Stanley Black & Decker's (SWK) CEO John Lundgren Presents at 2016 Electrical Products Group Brokers Conference (Transcript)

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Stanley Black & Decker, Inc. (NYSE:SWK) 2016 Electrical Products Group Conference May 16, 2016 10:45 AM ET


John Lundgren - CEO


Unidentified Company Representative

I'd like to get started. We're delighted to have Stanley Black & Decker, John Lundgren, the CEO and Chairman. And also like to give a shout out to John for arranging and hosting a fabulous golf tournament yesterday.

John Lundgren

Thanks Jim. Good morning everybody. Thanks for being here. We will assume that everybody can speed read that as you do. Just a little history, it's great to be here in EPG, but I think we show this slide because there was a time when we as legacy Stanley weren't at EPG. But over a 15-year period we’ve transformed from the small capital and product company to a larger cap diversified investor, revenues grown from 2 billion to over 10 billion. Our market cap has grown from 2.7 to 16.4 at the end of last year little higher than today and we'll jump to it, 15,000 employees to currently more than 50,000 associates around the world about 35% of them in the U.S.

And just quickly some of first quarter highlights, we grew 5% organically we're pleased with that. Tools & Storage growing at 8% and part of the growth was good performance in emerging markets and it's been awhile since we've had that some of that we're talking offline little earlier. Latin America with exception of Brazil coming back a little bit in some of the other markets are growing at better pace, we don't know if that will continue but it was good to see for the last four to five months. Operating margins were 13.1% in the first quarter with our security and industrial business operating margins rates up 110 or 120 basis points respectively versus the same period a year ago. That was encouraging for us.

EPS to the $28 was plus 20% of EPY and as a consequence we were able to raise our guidance, it was in a range of 620 to 640 to a range of 620 to 640 from $6 to $6.20, so good progress momentum as we've begun to build couple of years back continuing into the first quarter of ’16. Just looking the businesses really quickly and the geography again about 11.2 billion in revenue, 17 billion in market cap and 2% dividend yield something we're proud of, we paid a dividend for 139 years we've increased it for 48 consecutive years that's record if you're the CEO, you probably don’t want to break, so count on that maybe another way to look at it.

In terms of our businesses, of course our largest business is about two-thirds of our revenue. Its Global Tools & Storage, Power Tools & Accessory, Hand Tools & Storage the combination of the Stanley Works Hand Tools business and the Black & Decker Worldwide Power Tools & Accessory business. Industrial segments of about 2 billion that consist of the engineered fastening business which is the lion’s share of that and our infrastructure business which consist of our former CRC-Evans oil and gas business pipeline services and our infrastructure business the former Stanley Hydraulics business that some of your familiar with and then 18% of our revenue is our security business with combination of Convergent Security, Convergent Electronic Security and Mechanical Access Solutions rounding out our 11.2 billion.

Geographically, just little over half is the U.S., it was about half and with the strengthening of the dollar relative to foreign currency it's now 53%, 22% Europe, 16% emerging markets, 9% rest of world. That 16 was almost 19 two years ago and while we've continued to grow and maintain share FX has reduced it to 16. We have a long-term objective of that being 20 or more despite the foreign currency headwind. So the transformation continues and we think we'll poise to accelerate both the growth and the margin expansion and we'll talk about how and why we think we can do that.

Of the three segments we're number one in Tools & Storage, strong brand to well Stanley Black & Decker Porter Cable, Bostitch and others that you know, great organic growth, outside organic growth in global scale in both Power Tools and Hand Tools and the construction in DIY in auto repair and aftermarkets that’s called, Mac Tools and Industrial. Some of our iconic brands like Proto that folks know well in the channel, with the presence in both developed and developing markets. Clearly the undisputable global leader in Tools and Storage, we're number two in the Engineered Fastening business. Highly Engineered Solutions, as we say we're selling productivity to industry with a nice recurring revenue model where we're selling system or the Gillette analogy the razor and the blade again with global scale.

