Stanley Black & Decker, Inc.
Q2 2019 Earnings Call Transcript

Published: 23 Jul 2019

[Operator:]

Welcome to the Second Quarter 2019 Stanley Black & Decker Earnings Conference Call. My name is Shannon and I will be your operator for today’s call. I will now turn the call over to the Vice President of Investor Relations, Dennis Lange. Mr. Lange, you may begin.

[Dennis Lange:]

Thank you, Shannon. Good morning, everyone and thanks for joining us for Stanley Black & Decker’s second quarter 2019 conference call. On the call in addition to myself, is Jim Loree, President and CEO; Don Allan, Executive Vice President and CFO; and Jeff Ansell, Executive Vice President and President of Global Tools and Storage. Our earnings release which was issued earlier this morning and a supplemental presentation which we will refer to during the call are available on the IR section of our website. A replay of this morning’s call will also be available beginning at 11

[Jim Loree:]

Thanks, Dennis and good morning to our guests. Thank you for joining us. Stanley Black & Decker delivered a strong outperformance in the second quarter to close out the first half of 2019 in a solid position. We continued to generate above market organic growth, achieved operating margin rate expansion and delivered adjusted EPS growth overcoming a $110 million of pre-tax currency commodity and tariff headwinds. This 2Q outperformance is a testament to the agility and determination of our 61,000 employees around the globe. Their continued efforts to drive growth, realized price and control cost enabled us to successfully overcome the external forces that have pressured our margins in recent quarters. With their help, the company produced its first quarter of operating margin rate accretion since the fourth quarter 2017, a critical milestone. On that positive note, second quarter revenues were $3.8 billion, up 3% versus prior year. This included 3% organic growth and 3% from acquisitions which was partially offset by a 3 point currency headwind.

[Don Allan:]

Thank you, Jim and good morning everyone. I will now take a deeper dive into our business segment results for the second quarter. For those following on, I am on Slide 5 within the presentation. Tools & Storage revenue was up 2% as 5% organic growth was offset by 3 points of currency pressure. Volume growth contributed 3 points while price was aligned with our expectations and added another 2 points of growth. The tools team continues to do an excellent job balancing price realization and margin recovery with above-market organic growth and share gains. The operating margin rate for the segment was 17%, expanding 80 basis points from the prior year as the benefits of volume leverage, pricing, and cost control more than offset the impacts of currency, commodity inflation and tariffs.

[Jeff Ansell:]

Thank you, Don. In Tools & Storage, we maintained our Q1 momentum led by another strong performance in North America and Europe. Our continued focus on innovation-led growth and the ongoing execution of brand initiatives were key drivers to this success and share gain. Notably, our innovations in cordless and corded outdoor products across DEWALT, Craftsman and Black & Decker have enabled a fantastic outdoor season, where we are up mid-teens organically year-to-date. In Craftsman Outdoor, we launched a broad range of cordless products for the season with a 60 volt system catering to outdoor enthusiasts and 20 volt range designed for residential use. In DEWALT, we also launched new 60 volt outdoor products, which are part of our flexible battery platform. They are delivering growth in addition to our 20 volt outdoor line. We are seeing strong POS across the portfolio, as DEWALT outdoor continues to gain traction in the market. More broadly, our DEWALT 20 volt line is the largest professional cordless system in history, with over 250 products augmented by the recent launch of DEWALT Atomic series, which is the best-in-class power to weight ratio product. We are also pleased with the launch of our 12-volt DEWALT Xtreme series, a range of performance packed, offering power tool and organic solutions for variety of applications. With this program just beginning to ship, we expect to see incremental growth in the pro-power tool space in the back half of the year. Our DEWALT cordless battery platform continues to expand on serving a broad spectrum of end users from heavy-duty applications with large power requirements via FlexVolt to compact applications in the mechanical, electrical and plumbing and pro-user segments via our DEWALT Xtreme and Atomic range. This broad category innovation has been accelerated by tremendous brand execution across DEWALT Stanley, Stanley FatMax, Irwin and Craftsman, all of which are positive year-to-date. Lastly, a word on Craftsman, overall performance and customer rollouts remain on track and we continue to be well on our way to delivering three points of incremental growth in 2019 and our $1 billion target by 2021. The most satisfying part of the Craftsman re-launch has been our redesigned products are winning with the end user in delivering growth and share gain for us and our customers. Now, I’ll turn it back over to Jim to wrap today’s presentation.

