Power Tool Industry August 2018
Stanley Black & Decker
Q2 revenues rose 11% to $3.6 billion with 7% organic growth. Positive volume (+6%), acquisitions (+3%), price (+1%) and currency (+1%) all contributed to results and offset the negative impact of commodity inflation.
From their Q2 Conference Call with Analysts:
Tools and Storage had 11% revenue growth and organic growth of 10%, exceeding expectations. The other 1% was positive currency. The initial impact of their pricing actions contributed 1% to organic growth. Operating margins in Tools & Storage slipped to 16.2% from 17.6% in the second quarter last year.
The vast majority of the $50 million of commodity inflation and the $20 million of currency that they experienced in the second quarter was absorbed by Tools & Storage. Strong organic growth and share gains were realized across each Tools & Storage region and SBU.
Geographically, North America was up 10% organically with growth across all channels. The US retail channel generated low double-digit growth, US commercial markets posted high single-digit growth. Canada contributed exceptional organic growth of 13%.
Both Tools & Storage SBUs showed 10% growth for the quarter. Professional Power Tools were up in the low double digits. The Consumer Power Tools group rebounded from the first quarter impacts created by the slow start to the outdoor selling season and the Craftsman transition and posted mid-single-digit growth.
Working capital turns for the quarter were 6.6, down 0.7 turns from Q2 2017. The decline was primarily due to requirements needed to support growth and new product launches, including Craftsman.
They continue to see elevated commodity prices and now expect inflation headwinds to be about $205 million in 2018, with about $100 million already realized. That’s up $25 million from previous estimates. Steel, batteries and base metals are the most significant commodities contributing to the headwinds.
During the last eight weeks of the quarter they saw significant currency impacts as the US dollar strengthened. They now estimate that impact to be about $80 million this year.
They are currently estimating the impact of tariffs for this year at $35 million. That reflects the impact of Section 232 tariffs on steel and aluminum as well as the initial $34 billion of Section 301 tariffs on componentry and some finished goods. No one really knows if all of the tariffs will actually be implemented, and if they are, what the lifespan will be.
They have taken a series of recovery actions, including implementing price increases that should yield $190 million this year, an increase of $70 million from the $120 million in actions discussed in April. In addition, they’ll execute $36 million in other cost and productivity actions.
The additional $200 billion in tariffs under Section 301 that were announced in early July have not yet been accounted for. They estimate the annual impact on them to be about $70 to $80 million. However, they will not be implemented until September 1, so about $25 million this year, which they believe can be managed on current guidance. These tariffs are aimed primarily at finished goods such as hand tools and power tool accessories.
Approximately 50% of their North American tool revenue is supported by their North American manufacturing facilities.
They’ve raised their organic growth expectations by one point. Organic growth within Tools & Storage is now expected to be high single digits this year, reflecting strong volume and incremental pricing actions.
Their introduction of Craftsman is on track. Lowe’s and Ace will begin to transition to the new Craftsman offerings in the second half of the year with completion in 2019. Irwin, Lenox and Waterloo had high single-digit organic growth for the quarter.
The acquisition pipeline is strong, and there are some deals that are right in their heartland that would immensely strengthen some of their key franchises.
They are exploring partnerships and acquisitions in Lawn & Garden in order to take advantage of Craftsman’s heritage. CEO Jim Loree said, “stay tuned, it won’t be long before you see something that will make sense.”
From the UBS Industrials Conference:
They’re calling their introduction of the Craftsman brand at Lowe’s “Painting the Store Red.”
Irwin and Lenox account for about $800 million in revenue. They are beginning to recognize global revenue synergies that could be an additional $100 to $150 million in revenue over time.
They have $1 billion of activity in ecommerce that is growing in excess of 20% each year.
About $4 billion of their annual revenue is outside the tools business.
The toughest channel to raise prices and recover costs is the home center channel; the key to pricing power in that marketplace is making sure that you have a value proposition and a brand that resonates with the end user. There were some price increases in the second quarter and price increases will be fully implemented in the third and fourth quarters. They believe that as the leader in the marketplace they will set the table for pricing and competitors will follow.
The market research they did prior to acquiring Craftsman showed that people would be twice as likely to buy Craftsman if the brand was available outside of Sears. Initial research with Lowe’s shows that Craftsman is bringing in new customers, and that one out of four people purchasing Craftsman had not actually been in a Lowe’s store in recent history.
Craftsman will start off diluting margins because they do not manufacture all of the product and the brand was only delivering 3% margins. The goal is to get them to the line average over time, which is the high teens. In order to do that they need to change the manufacturing footprint. They are going to add new facilities in the US to manufacture Craftsman, which will support higher margins.
40% of the Craftsman volume was Lawn and Garden, so the acquisition has basically put them in the business. They feel they are close to being able to transform the gas lawn and garden market into an electric-powered market. However, even the best players in lawn and garden make margins in the low double-digits; they want margins in the 10% to 15% range.
Cordless tools will be more expensive than corded tools for the foreseeable future, but the advantages of cordless are overwhelming. Their market research with customers shows that people using FlexVolt tools for the first time are “completely blown away” by the performance of the tools. They believe the FlexVolt halo effect has given the 20-volt tool category a boost, and now professional cordless tools are growing in the teens. Since the FlexVolt system allows people to interchange the battery with other FlexVolt tools, the initial purchase ensures customer loyalty.
CEO James Loree told Forbes Magazine that a defensive strategy was one of the reasons Stanley aggressively pursued Craftsman. They were very concerned that if a retailer or a competitor got the brand it would pose a huge threat to SB&D from a volume point of view.
Stanley’s advanced manufacturing center that will test new technologies, including a 3D metal printing process that might someday allow a tool company to print out products in retail outlets, will open in Hartford, Connecticut in August.
SB&D Emhart Industries Inc. and Black & Decker Inc., both subsidiaries of Stanley Black & Decker, have agreed to pay about $100 million for the cleanup of contaminated land in Rhode Island, according to the US Department of Justice, the Environmental Protection Agency (EPA), and the Rhode Island Department of Environmental Management. The settlement includes cleanup work in the Woonasquatucket River and bordering residential and commercial properties along the river.
The Stanley + Techstars Additive Manufacturing Accelerator opened with 10 startups on board. Businesses chosen are from Canada, Ireland, Israel and the US. Additive manufacturing makes products by adding layers. It’s being used because it allows companies, engineers and designers to make products more quickly and easily. This so-called 3D manufacturing could change the function of factories, according to SB&D CEO James Loree.
Milwaukee Tool broke ground on the third phase of the expansion of the company’s headquarters in Brookfield, Wisconsin. Wisconsin Governor Scott Walker wore a shirt in Milwaukee’s signature red color to the groundbreaking. The construction of the $32 million research and development facility that will add 350 jobs is slated to begin in the third quarter of this year and be completed in the fourth quarter of 2019. The completion will increase the headquarters campus to more than 500,000 square feet. The Wisconsin Economic Development Corp. awarded Milwaukee up to $18 million in performance-based state income tax credits when the expansion was announced and has now sweetened the deal with another $8 million in credits. In return, TTI has agreed to create 942 new jobs, retain existing jobs and make $67 million in capital investments through 2022.
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