That business, two things we like about it, it’s global presence it is about a third Europe, a third US and third Asia, so nice geographical dispersion historically about 70% of that business was OEM auto via acquisition and organic growth in the consumer electronics and others, it’s now about 50% OEM auto, so tremendously influenced by the light vehicle production, it's a primary market, but with a large presence in consumer electronics and growing presence in things like Aerospace and Defense and that’s where that business has a tremendous opportunity to grow from its existing day. High profitability really strong margins in that business and it's a business that most of you are aware is a platform for future growth via acquisition.

And last but certainly not least we're number two in commercial electronic security, high value added vertical market solutions, retail being a large end market, universities, education, financial institutions. Importantly, it's very CapEx light relative to residential security and that's an important thing to know if you're distinguishing between commercial and electronic security businesses with a global footprint. Again the potential large margin accretion opportunity longer term, these are businesses that historically we've in the mid to high teens operating margin, right now they're low double-digit with European high single digits and U.S. being mid-teens. As we continue to improve the performance of those businesses, that in and off itself is our single largest short to immediate term margin and income improvement opportunity despite everything else we have going on.

The other thing I want to say about security it's very important over the years, they're very-very commercial security, is a very-very good business to be in recessionary time. Arguably Stanley owns Black & Decker because Stanley was in the electronic security business during the last financial crisis where it became 40% of revenue and 50% of operating profit. So, countercyclical if you want to think about it that way and if you think about our portfolio it's nice to have 20% or 25% of the business in a market that is helped by commercial construction, but that being said it's a great anchor, if the GDP slows down or in the midst of any kind of a recession.

I'd like to show this chart for a couple of reasons. We have investors as opposed to traders in the room, so, it gives a nice long term perspective, plus it makes me feel really good because I've been around most of the time. Over time S&P 500 has shown a 108% over the last 15 years, our industrial peers have grown 200% and we've grown 412%, total shareholder value. It's a track record we are very proud of, and I show it just to kind of remind everybody that our strategy that has been fundamentally intact for the last 10 year or 12 years is unchanged in terms of markets and businesses we're going to focus on capital allocation policy and we're happy to talk about that in the Q&A.

That’s great past performance, what's going to allow us to continue that performance going forward, for us it's SFS, got us there, the Stanley Fulfillment System. Now, it's SFS 2.0 taking it to the next level. If I can go right to left on that chart, core SFS it's all about lean, it's about eliminating complexity, reducing waste, driving asset efficiency and it's really helped us grow working -- double working capital turns twice in the history since its implementation, it's gotten us a long way to go. Functional transformation is, it essentially is applying that to the backroom. We think relative to best in class all our benchmarking and we've got upward to 300 basis points of SG&A that we can get out to finance, IT, those costs.

And it's nothing we're really embarrassed about or kicking ourselves about. We've made a 100 acquisitions in the last 15 years, energy, plug and play systems on top of what you've got, a lot of inefficiency gets soaked in, we think if we take between a 100 basis points and 300 basis points out of SG&A via functional transformation, clean sheet zero based budgeting for all our backroom operations that don't touch customers and end users, we can reinvest about half of that in our SFS 2.0 growth initiative that you see on the left hand side of the screen and drop the other half to the bottom line, so it's a very conscious effort led by Don Allan, Rhonda Gass, our CFO, our CIO and a very capable team, it's going to take two, three, four years to get there, but we're tracking it every day at a very high level and we're consciously optimistic that we will achieve those objectives.

If I keep going right to left on your screen, digital excellence is just that, we read about it all the time, rapidly elevating our digital IQ, that's just one example if we think of simply online business, we're pushing $500 million of online business primarily through Amazon, but obviously some of our big customers are,, et cetera. That was zero four years ago, not 5% or 6% of our revenues and being better at it, working and collaborating with our customers to find the right blend, this is very important to us leading to commercial excellence. Most of our outsize growth in Europe where we're growing mid-single digits organically in a market that’s flat to 2% is due to our effort on the commercial excellence side, better relationship with customers, better collaboration, better transparent forecasting, transparency in the forecasting process and just improving the way that we offer our products with our retail partners and our industrial partners to gain market share and while I think we've done a pretty good job around the world, I'm very proud of our European team, it's really taken it to a different level, I'll just mention in passing Europe is not so different from the U.S., they're a developed market, I've spent 14 years of my career living and working abroad mostly in Europe.