[Jim Loree:]

Thanks, Jeff. Great quarter. So to recap, we had strong operational performance in the second quarter, serving us well in this dynamic external operating environment. Partially due to the outperformance based on margin rate accretion, we’re able to reaffirm our full year guidance today, despite somewhat slower end markets especially in industrial automotive. And as we look to close out a successful 2019, we are focused on day-to-day execution and operational excellence in accordance with our SFS 2.0 operating system. This includes continuing to leverage our organic growth catalysts, building momentum and realizing early benefits from the margin resiliency program, successfully integrating our recent acquisitions and generating strong free cash flow. I’m confident that our seasoned management team will bring the same level of passion, intensity and agility that we demonstrated in the first half to successfully deliver the second half of 2019, well at the same time, preparing for a strong 2020 and beyond. Dennis, we are now ready for Q&A.

[Dennis Lange:]

Great. Thanks, Jim. Shannon, we can now open the call to Q&A, please. Thank you.

[Operator:]

Our first question comes from Julian Mitchell with Barclays. Your line is open.

[Julian Mitchell:]

Hi, good morning.

[Jim Loree:]

Hi Julian.

[Julian Mitchell:]

Hi. Maybe just my question would be around the phasing of the gross external headwinds and what that means for operating margins in the second half. So I think your guidance implies about $120 million of gross external headwinds left for the second half, maybe help us understand how much of that falls in the third quarter. And just following up on the commentary on margin expansion for the rest of the year, that I think you’d said, are you saying the Q3 margins will be up year-on-year as well or it was just a general, second half comment?

[Jim Loree:]

Okay. So you’re correct with the $120 million in the back half of the headwinds. That’s an accurate calculation. And then, the third quarter – the split would be roughly $75 million to $80 million in the third quarter and the remainder in the fourth quarter. So a bigger amount hitting in the third quarter as things like commodity continue to tail-off, etc, and then we obviously have new headwinds in both quarters from tariffs. So that would be the split that we’re seeing. And we do expect margin expansion both in the third and the fourth quarter. However, the third quarter will be probably a modest expansion in the 20 bps to 40 bps range, and then we’ll see a larger expansion in the fourth quarter as a lot of the actions that we’re taking in response to the new tariffs, such as pricing will get a full effect in the fourth quarter and then some of the margin resiliency things we’ve been working on, that will – that will grow across the back half of the year and we’ll see a larger impact in the fourth quarter, hence why we see bigger expansion in the fourth quarter.

[Operator:]

Thank you. Our next question comes from Nigel Coe with Wolfe Research. Your line is open.

[Nigel Coe:]

Thanks. Good morning.

[Jim Loree:]

Good morning.

[Nigel Coe:]

Hey. Maybe just – Jim, you talked about deceleration through the quarter. Maybe just talk about how June trended you guys. You didn’t mentioned weather, so congrats on that, but I’m sure weather was a factor. And maybe just touch on the inventory headwinds that you saw at the big box channels. And I’ll leave it there. Thanks guys.

[Jim Loree:]

Yes. We don’t want to get too much into the month by month data, but suffice it to say that we didn’t really see a significant slowing in the construction DIY-type markets. The slowing was predominantly in the industrial, general industrial and specifically automotive sectors of our business. So our DIY construction and those types of tools held up very well. I mean, we’ve got POS as strong as I’ve ever seen in 20 years. So if the market is slowing, it’s not slowing for us not in that – in that part of the business. And a lot of the inventory corrections we saw were in the industrial channel, and we saw other corrections that were modest in different parts of the Company, that’s just normal course activity though.

