James M. Loree
Chief Executive Officer at Stanley Black & Decker
Thank you, Dennis and good morning, everyone. As you saw from this morning's results, we continue to navigate a dynamic macro environment, including inflation, rising interest rates and now late in the quarter, we started to see these factors impact retail customer demand across our global tools and outdoor markets. The significantly slower demand trends in June, combined with a very late start to the outdoor season due to weather, resulted in significant volume pressure versus expectations and revenue landed well below our plan. In response to the sudden shift in demand, we have taken immediate corrective cost actions which are already in progress. We are now expecting demand to normalize closer to 2019 levels for the remainder of 2022. The organization is focused on taking the necessary steps to reduce inventory, generate cash flow and resize our cost base through corporate simplification, organizational optimization and supply chain transformation.
We will provide more detail on these areas later in our presentation but we expect these initiatives can deliver pretax savings of $1 billion, as well as a significant reduction in inventory beginning in the second half of 2022 and through the end of 2023. Over the last nine months, we've executed a number of acquisitions and divestitures that have successfully focused our company around our market-leading tools and outdoor businesses, as well as our strongly positioned industrial products business. As you saw last week, our Security and Access Technology transaction successfully closed and we are using the $3.5 billion in cash, gross cash proceeds net of tax to fund the $2.3 billion share repurchase from earlier this year, as well as to strengthen the balance sheet and reduce debt levels in the third quarter. We also expect our oil and gas divestiture to close within the third quarter.
These transactions enable us to intensify our focus on operational efficiency within our remaining now simplified business portfolio. We also must continue to advance our strong innovation agenda, pursue a faster path of electrification and outdoor and engineered fastening, while we drive further global market penetration along the way. We are redirecting resources within our tools and outdoor businesses to ensure we are extremely well positioned for strong long-term growth, profitability expansion, consistent annual cash flow and improved shareholder returns. Incorporating the changes from this new demand environment as well as factoring in the impact of our cost reduction plan, caused us to revise our 2022 adjusted diluted EPS range down to $5 up to $6 and to update our free cash flow estimate to be $1 billion to $1.5 billion in the second half of 2022. This free cash flow range excludes the tax payments associated with our security divestitures.
To summarize our second quarter, revenues were $4.4 billion, up 16%, driven by our outdoor equipment acquisition, Organic revenue was down 6%, which was impacted by slower tools and outdoor demand trends across many of our global markets due to poor weather start to the outdoor season and reduced consumer spending. Price realization contributed 7%, which accelerated sequentially from the first quarter. Our total company operating margin was 9.2%, benefiting from the contribution of our pricing actions but was down versus prior year due to lower volume, cost inflation and supply chain logistics cost increases. This resulted in second quarter adjusted EPS of $1.77, more from cobalt on Q2 and 2022 guidance a bit later.
As I previously mentioned, we saw a swift deterioration in consumer tools and outdoor demand. This was in contrast to professional tool demand and the professional outdoor independent channel, which remains healthy and continue to be active opportunities. During this time frame, the consumer faced price increases across many categories, including essentials like food and energy. Consequently, our consumer categories have started to become impacted. We have seen this phenomenon across many of our global markets as central banks tighten the money supply to control high inflation. The chart on the left illustrates our tools US POS trends against a 2019 base. Late in the quarter, it became clear that the point-of-sale trends were settling into a much lower growth position. And with information we have now, we believe it's prudent to build this into our plan for the back half.
Price and a strong professional market delivered total dollar growth off the 2019 baseline. However, volumes turned negative versus 2019 in the later part of the quarter, or specifically in the month of June. We have analyzed the trends in the pricing in the market and do not see retail price gaps versus competition. This coupled with our information at the category and retailer level leads us to conclude that our markets are softening. Outdoor power equipment also experienced slowing demand during the month of June. Customer inventory levels are elevated, largely driven by a very slow start to the season due to poor weather, which clearly is impacting replenishment demand across the retail outdoor power equipment industry.
The poor consumer outdoor season is a well known fact in the industry initially due to poor weather start and then declining consumer spending due to inflationary pressures previously discussed. However, there are a couple of significant positive factors to consider in this difficult demand environment. One, we will be past the constraints on semiconductor supply in the third quarter and other inputs have greatly improved as well. Therefore, we are expecting better fill rates in the back half to capitalize on the continued strength we're seeing for professional and user driven demand and tools and outdoor. And two, the tools inventories of many of our major customers in North America are below 2019 levels, which shouldn't limit our destocking risk to customers in certain other geographies such as Europe, and as well as the US outdoor retail category I mentioned.