The relationships are generally a little more, I don't want to say adversarial -- more transactional and less collaborative and to the extent we can drive those relationships to more collaborative win-win, we're going to win them for a long run and I think I really feel good about the progress our European team has made. Last but not least, breakthrough innovations. We’ve done a nice job over the years growing organically with modest product improvements, price improvements that come with it, incremental improvement that are absolutely required if you’re going to be a brand leader and stay in the marketplace and continue to lead. We’re going to continue to do that. We always will. Lot of world’s first particularly in our Global Tools & Storage business and continue to drive that organic growth.

We’re talking about big swings here. We’re talking about dedicated teams by business starting in Global Tools & Storage. We now have them implanted in virtually all of our businesses, taking big swings and what we’ve said is if what you’re working on isn’t going to be at least $100 million in revenue, which would give us 100 basis points of organic growth above and beyond what we’ve got, don’t bother. Sale quickly, all those things that we all know and we learn about with these big opportunities but we’re pretty excited about some of the things that have come out of this activity in a relatively short period of time.

So it's all about market moving growth ideas in our core businesses that will really enable us to continue to grow organically well above market levels. That’s the enabler. It really-really is part of our DNA. We don’t talk about the acronym, et cetera, so much, but everybody in our Company can tell you what their role is relative to SFS 2.0 and why it's going to get where we need to be. So, why invest in Stanley Black & Decker, a lot of great franchises. Our people and our brand being our most valuable assets like so many companies, but I think a lot of people, a lot of companies would feel really good about having the stable brands that we have that I showed you a little earlier. And the fact that in essentially every business we compete in we’re number one or two, if we don’t have a path to get there, even if we’re earning our cost of capital in that business it’s not just showing shareholder value but ultimately we’ll find a way to get there or we’ll get out. We’ve done in the past and we’ll continue to do it going forward.

We believe we’re poised for differentiated growth. Breakthrough innovations via SFS 2.0 as I talked about and for those of you who followed us more closely we’re on a self-imposed 18 to 24 month M&A hiatus. Historically we’ve done very well with accretive strategic acquisitions. We’re back in the M&A business, the pipeline is full and we will resume deploying approximately 50% of our cash towards acquisitions while the other 50% comes back to shareholders, and I’ll come on to that at the bottom of the stream.

Margin improvement opportunity operating leverage as we grow that’s good. We’re going 5%-6% a year that’s great in terms of leveraging fixed cost. Functional transformation as I mentioned we’ve got a great opportunity to get up to 300 basis points out of the backroom which is necessary to run the business, but not adding a lot of value relative to our customers. We think we’re on the way and again security improvement, upwards of 500 basis points of margin improvement opportunity over the next two to three years with 20% of our business the math is pretty simple it's 100 basis points of margin or 50 basis points of margin even if we only get halfway there.

We continue to generate a lot of cash. Our cash conversion ratio is top decile a year in year out when measured against the diversified industrial peer environment. And as the consequence, we’ve got a stated strategy of about over time 50% to M&A and 50% back to our shareholders with a constant steady regularly increasing dividend and opportunistic share buyback.

So, Don Allan, our CFO and Jim Loree our COO, often referred to us to it's a hybrid growth company with a fairly -- with a shareholders friendly cash deployment and capital allocation policies with some good opportunities for growth in the future. Let’s go to Q&A.

Question-and-Answer Session

Q - Unidentified Analyst

John, would you differentiate, in this transformation of Stanley over the last few years it's been quite profound. Can you help us understand where you stand today versus say three to five years ago in terms of leadership development, management development, standard growth, whatever you want to call it.