[Operator:]

Thank you. Our next question comes from Michael Rehaut with J.P. Morgan. Your line is open.

[Michael Rehaut:]

Thanks. Good morning everyone.

[Jim Loree:]

Mike, good morning.

[Michael Rehaut:]

First question I had was on the – the core organic growth, you know, the tools business continues to perform very well, just wanted to understand, given some of the comments around industrial which might not as much impact the Tools segment more perhaps the other segments, but your comments around some slowing of end markets, emerging markets, etcetera. How do you expect the back half to play out on an organic growth standpoint, 3Q versus 4Q? And then just lastly if I could sneak a clarifying question as well. Don, you mentioned the tax rate impacting 3Q, 4Q results. A little more detail there, if possible? Thanks.

[Don Allan:]

Sure. So, the organic tools and storage performance as we mentioned in Q2 was 5% organic growth, and we had a little bit of negative decline in some of the industrial channels that we serve for industrial tools, about 2% of a decline in those particular businesses. So, nothing significant. We do believe as we look at the back half of the year for Tools that we’re we think the organic growth is somewhere between 5% and 6% for the back half, with the quarters being pretty much in that range for both quarters. So, the trend that we saw in the second quarter feels like the right trend as we go into the back half of the year. And so, we’ve shown a little bit of moderation in the Industrial section of the tools business. On the tax rate, the third quarter tax rate is kind of 25%, 26% and the fourth quarter will be around 15% to 16%.

[Operator:]

Thank you. Our next question comes from Nicole DeBlase with Deutsche Bank. Your line is open.

[Nicole DeBlase:]

Yes, thanks. Good morning guys.

[Jim Loree:]

Good morning.

[Don Allan:]

Hi, Nicole.

[Nicole DeBlase:]

Hey, there. So just one quick one on the 3Q versus 4Q ramp, I didn’t hear you guys talk about organic growth for the two quarters. I know the comps are a little bit easier in the third quarter, a little harder in the fourth. So just how to think about the 4% for the rest of the year? And then, on just on Tools & Storage, did you guys see the 3-percentage point benefit from Crafts in this quarter, implying that just the underlying market was kind of flattish?

[Jim Loree:]

So, on the third and fourth quarter organic growth, 4% for the year. When you look at the third and fourth quarter split, the third quarter is a little bit below the 4%, fourth quarter is a bit above the 4%. We have to remember in the fourth quarter there is a lot of activities that will be happening around the brand transition in particular. So, we’ll see a positive impact from that. We’ll see some of it in the third quarter as well. But we’ll see a bigger ramp, most likely in the early part of the fourth quarter. So that’s just something to consider as you think about the performance. On the Craftsman side, yeah, we saw a significant impact of about 3 points related to the Craftsman rollout. And so, as you saw from the performance, in North America we had a very strong high-single digit retail performance across many of our key customers and not just related to Craftsman, certainly Craftsman was a significant part of that, but then we saw some negative performances in emerging markets. I mentioned the three countries that were contracting and we saw some positive performances in the European market. So, you know, overall, it’s kind of kind of netted to a relatively small number, but we had some significant pockets of growth as you look at them.

[Operator:]

Thank you. Our next question comes from Tim Wojs with Baird. Your line is open.

[Tim Wojs:]

Hey everybody. Good morning.

[Jim Loree:]

Good morning.

[Tim Wojs:]

Maybe just touching on Europe a little bit. You know, I think accelerating organic growth in that region is pretty impressive. So, I’m just thinking you know, as you look over the next 12 months, just the sustainability of a mid single-digit type organic growth number in Europe and the programs that may be supporting that as some color. And then what do you think Europe on an underlying basis in Tool this is actually growing, thanks, the market?

