Operator: Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Your line is now open.
Michael Rehaut: Thanks. Good morning, everyone. Appreciate it. I just wanted to kind of understand some of the puts and takes on the updated guidance if I may. Kind of what really in effect drove the upside in the third quarter and it seems like, on an EPS basis year 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 are increasing in the fourth quarter relative to prior expectations. But would love to understand that dynamic of what drove the 3Q upside and why you are reiterating 4Q. And also, to that point, the reiteration of the free cash flow guidance relative to the raising of the EPS guidance. What’s the bridge there as well? Thank you.
Don Allan: Yeah, Mike. Good morning. Third quarter was a strong quarter for us. Our sales came in roughly as we were expecting and we drove the EPS be on the strength of gross margin performance in SG&A management. The gross margin is a factor of the program running a bit ahead of both pace in 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 you know, Chris and team came on Board and spent part of the quarter kind of revisiting current and future year priorities, there was probably a bit of SG&A that will shift from the third quarter to the fourth quarter that helped out the third quarter net. As we head into the fourth quarter, the topline 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 in Outdoors and Attachment Tools that we saw in the third quarter and also an expectation that 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 topline slightly 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 are at a point where we are 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 keep the EPS amount constant in the fourth quarter.
And then on free cash flow, you are 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 largely why the free cash flow guide stays where it is for the year and the quarter.
Operator: Thank you. Our next question is from the line of Tim Wojs with Baird. Your line is now open. Tim Wois, 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.
Chris Snyder: Thank you. I wanted to follow up on the prior commentary of about 50 bps to 100 bps of quarterly gross margin improvement. It seems that would imply 2024 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 macro and volume standpoint and also from a cost interest standpoint. I guess metal and freight maybe up? Thank you.
Don Allan: Yeah. We will give detailed 2024 guidance at the end of the year when we do our fourth quarter. But 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 2024, we would expect full year gross margins around 30%, potentially a little bit higher than 30%, 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 30%s, we will update to what degree that is in January. I think when you talk about the macro — the macro, while there 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 in our business is kind of the resetting of inventories and channel 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 topline next year, we are expecting a similar stablish 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 has the consumer stabilized and the rebalance between goods and services and has the outdoor business stabilized post-COVID.
Operator: Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Your line is now open.
Nigel Coe: Oh! Hi. Thanks. Good morning. Thanks for the question. It seems like everyone is getting in three or four questions into one question. I will try and keep a bit simpler. But maybe no, who knows. I am just thinking, in the sort of a flat macro, given the imagery destocked especially in the Attachments, and obviously, Outdoor. Even unstable macro, do you think you can grow topline in that kind of setup? And then maybe my follow on question within the question is, what does the write-down at the Irwin and Troy-Bilt tell us about those brands. I mean, is this part of the SKU reduction initiative. Any kind of like insights into what’s driving those write-downs?
Don Allan: Yeah. I think, the — I will start with the brand question and navigate to the macro question related to next year and thoughts about could we grow our topline. The Irwin and Troy-Bilt brands that are 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. There’s the aspects of how we do business with our customers and our suppliers. How we work internally in a more efficient and effective way. But there’s 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 in DEWALT, CRAFTSMAN and Stanley, and those would be focal points for that strategy going forward.
But as you get into the next tier of brands like Irwin or LENOX or Troy-Bilt, et cetera. We will utilize them effectively but we will utilize them in a more simplified way and then you really seeing 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 SKU rationalization impact in there, but I think it’s more of the strategic way we are going to utilize it going forward. Looking at the macro for next year, I mean, Pat gave really good answers to our view is things are not, they are kind of mixed and it’s dynamic. That’s the way it is today and then we are kind of going into next year thinking that’s going to be similar to that. We have pockets of strength like our Professional Tool business.
We have weak points in Outdoor and consumer trends. We get strength in aerospace and auto in our fastener and Industrial businesses. And we have some destocking happening in some other portions of our Industrial business and 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, that’s possible, too. I think we are 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 through that will be somewhat consistent to this. And if it is stable, can we grow? Well, we are investing for the main objective and reason to is to focus and gaining market share.
And we have had a long history of gaining market share at Stanley Black & Decker. And we went through a period of time, in particular, in late 2021 and 2022, where we felt the impact of the shortage of semiconductors that really put us in a position where we actually lost some market share and we have been pretty frank and clear about that. But we are positioning ourselves again to get back to gaining share and we believe we stabilized 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 will — we won’t be slight as much negative, if it’s stable or neutral will probably grow a little bit.