John Lundgren

I didn’t say you asked that question, did I? For those of you who aren’t aware, the last three years in a row we’ve been recognized as one of the top 15 companies in the world for leadership development, that doesn’t happen by accident and as much as I’d like to take credit or some credit for some of the past results, but something I feel really-really good about pointing out, I am in my 13th year as the CEO. I had 14 direct reports day one, which is too many, but you want to assess the entire team. Of those 14 direct reports eight are still with the Company 13 years later in more senior position, four have retired well into their 60s and two we’ve come to the realization they weren’t the right fit. So I guess to simply answer your question is I think we were pretty good all along and we have that once in a lifetime opportunity of putting Stanley Black & Decker together and being able to choose the best from two pretty good companies, put them in the right position and continue to grow. So the talent that was privileged to work with by virtue of that merger of two pretty good companies to make a very good or even a great company good faith, good future, something we take very seriously with our OPR development process. I guess I'd say it gets to the point where I think we were pretty good years ago and we're a little better now than we were, I’m really happy with our bench most of whom --.

Unidentified Analyst


John Lundgren

Twice the talent to work with. I think Stanley was a very good company in my view, and I think Black & Decker was a good Company. I would argue it was undermanaged and all of the sudden there were so many people in the worldwide Power Tools & Accessories organization that this audience would not have been exposed to because they were relatively senior folks, but not offices of the Company and a lot of those people are in other businesses now great commercial people, great product people, but former DeWalt mid to senior executive are now running that tools, running the mechanical security business. So these legacy Stanley businesses maybe another way to say it is, I’ll look around a room now five years into the merger but even three years ago and say, Jeff came from Stanley, Cliff came from Black, we didn’t even think about it, it’s just one team.

So once we got through the bumps if you well and some of the egos that needed to be managed in a merger and it was clear who was in charge, we go one level down in manage, the enemy is competition, the customers are who we need to focus on and end users and that was just that, but seriously that once in the lifetime opportunity that we'll no credit for, as it was good fortune. Thankfully we've leveraged it and it's worked out well.

Unidentified Analyst

Just two quick on, first is on the functional transformation John, is there any particular kind of heavy lift on cost or EPR or anything like that to get to that and how should we think that?

John Lundgren

Yes, it's IT, it's the heavy lift on cost, all of the above. The good news when Stanley Black & Decker came together Black & Decker had about three quarters to their company on SAP worldwide product tools and et cetera, that's why Global Tools and Storage runs as smoothly as it does, we've got $7 billion on a common platform. We've got 4 billion on above 72 others now that down to 22 others, it's not quite that bad. But you're right now, we got heavy lifting to do in IT we will get there overtime very rationally by simply not supporting system that are too expensive or too inefficient. It will take three to five years, but that's why if Don were here he’d tell you, our CapEx requirements haven't changed dramatically.

We say we're going to be between 2.5% and 3.5% of sales and let's just say for argument’s sake that's 350 million a year. Historically, 50 of that might be IT systems related going forward it will be 75 to 100 in certain years. So your question actually was rhetorical and that's exactly where most of the work needs to be. And again philosophically if it touches the customer and end-user we better do it locally, we better do in the market, we better do it with people with the relationship and understanding, if it's doesn't do with one place where it's low cost, leveraged share services we're getting better at it, but we've got ways to go and we’ve got some money to spend together.

Unidentified Analyst

And then just on the M&A pipeline and maybe a little more granularity if we could, kind of late last year when you were looking at kind of the sunset of yourself imposed moratorium, I think there was a view that there were actually a number of things maybe pop out of private equity or other things that may really come into the aperture, is that in fact happening and --?

John Lundgren

Absolutely, in a lot of -- if it's private, if it's foreign those relationship take a long time to build and you have to work hard to maintain them, but we never stopped that, we just didn't aggrievedly pursue anything. Not a lot’s changed the pipeline is full, the areas remained to be global, despite we're the world's leader I'd like to point out we're without question the world's leading Tools & Storage Company. We have 17% global share, it's a lot higher than that in the U.S. and it's a lot higher than -- but there were categories even in the North America where we could grow and there were opportunities all around world the emerging markets, Europe elsewhere, we're very-very good businesses that can and will and we say we're going to continue to consolidate the global tools and storage industry.