[Jeff Ansell:]

So, I’ll take that. And this is Jeff. We’re quite optimistic for the remainder of the year in Europe. So, if you remember, we had a little more than 2% growth, organic growth in Europe in the first quarter, 5% here in the second, and we feel comfortable with that same type of growth rate in the back half, really driven by share gain. If you look at the results we’re posting, where we’ve been up somewhere between eight of ten and ten of ten in total markets for the last several years and that trend continues. So, the expansion and growth of DEWALT Stanley, brands like FACOM, etcetera in Europe have been extraordinarily positive. So, we feel very good about it and I think our intelligence would tell us that the European tool business has grown well less than half of that is what we think, probably less than 2% and we’re probably going to end the year closer to five. So, we feel good about it. But again, it’s probably more share gain than it is robust end market.

[Operator:]

And our next question comes from Justin Speer with Zelman & Associates. Your line is open.

[Justin Speer:]

Good morning, guys. Thank you.

[Jim Loree:]

Hey, Justin. Good morning.

[Justin Speer:]

Just the SG&A, I know you have the cost reduction program rolling through that $60 million I think per quarter on the $250 million program announced last year. That seems to be phasing well. But as you think about this program and some other programs that you may be unfurling for the balance of the year, SG&A and thinking about in the next year, is this permanent or should we think about some of these costs coming back next year if growth is better next year?

[Jim Loree:]

Yes. I would say that the vast majority of this is permanent change. You know, like any time you do a cost reduction program, you make decisions maybe to freeze merits and some other things that are definitely temporary, but those are modest, when you look at the total impact of $250 million. And so, as we think about margin resiliency initiatives going forward, those will be permitted, kind of process sustainable structural changes in how we do business to make us more efficient and effective in meeting the needs of our customers, and as we work with our vendors and other partners across the business. So, the margin resiliency initiative is really about sustainable permanent change.

[Operator:]

Our next question comes from Josh Pokrzywinski with Morgan Stanley. Your line is open.

[Josh Pokrzywinski:]

Hi, good morning guys.

[Jim Loree:]

Hey, Josh.

[Josh Pokrzywinski:]

Just want to follow-up, Don, on your point on the 3Q versus 4Q phasing and you mentioned that price was part of it. And I know that there is probably a lot of little things that add up to that third quarter versus fourth quarter EPS growth rate, but if I remember last year, you know, the expectation for price in fourth quarter was pretty high, and then ultimately with promo activity and I think seasonally, just having a harder time getting price in the fourth quarter given the holiday, that ends up being kind of a long pie. Is there something different about how you’re expecting to go through that process this year or something that you think has changed in the market from a pricing perspective?

[Don Allan:]

Yes. I would say, a part of what’s happening in the fourth quarter is price, because we get a full quarter impact versus the third quarter, getting a partial impact. But the bigger impact of why our earnings are up or will be up in the fourth quarter is that the dollar volume for revenue is expected to be significantly higher than the third quarter, given that we have various brand transitions that we’ll be executing on. We expect the industrial segment to perform at a higher level, given we had a very difficult fourth quarter last year and as they’re anniversarying some of those headwinds. And then obviously we expect security to demonstrate some growth as well. So, it’s all those different factors. But if you look at a 4.5% roughly organic growth performance in the fourth quarter, you’re going to get to a sequential growth number in revenue that’s close to $250 million to $270 million. And as that flows through to operating margin and eventually earnings, that’s going to be a significant reason for the higher level of performance, combined with all the other little things that you mentioned, like price, margin resiliency, etcetera. The tailing off of commodity inflation that’s going to happen more in the fourth quarter versus the third quarter, it’s all those different factors that are going to drive that. I think one of the things that I didn’t mention, but I will mention now is that when you look at the operating margin dollars as a percentage of the full year, the percentage in the third quarter isn’t dramatically different than the percentage in the third quarter of last year. And so, when you look at the OM dollar percentage to the full year by quarter, you look the first quarter was lower by about 2 points to 3 points, versus last year. The fourth quarter is going to be higher by 2 points or 3 points for the reasons I mentioned. But the two quarters in between are pretty much in line with last year’s performance. When you look at that level, you can do the same thing at pre-tax, it’s relatively the same thing. It’s really when you get down EPS that you see a bigger deviation because of the tax rate.