Across our industrial businesses, backlogs remain strong and demand for aerospace fasteners is steadily climbing as the recovery and narrowbody production has begun. The auto recovery continues to be choppy, but we do see some improvement and continue to outperform light vehicle production levels, as demand of electric vehicles remains well above supply and OEMs continue to pursue strategic long term transformation to EV-centric portfolios. In summary, we see a demand environment that is modestly higher than 2019 levels and therefore, we are implementing an aggressive cost and inventory response to this new environment while also pivoting the company to a new strategy for long-term success.
We continue to have conviction in the long-term outlook of the markets we serve around construction, repair and remodel, outdoor and across the industrial sector. With the housing inventory at historical lows, and relative strength in the industrial markets we serve, our businesses are squarely positioned to satisfy our customers' demands after we navigate the current environment. The portfolio transformation that we have orchestrated over the past nine years is coming to conclusion, and we are setting up our core businesses to emerge even stronger on the other side of demand disruption. As we look ahead, Stanley Black & Decker is an important point of inflection in our vision and strategy. We must ensure our customers and end users and their needs are where our energy and resources are fully focused. Our plan is to rapidly optimize our organizational structure to support our simplified company.
We will take the complexity out of our businesses and the decision-making processes. Then we will invest to accelerate growth to enable us to grow organically two to three times the market. The operating environment clearly has dramatically changed in the last month, especially as we really evolved into the last stages of the quarter or June. Since accepting my current role, the leadership team and I have accelerated and intensified the organization and operational streamlining efforts. We are rallying the teams around a more focused portfolio and providing the businesses with the resources closer to the point of impact. Our tools, outdoor industrial businesses are high-quality assets today. And we have the opportunity to improve them further through faster organic growth and significant operational enhancements to improve our margins.
As we think about our leading franchises, the key areas of focus will be innovation, electrification, market leadership and supply chain transformation, with always keeping the customer and end user needs in our sites. First, we are reimagining tools and outdoor innovation to create shorter innovation cycles and new technologies, so we can provide differentiated competitive offerings with speed to market. This includes introducing a high quality of new margin-accretive core innovations to the portfolio in addition to more big swing innovations that carry the same disruptive power of our successful franchise extensions such as FLEXVOLT, ATOMIC, XTREME and POWERSTACK.
Secondly, we are taking meaningful action to deliver innovation in electrification with power tools and outdoor power equipment as well as capitalizing on our partnerships with auto OEMs to leverage our highly engineered auto fastening solutions, the electric vehicle market as it rapidly expands. These are big opportunities for growth and margin expansion across the portfolio. We are accelerating our efforts in these areas as these trends are moving quickly, and we must maintain our market leadership position during this technology shift. Next, we will step up our commercial support, bringing more digital tools to our commercial model and increasing sales leadership to directly engage with our customers and end users. These resources drive share gain, and key information from our end users related to our products and potential new innovations.
In addition, we will enhance our efforts in digital marketing around new innovation launches, promotions and other key end user interactions. Finally, to enable this growth, we need to accelerate our supply chain transformation. One of many lessons from the pandemic is that complex and long supply chains are prone to disruption and in our specific case, are not matched well with the short-cycle nature of our businesses. So you have a choice, maintain very high levels of inventory due to the long supply chain or have your supply chain closer to your customers, elevate your agility and resiliency to better serve those customers. We believe being closer to the customer is the right answer. Organizationally, we are working to ensure that I have the right people in the right roles to execute this vision.
We have an accomplished leadership team supported by a diverse, extremely capable organization, which is comprised of Stanley Black & Decker veterans and supplemented by new talent with fresh perspectives and industry expertise. We continue to bring in new members of our leadership team to partner with our existing seasoned leaders. A few examples of this are: Robert Raff and John Wyatt are leading our tool and outdoor businesses and Tamer Abuaita, sorry, Tamer, who joined us at our Chief Supply Chain Officer in January. I am excited to see Robert rejoin the Tools business to lead the team with fresh energy and insight. He is a veteran tool executive who also led our security business transformation. He knows the business, the team and our customers, and we'll bring that perspective as he gets the tool organization focused on our shared vision.
Tamer brings nearly 30 years of experience leading global transformations, expansions and post-acquisition integrations of supply chains for multibillion-dollar consumer goods organizations. He is ideally suited to lead the transformation of our supply chain All of these growth and supply chain investments are necessary to support higher growth and share gains with our target objective being two to three times the market growth. Now let's get tactical. Let me describe our global cost reduction program, which has a savings potential of $150 million to $200 million in 2022, growing to $1 billion by the end of next year, and totaling $2 billion within three years. These actions are necessary as we successfully navigate the current market environment. But importantly, when the time is right, will give us the ability to further accelerate investment in the commercial programs I just outlined.