As I said earlier, we love the Engineered Fastening Business, we really gotten to know it, we like the recurring revenue aspect of the model, we like the fact that you get paid for technology and for providing as we say, if you could add productivity to auto manufacturer or consumer electronics manufacturer, production system you get rewarded for that you get paid for that, so we look it. A lot of opportunity in that space, we need to focus on places where we're not as relevant. Because if you’re good consumer electronics, good auto we need to focus in other verticals. And there is still opportunity in securities, but the right one we need to get our own security business hitting on all eight cylinders before we're going to think of anything meaningful in that area and some of our smaller business in Security like healthcare, which is a great franchise acquisitions are also really expensive.

So they are there, we've got to think hard about having to buy something at 20x, when you're trading at 16x and can you get a return. So think Global Tool & Storage plenty of opportunities think Engineering Fastening plenty of opportunities then small bolt-on elsewhere, plenty there.

Unidentified Analyst

You mentioned 5 to 6 in your sales, 3 e-commerce from zero five years ago, so I'm just wondering the fact is that could be much-much higher going forward.

John Lundgren

Could be.

Unidentified Analyst

To what extent is your e-commerce ramp-up enable market share gains versus your competitors? And how does that economics of selling through Amazon for Stanley compared to HomeDepots?

John Lundgren

Well, I'm not going to get too granular on it, but if you look at our total margin progression, you could probably do the math that said it was much worse through ecommerce that we couldn't be accreting our margins and I'll say no more than that. The margins are attractive. That being said we do upwards of a $1 billion with our two largest retail partners and they are our retail partners and I won't be a cavalier, many of you know Jeff Ansell, who runs are Global Tools & Storage business, as he was presenting to an internal group, might even have been our Board talking about the growth from zero to 500, I said Jeff how big does that have to get before the conversations with our largest customers become a little uncomfortable, he said about 500 million.

So, it's something we've to balance very carefully, but we have to commit to our retail partners that they will never be disadvantaged versus someone else, an end user, a pro can go to, I can use their name, or, they can do it, they're not disadvantaged from a price perspective, because our customer rightfully so, they'll use a the best buy analogy to say, if we just become nothing but a showroom and people look around then your products aren't going to be what's on display. And again our share gains have been a combination of us understanding that the retailer doesn't own the end user any more than we do, we're focused on products, we're focused on end users, we will get to him or her mostly him in our professional product tools business the most efficient and effective way we can and the fact that we've been able to work with our retail partners I think pretty effectively, reassuring them they will not be -- we will not allow them to be disadvantaged relative to ecommerce, it's a balance, it's the collaboration, it's the transparency that's required.

It's going to continue to grow, but their business will grow too. It won't be just the Amazon to the world, it will be the ecommerce opportunity or option within an existing large customers.

Unidentified Analyst

John can you maybe expand on your earlier comments around security being an attractive and important part of the portfolio providing counter cyclicality. You don't necessarily need the construction upturn. How do you see it in terms of the portfolio today, where do you see it headed and your opportunity?

John Lundgren

No change, it's a business that we like a lot, and we like a lots of reasons I've said. And as we look within -- and we've said a year and half, two years ago that the second half of this year and the calendars I use that means starting in July, sometime between July and December, we'll take a position on security and what we've said initially was it will continue to improve, but the rate it’s improving and as long it is, that is our biggest short to intermediate term improvement opportunity. It's a business we like strategically and keep it all. If it wasn't we think about spinning it all off and it would almost surely have to be a tax free spin to shareholders because we'd have to get an incredibly large price to cover the tax leakage versus in a tax free spin to shareholders. And those the two bookends if you will.

