allows you to get a better cost basis and maybe more automation and assembly? So I think that there's avenues both on the delighting the end user, and there's also avenues on improving the cost basis. But I don't know what you'd add to that, Don?
Yeah, I mean, if you think about the core model, it's going application by application and just making the existing contractor more efficient and effective at their job. And that saves time, it saves money, you know, et cetera, for the contractor. So they see the value of that, but it also brings news to the category in a way that reinvigorates your brands. And then you have kind of the bigger swings that Pat was talking about, and this industry, you know, power, runtime, and safety and ergonomics has been important for our users.
And while, you know, there's continued advances in all of the electronics, the motors, batteries, they continue to push forward in a way that you're taking out new applications that couldn't be done efficient or effectively or in a cost-effective way, with battery in the past, and we continue to see a lot of opportunity on that front.
I guess kind of marrying the two things we've talked about thus far, the cost journey, as well as the growth opportunity and some of the innovation, tools and outdoor sort of capture a few of those things. Obviously, a big area of electrification. You guys have made investments there as well with MTD. How would you characterize the level of competition, the level of customer uptake on electrified product, maybe versus traditional? How has that journey gone?
Yeah, I mean, I think the competitive dynamics have been, at least from what I've been able to assess in my five months here, relatively stable. We have very good, very capable competitors. So, you know, we're gonna have to be at the top of our game to delight end users and delight channel partners, but we feel like we're equipped to do that. I think it's in terms of uptake, I'd say, you know, we made a big outdoor acquisition a couple of years ago. I'd say on the handheld walk- behind transition to electric, I'd say that's at or above the pace we would have anticipated in that outdoor equipment transition.
I'd say when you're talking large format, like ride- on, whether it's for the consumer or for the pro, I'd say that's slower than we would have anticipated, and I would expect it to kind of keep going at that pace, and that, you know, the performance and cost basis that's gonna apply—you know, that's gonna appeal to the consumer for that larger format. I don't think the industry is there yet. I don't think that's just us. I think that's broadly, there's just not the cost benefit there yet. So I think it will happen, just like more and more of automotive will make that transition, but I think it's gonna be at a much more measured pace than we or others would have anticipated a year or two ago.
Understood. So like, putting all this together, you guys are, you know, as part of this journey, kind of identified maybe where the landing zone is for 2024 in that $4-$5 range, understanding there's sort of this exit rate phenomenon that's taking place. I think for most folks, you know, kind of the internal calculus from here is how much of, you know, that $4-$5 is sort of a baseline off which, you know, we resume normalized growth, versus are there a lot more incremental, discrete items that you would say, okay, you know, never mind what revenue is over the next few years, there's still X, you know, $100 million of cost being taken out. Any way to maybe thread the needle on that or define that a little bit more, just what we could at least think about order of magnitude post 2024?
Yeah. Well, you know, I'd say, as you referred to, you know, some of the expectation Don, Don had, you know, half a year or a year ago, I still think that's very much in the zip code. I think next year will play out, you know, based on, where the macro is, on the margin, what our level of investment is and where deflation is, and we'll kind of give you that update. But we're coming out of this year, this is consistent with the guidance we gave at the end of Q2, with a very kind of healthy trajectory that kind of points to that zip code.
I think beyond that, you know, we still have $1 billion of cost out after the end of this year, and we have a lot of confidence in that. I would say, as Chris has come on board and as Chris and Tamer and I work under Don to take his vision forward, we're working to see, you know, can we and should we be pushing that gross margin up from there? What is the right long-term algorithm for this business? I, you know, I think we feel like, if we set the right priorities and we stay focused on those priorities, we have every bit the ability to get the EBITDA margin to the high teens, if not into the low twenties. That's what we're focused on.
And with a really healthy gross profit margin, that's at least 35%, if not higher than that. I think you want to be at that level if you're gonna be able to invest in innovation and brand consistently throughout the cycle. And whether or not you go higher or lower than that is predicated on where do you see the growth opportunities, right? The more you see growth opportunities, you know, that, that might have your gross margin be on the lower side of the range. The more you see, you know, something like growth that's, that's mid- single digits and thereabout, you might push that margin up a little bit higher. But, you know, we're trying to drive the business to at least mid- single digits growth, at least 35% gross profit margin.
To the extent we can push one or both of those higher, we will, because we're trying to get to the business to high teens, low 20s, EBITDA margin.
Understood. Crystal clear, and I see we're out of time. So guys, I really appreciate you taking the time. Thanks for joining us, and we'll leave it there. Best of luck to you.
Well, thank you.