[Operator:]

Our next question comes from Deepa Raghavan with Wells Fargo. Your line is open.

[Deepa Raghavan:]

Good morning, all.

[Jim Loree:]

Good morning.

[Deepa Raghavan:]

Great quarter. Obviously, a lot of moving pieces within your guidance, can you talk through some of the items that positively surprised you in the quarter? It could be with your pricing initiatives, the cost actions, whether it was in markets or regions that surprised you favorably, or what also was unfavorable versus your prior thoughts? Relatively, are you seeing any incremental push-backs or demand impacts from this continued price increases that you are living in the market? Thank you.

[Don Allan:]

Okay. So I’ll take the first part and then maybe I’ll pass the second question over to Jeff around pricing, but the – as far as the quarter what things we saw that were a little bit different than expectation, emerging markets clearly was lower to some extent. We expected some slowness, especially in Argentina and Turkey, but Mexico was a bit of a surprise given the events that happened in the middle of the quarter around the threats of potential tariffs that seemed to slow the markets a little bit in the back half of the quarter. So that was certainly a little bit different than expectation. When I look at kind of the retail tools performance, I think we’d say, it pretty much was in line with expectation. No real, unusual surprises there, either positive or negative in that regard.

[Jim Loree:]

Although I think the POS was a positive surprise.

[Jeff Ansell:]

Yes, the low down was kind of as expected.

[Don Allan:]

The low-double digit POS is always a positive, probably above expectations. So that’s a fair point, Jim. But as far as our kind of revenue performance, there really wasn’t anything that really stood out as unusual, but that’s a great positive trend, as we think about execution in the back half of the year, especially the third quarter. And then industrial, slowing down a little bit, as we mentioned in the industrial tool business, was a little bit of difference versus expectations. However, we expected a lot of that slowness in our Industrial segment. Jeff, you want to take the price question?

[Jeff Ansell:]

Yes, maybe two things to add. When we talk about industrial within tools, the industrial construction part of our business which is the hardcore construction part of the business continue to perform really well. POS was great. Growth was great. When you get into heavy duty manufacturing industrial like the industrial storage business and some of those things, they were pressured. So we continue to win in every part of construction. It was more of the industrial manufacturing part that was pressured a bit in the quarter. In regards to price in POS, you know, we’ve done everything we can to deal with the effects of price inside of our business, and then that has required us to pass on price to our customers as well because we – there is no way we could contain it all. But even as we’ve done that in the last – in the year to date basis, we’re up double-digit POS on a year-to-date basis, and that’s from everything from outdoor, through cordless power tools, brands everything. So we feel like we’ve done a really good job of managing price and volume to this point. The future, we will continue to stay really close to it, but we feel like we’ve done a pretty good job with our customers of managing the volume price equation. And as a result, robust POS is driving growth for us and our customers.

[Don Allan:]

Yes. I think the other positive, even though it’s not a huge positive versus our expectations, but the – you know, the fact that Europe has been able to continue to be very strong, even in the face of tremendous uncertainty over there. Everything every – almost every country, you look at, you see political, geopolitical turmoil and economic stress and just limited growth. And so, I think the kind of mid single-digit growth performance in Europe continue to sustain that and I think that bodes well as well as Jeff said for the second half in Europe.

[Operator:]

Our next question comes from Robert Barry with Buckingham Research. Your line is open.

[Robert Barry:]

Hey guys, good morning.

[Jim Loree:]

Good morning.

[Robert Barry:]

Just a couple of quick follow-ups. I think you are expecting Tool’s margins to be only very modestly up in 2Q and then much more meaningful in the back half, and it looks like 2Q ended up being more meaningful and now 3Q is going to be only pretty modest. So just curious what kind of drove the outperformance in 2Q or why that kind of shift is happening? And then just a quick follow-up on the Craftsman channel loading. When does that peak that contribution to growth? Thanks.