Over the past two months, we have applied rigorous prioritization to eliminate and reduce overlapping capabilities and functions. As a more straightforward company, we don't need the same structure that was set up for a diversified industrial model. The corporate simplification is nearing completion, and it will generate $200 million of annualized savings. The resizing effort allows us to ensure our resources serve our core businesses and are closer to the point of impact with the customer and in our supply chain. As a result of these initiatives, we expect the 2023 corporate spending level will be below the 2019 spend. To help us navigate today's economic crosscurrents and in the spirit of simplification, we are also attacking indirect spend. We are prioritizing across all categories and cost centers, to requalify what we will continue in the near-term. We expect this exercise to generate an additional $200 million of annualized savings.
Next, we have an opportunity to improve the speed and agility of our operating and decision-making processes. We are doing this by reducing the complexity of how we are operating as an organization including evaluating the number of layers in our structure from the C-suite to the point of impact. To put this in perspective, we believe we can move from our current organizational structure, which has 12 layers, down closer to seven to eight layers. I believe that we function much better as a company when our leaders can come together quickly for prioritization and decision-making and results - and results in us moving forward in a more agile manner. Additionally, as we have gone deeper into our outdoor integration, we see opportunities for savings where there are synergies with our tools business.
We are implementing the spans and layers and cost synergy exercises during Q3 and expect this effort to deliver an additional $100 million in annual savings. Lastly, we are accelerating our supply chain transformation. We believe there is approximately $1.5 billion of P&L efficiencies that can be gained by this acceleration over the next three years was $500 million by the end of 2023. I will go into more detail on this value stream in just a moment. So to summarize, we believe this program can deliver cost savings of $150 million to $200 million in 2022, $1 billion by the end of 2023 and $2 billion within three years. I will now dive a little bit deeper into the supply chain transformation, which is the largest driver of this global cost plan, particularly in the medium-term.
As mentioned, we are embarking on a three-year journey that will completely reshape our supply chain. It will be focused on accelerating our make-where-we-sell strategy to be closer to our customers and more responsive to demand. Our supply chain needs to be agile and adaptive with new product innovation and therefore, as we ramp up our investments in innovation and expand the quantity of our new products we bring to market annually. We also need a supply chain that significantly reduces our innovation cycle time to launch new products much faster than today. This transformation is a key pillar of our strategy and a catalyst for returning our gross margins to 35% plus level. Our success with this transformation will build a more sustainable, agile and efficient supply chain that is resilient in an ever-changing and dynamic operating environment and further enable our advanced manufacturing technologies.
We'll be focused around four value streams. First, product platforming shifts our optimization focus from cost to supply by leveraging product families designed around common building blocks. This shift enables us to standardize our components through platform solutions that create economies of scale with our key suppliers, which ultimately reduces the complexity in our product design and supply base. It also reduces time to market on innovation by leveraging common design. We also believe we can reduce the number of SKUs in our system by 40%-plus. These programs collectively can deliver cost savings of approximately $300 million.
The next significant opportunity is strategic sourcing, which has a savings potential of $500 million. As we look to set up our supply base through our make-where-we-sell strategy, we have an opportunity to deepen our relationships with suppliers and help them optimize supply and efficiency. In addition, we have significant opportunities to leverage contract manufacturing in parts of our supply chain that can improve cost and speed to market. Finally, our simplification efforts within our first value stream product platforming, also carries benefits here as we have less unique parts and sourcing complexity, which results in higher scale purchases.
Our current supply chain is a result of organic growth and additions through acquisitions. And while it has been optimized over the years, there is significant opportunity to reduce complexity, eliminate logistical inefficiencies, increase scale for our manufacturing and serve our customers better. Currently, we have approximately 120 manufacturing facilities in our network. As we think about our supply chain in the future, we want to be closer to our customer, and we want to do it at a lower cost. This means we need to simplify and consolidate our regional footprints around high-performing industry code auto, technology-enabled sites. Our target is to reduce our operating footprint by at least 30% and optimize our distribution network, which can generate approximately $300 million in savings.
Lastly, we see an opportunity to capture $400 million through operational excellence. This is focused on driving incremental efficiencies across our facilities, leveraging the SBD Operating Model, having the right levels of inventory and streamlining the spans and layers within our operations organization to align around our core businesses. These value streams total approximately $1.5 billion of our over three years, with an opportunity for $500 million during the first 18 months of the program. Clearly, this represents a significant value creation opportunity. However, it also creates an opportunity to elevate the focus on our customers and end user needs.
Corbin will now take you through more detailed commentary on the second quarter results as well as what we believe this near-term demand environment means for the remainder of the year. Corbin?