And since then we've looked at certain pieces of the business that aren't number one or two and may not get there and we see what things are trading at because there's been so much consolidation since we made that statement, there have been three major consolidations in the industry, so fewer targets for us but very high asset values. So, if there's a piece of the business and we've specifically said mechanical security then we don't see the path to number one or two but we see it worth a fortune to someone else we would consider divesting it, so you've got the two bookends looking at pieces in the middle. In the meantime, what's helping our margin growth is the fact that our European Security business particularly is improving about 50 basis points a quarter, and it’s a $1 billion sort of business. That's helping us a lot.

So, I love the direction of the curve, I wish the slope of the curve was steeper but as long as we keep the curve moving in that direction, we like security, we will look at specific pieces and we'll have a definitive position, certainly no sooner than July and no later than November, December. That's about all I can say but not a lot of change other than we've added the nuance, maybe there is a piece of it, that's worth a ton to somebody else and is less strategic to us because it doesn't meet all our long term objectives. The good thing is all those businesses are earning their cost to capital now, so most models say they are creating, or not destroying shareholder value, that wasn't the case, two years ago.

Unidentified Analyst

You talked about focusing on M&A in Fastening and Tools, I the potential synergies and the Tools business seem pretty clear, but what would be the flavor of the synergies buying in Fastening and especially if you're entering a new vertical?

John Lundgren

Sure, we're the second largest engineer fastening company in the world, so the synergies are there, great example is, we were 70% OEM auto, we bought a company called Infastech, formerly Avdel. Put us into consumer electronics and the synergies came right away, we had a nice geographical balance, we got some great people, particularly to run our Asian business yet we took the same I’ll call it the vision or segment infrastructure now we’re spreading it over $1.4 billion versus $800 million.

So if nothing else there is the synergies of corporate or segment operating costs and then simply sharing best practices in terms of production. From the sales perspective, from the execution perspective, more likely we’d have to do it via acquisition, so we’ve got the customer focus. The folks that are subject matter experts calling on Aerospace, calling on Defense, as opposed to calling on the large consumer electronics companies or all the auto makers. But the synergies are there both ways. There are cost synergies, ultimately revenue synergies but in my 12-13 years we’ve never put a revenue synergy in an acquisition model to justify the cost, that’s all we say, it's a budget feeder or a hedge. So I think let me say I think the synergies in terms of percent of total are probably as good an Engineered Fastening as they are in tools and storage because we’re a pretty big company and we’re just going to get the leverage from anything we do.

Unidentified Analyst

Just a quick follow up, you mentioned now and in the past specifically about going into the Aerospace vertical, just comment on what are the multiples look like there. And if you get into that vertical, how might that change the growth in margin profile?

John Lundgren

It's going to vary by target and vary by target, but we’ve got a history. If we’re paying higher then -- it’s what’s kind of kept us away from if I look at security it's kept us away from some pretty attractive, I’ll call it healthcare acquisitions in that the multiple are 25 and 30 and you’re trading at 16, we can’t find the synergies to have that make sense. If I go back seven-eight years ago and security people, wait a minute, you’re trading at 7, you’re buying something at 12, two years later that 12 look 4, when we got the synergies. It's going to vary by target and I guess simply said if we don’t get between what we’re paying in terms of multiple and synergies we can’t get it to ultimately at or below what we’re trading at, we’re not going to do it.

We’ve never made an acquisition where we don’t look at it relative to buying back our own stock and have the conversation with ourselves and with our board short term and long-term should we do it. So it's got to be accretive in year one, it's got to get to 15% operating margin within three years if it's a bolt-on and five years if it's strategic. And as long as we maintain that discipline I think it will be case by case, but we’re going to be fine in terms of creation of shareholder value. And I think one of the reasons you or we should be cautiously optimistic which if I can say that that we aren’t going to go crazy trading, paying huge multiples or something, most executives including me don’t like taking money out of our own pocket and about two thirds of what I get paid is based on CFROI and if you’re paying too much and I am not getting enough back, you’re taking a lot of money out of your own pocket.