[Don Allan:]

Okay. I’ll start with the margin question and pass the Craftsman question over to Jeff. Yes, we expected modest rate accretion in the second quarter for Tools & Storage. We ended up getting close to 80 bps of accretion in the second quarter. We still expect good accretion in the third quarter, not quite as much as 80 bps, but still a very healthy performance and then it gets even stronger in the fourth quarter. The second quarter really is just a factor of us being very focused on how we manage, as I mentioned in my comments, and we mentioned a fair several times over last year, really that balance between volume growth, pricing and making sure that we are focused both on organic growth and margin rate accretion performance. And I think the tools team did a great job managing that dynamic in the second quarter to get this type of performance. So a little bit of timing related to tariffs, where some of the tariffs shifted into the third quarter related to the new List 3 one going from 10% to 25%, that was a little bit of a positive that didn’t impact us in Q2. Just given the timing of it, but beyond that, it was really just strong execution by the tools team. Jeff, do you want to take the Craftsman question?

[Jeff Ansell:]

Sure, Don. In regards to the question on Craftsman loading, I would say probably the loading itself anniversaries to a large degree in the fourth quarter. So if you look at the rollouts, we’ve been rolling out Craftsman for – on an increasing basis over six quarters. So it’s really – it’s the fourth quarter where it starts to anniversary most of the largest loads. At the same time, we stay really close to that POS and I think we’ve said before and I’ll say it again, the POS in Craftsman tend to be almost twice what it replaced in the categories that we’ve added it. So even though we’re anniversarying the loading, we still feel really good about the 3 points of incremental growth in our path to a $1 billion by 2021. So both of those things are – they’re positive at this point.

[Operator:]

Our next question comes from Ken Zener with KeyBanc. Your line is open.

[Ken Zener:]

Good morning, gentlemen.

[Jim Loree:]

Good morning, Kenny.

[Ken Zener:]

Jeff, I wonder if you could comment, in the old days of Black & Decker, the outdoor power tool group had an effect on 2Q, obviously with your growing investment and insight into the outdoor power tool and given the very wet second quarter. Could you comment on any perhaps drag you saw there, but also – for whoever, how that might affect the execution of when you get a more, it’s a great business, but it becomes more seasonal, how that kind of affects perhaps operations or how you’d approach a very wet winter and how we should think about that going forward?

[Jeff Ansell:]

Well, our result in outdoor has been really good. So we’re up mid single digits by 15% on a year-to-date basis. Some weeks 19%, and the best intelligence we have says the outdoor space would be up about a third of that. So that clearly represents share gain across Black & Decker, Craftsman and DEWALT. And I think the thing that’s changed over the last 25 years, I’ve been in the outdoor business is, we’ve become a much more prevalent player for a longer part of the season. So while we historically participated in the spring part of the other season, we’ve gotten far, far better at other categories where now that’s elongated well into the fall and early winter, blowers and some of those things that we historically hadn’t done. So the – if you think about it that way, we shipped those products in Q1, they sell in Q2, blowers and so forth happened in Q3, so outdoor has become – it’s a seasonal business, but it’s is now three quarters of our year versus what used to be one quarter of our year. And so all in all, I don’t think the season hasn’t impacted us. And I think the season in total was up a bit for – in the market, but ours was probably three times the market growth. But we feel good about that same prospect for the fall as well. We have really good promos and listings and so forth.

[Operator:]

Our next question comes from Michael Wood with Nomura Instinet. Your line is open.

[Michael Wood:]

Hi, good morning.

[Jim Loree:]

Good morning.

[Michael Wood:]

Can you give us any initial quantification of the 2020 carryover external headwinds from tariffs, FX commodities and potential offsets with the carryover from your cost actions. And you also called out less commodity inflation, just curious if you could pinpoint where you’re seeing that and does that become a year-over-year tailwind by year-end?