And it is then simply said though it's really, really good focus for the long-term incentive for all of our management team and more than half of their compensation is paid on a combination of EPS and CFROI. And that keeps the discipline there and unfortunately it means we do have to walk away from some pretty attractive things because the multiples are simply astronomic and we can’t get it to fit in your space. I don’t think that’s the case in aerospace and defense, but there’re people in this room who know more about it than I do as we start to get into that space.

Unidentified Analyst

John, if I can talk about taking big swings, is there something going on in your markets now that you think it make sense to take these bigger swings at innovation and why is 100 million the right revenue threshold and more on the though process?

John Lundgren

100 million is just to let everybody folk -- the 100 million was arbitrate, but if you think about it, it would give us 100 basis points of organic growth annualized. So, it was meaningful. And it was to get these folks away from -- we’ve got a pay by the drink, in terms of just very small innovations and improvements, this will continue to maintain a slightly improved market share. So the 100 million was arbitrate, but just to say there’re companies in here that’s earlier and later but that’s not a very big number for us, it's a big number, because it's 100 basis points of organic growth.

The kinds of things are -- let me just say the philosophy is we’re in the tools and storage business let's be paranoid or fanatic about how do we disrupt our own business model before someone else does it to us and it's a hard thing to do, but that’s what we’re doing. We’re shaking, who could -- who or what could put us out of business, what would we do to either preclude that from happening or better yet who are near neighbors that we can put out a business with disruption through the combination of lithium ion battery technology, brushless motors, the intense desire and growing need for sustainability, safety, combining all those things that are important to end users in our category, what can we replace that’s out there doing similar things to us, those are the kinds of things we’re talking about.

And I am not trying to do a shell game or anything else by the third quarter we’ll be fairly public with it, that’s such until our customers are all comfortable with it, they’ve seen it, we’ve got a history that we don’t share those things with the investment community until the customers are with it. We started to sell it in and then we get a flavor for how big it might be, but it's close, it will be this year when we start to expose some -- I'll say -- how do I say differently, when we start to try to capitalize on the initial return of this effort, it’s been going for the couple of years now.

Unidentified Analyst

John, I think foreign currencies hit you pretty hard the two years and maybe the pressure has eased a little bit in the recent months, but how --.

John Lundgren

You got to guarantee that I hope right.

Unidentified Analyst

Well just looking at the past two months, it’s going to get better but you've got some export import dynamics in certain region, so how do you think about future investments maybe reducing some of these risks going forward?

John Lundgren

Yes, it's a really question, raw numbers we had to overcome 220 million at the operating margins level of foreign exchange last year. This year going in our plan and guidance was based on 180 million which is about $0.90 a share of FX headwind. Our current estimate is 140 million, so essentially that 40 million difference which is almost $0.20 in EPS was what allowed us among other things to raise our guidance and say all things being equal that's where it’s -- it’s still need to be very clear, it's a 140 million of FX headwind this year relative to last year. It just happened to be less than we've thought. In terms of Jeremie's question what are we doing to mitigate some of it? Of course, we hedge, to the extent prudent, hedges roll off so it's a double edged source.

We have an objective of producing at least 50% of what we produced of what we sell in the Company where we -- in the country where we produce it. And simply said a lot of our cost agita is because in emerging market in particular, we've got huge production in Brazil obviously a lot in China. We still have a lot of dollar denominated component, critical component going -- so despite low labor costs you got dollar denominated component because we either don't want to risk using our IP or we can't develop qualified suppliers for critical motors and things of that nature in the local market.

So the drive is to develop local sourcing for critical components in low cost countries or weak FX countries so the higher percentage of components that are coming from those markets, the costs have come down along with the price and along with translations and it will work out fine. But if something we’re just tackling overtime, we want to be global and we know that there are going to be volatility particularly in emerging markets and if you're Europe it's 22% of our revenue it's may not grow as fast as other markets, it's a huge market and we're there for the duration, but managing the cost is I think how we're going to stay competitive long-term as much local sourcing that we can do it and it gives us a lot more flexibility.

John Lundgren

We’re out of time. Thank you.

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