[Jim Loree:]

Yes. So obviously, we will have a carry-over impact from the List 3 tariffs going from 10% to 25%. So we only have about a half-year impact of that this year. That’s roughly $70 million of an impact in 2019. So you can expect that to be roughly the same in 2020. The commodity impact or deflation impact or lower inflation is probably $15 million to $20 million this year, most of that hitting the fourth quarter. So we would expect a little bit of a carryover impact from that. It’s coming from things, certain steels and resins primarily that’s driving it. But we’re also seeing it in a couple of other categories. It’s kind of spread across various different categories. No one big one driving all of it. So, if things stay where they are, we would expect a carry-over impact. It may be as reasonably close to the tariff impact at this stage. So hopefully they neutralize themselves at this as we look at it right now.

[Operator:]

Our next question comes from Sam Darkatsh with Raymond James. Your line is open.

[Josh Wilson:]

Good morning. This is Josh filling in for Sam. Thanks for taking my question.

[Jim Loree:]

Good morning.

[Josh Wilson:]

I want to dig in to the incremental pricing. You maintained your organic growth guidance for the year, but it was lower volume expectations offset by some incremental pricing. Could you give us some more color on which segments and which geographies that incremental pricing is coming in and what gives you confidence that those markets will support those increases? Thank you.

[Don Allan:]

Well, I mean, we’ve been as you know, we’ve been getting price in the market for over a year now related to all these different headwinds and so some of these are going to start to anniversary themselves in the back half of the year. So, you’ll have a full year impact. We will have new pricing actions related to the List 3 going excuse me, going from 10% to 25% in the back half of this year. We’ve been running at about a two-point price impact. I would expect that probably would be somewhere between one point’s, to two points in the back half of the year, given that we’re starting to anniversary some of these things as likely being maybe closer to one versus two. So, the impact of price in our organic growth will be a little bit smaller than what we’ve experienced in the first half of the year and then obviously the offsetting impact to get to 4% organic growth will be volume, which means it will be a little bit bigger versus what you just mentioned.

[Operator:]

Our next question comes from Ross Gilardi with Bank of America. Your line is open.

[Ross Gilardi:]

Thanks. Good morning, guys.

[Jim Loree:]

Good morning.

[Ross Gilardi:]

I was just wondering if I could throw in a question on the Security business. I was interested in your comments on improving trends in what parts of the business are you seeing strength. And then just more broadly and while you’re clearly making a margin progress, you’re still a long way from the mid-teens operating margin objective that you want for the business. How would you look at it next year, if you’re still making positive progress, but you’re still well short of your margin targets with respect to retaining or divesting the business?

[Don Allan:]

Well, the retaining or divesting of the business question is a question that we promised to answer a year, two years from a year ago in May. And right now, we’re not speculating on all these different aspects of and scenarios what-ifs, and so on. What we’re focused on is margin improvement and organic growth and transformation of the business model to make it a more relevant business model and a more defensible business model for the 2020s. And regardless of whether we elect to keep it or divest it, either way, the value that we’re creating by focusing on this is substantial and that’s the way we’re thinking about it right now. We don’t want to distract ourselves with having to evaluate what’s the right time to divest should we divest or what’s the right divestiture approach if we choose to do that. I mean there’s a lot of complexities associated with those questions which we’ll answer at the appropriate time. But for now, we’re focused on margin improvement, which we’ve accomplished at the beginnings of now and we’re and it’s mostly in the electronic business. I’ll tell you, it’s across the board in the electronic business where we’re focused on margin improvement and now we’re moving now that we have that going, we’re moving to an extreme focus on driving the value proposition and the go-to-market feet on the street, selling the applications that we’ve developed.

[Operator:]

Thank you. This concludes the Q&A session. I would now like to turn the conference back over to Dennis Lange for closing remarks.

[Dennis Lange:]

Shannon thanks. We’d like to thank everyone again for calling in this morning and for your participation on the call. Obviously, please contact me if you have further questions. Thank you.

[Operator:]

Ladies and gentlemen this concludes today’s conference. Thank you for joining. Have a wonderful day.