Dennis Lange - VP, IR Jim Loree - President & CEO Don Allan - EVP & CFO Jeff Ansell - EVP & President, Global Tools & Storage.

Jeff Sprague - Vertical Research Nigel Coe - Morgan Stanley Ken Zener - KeyBanc Rich Kwas - Wells Fargo Securities Josh Pokrzywinski - Wolfe Research Saliq Khan - Imperial Capital Chris Belfiore - UBS Rob Wertheimer - Melius Research Robert Barry - Susquehanna Scott Redner - Bellman & Associates.

Welcome to the Third Quarter 2017 Stanley Black & Decker Earnings Conference Call. My name is Shannon and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I would now turn the call over to the Vice President of Investor Relations, Dennis Lange. Mr. Lange, you may begin..

Thank you, Shannon. Good morning, everyone and thanks for joining us for Stanley Black & Decker's third quarter 2017 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 & Storage.

Our earnings release which was issued earlier this morning and a supplemental presentation, which we will refer to on the call, are available on the IR section of the website. A replay of this morning's call will also be available beginning at 2 PM today. The replay number and the access code are in our press release.

This morning, Jim, Don, and Jeff will review our third quarter 2017 results and various other matters, followed by a Q&A session. Consistent with prior calls, we're going to be sticking with just one question per caller. And as we normally do, we will be making some forward-looking statements during the call.

Such statements are based on assumptions of future events that may not prove to be accurate. And as such, they involve risk and uncertainty. It's therefore possible that actual results may materially differ from any forward-looking statements that we may make today.

We direct you to the cautionary statements in the 8-K that we filed with our press release and our most recent 34 Act filing. I'll now turn the call over to our President and CEO, Jim Loree..

Thanks, Dennis. Good morning, everyone and thank you for joining us. As you saw from this morning's release, we delivered a strong third quarter continuing our track record of a solid execution. In fact this is the 16th consecutive quarter where we have met or exceeded expectations.

Tools & Storage and Industrial led the way, once again contributing a robust organic growth performance which was 7% for the quarter. Total company revenue growth came in at 14%. Acquisitions delivered nine points of growth which includes the offset from the impact of the mechanical security divestiture.

Tools & Storage delivered 22% total growth, including 9% organic. All regions contributed to the continued growth and share gains of this franchise. And of note was the acceleration within emerging markets which produced 16% organic growth in the quarter and mid-teens growth in all three regions Latin America, Asia, and the rest of the emerging world.

The tools folks are executing superbly by leveraging our SFS 2.0 operating system to deliver core and breakthrough innovation with operating margin expansion, at the same time integrating the Lenox, Irwin, and Craftsman brands into our portfolio. This was an outstanding effort by Jeff Ansell and the entire Tools & Storage team.

Jeff, as mentioned, he is with us today on the call and will be providing some more color. And looking forward, we expect to benefit from a series of growth catalyst in Tools, including DC brushless, FlexVolt, the Newell Tools acquisition, and beginning in mid-2018 the Craftsman brand.

The Industrial segment delivered a significant outperformance for the quarter continuing its 2017 trend of strong results. Organic growth at 8% was impressive. And in Engineered Fastening, we continued to see robust automotive system sales in addition to higher industrial volumes which supported 6% organic growth for the quarter.

Our infrastructure businesses delivered 15% organic growth, an outstanding performance as commercial actions, plus positive underlying markets benefited both project and inspection activity within oil and gas and expanded hydraulic tools volumes. Our total company operating margin rate remained healthy at 15.3%.

Excluding M&A related charges, a 10 basis point expansion versus the third quarter of 2016, we continue to focus on investing in future growth, while generating meaningful operating leverage.

In this thing, productivity execution and other cost actions enabled us to offset increasing commodity inflation, while expanding our gross margin rate by 60 basis points. The strong innovation fueled growth positioned us to continue to make a series of targeted investments to support future innovation, growth, and margin expansion.

Diluted adjusted EPS for the quarter was $1.95, 16% above prior year reflecting strong operational execution. So I want to thank our teams around the globe for their dedication and results driven work that produced this great quarter and year-to-date performance.

And based on the above market organic growth and our confidence in the outlook for the balance of the year, we're once again rising the mid-point of our previous 2017 full-year adjusted EPS guidance this time by $0.10 with a new range of $7.33 to $7.43 or between 13% to 14% growth.

And now I'll turn to an update on the acquisition of Lenox and Irwin businesses, as well as the Craftsman Brand. In a nutshell, we remain at or ahead of our expectations both from a financial and integration execution perspective.

Specific to Newell Tools, we continue to execute on our plans to integrate employee, suppliers, and customers, into our existing operations. We remain focused on and confident in our ability to capture the $80 million to $90 million of cost synergies associated with this transaction.

We're deploying core SFS principles into production facilities and are in the late stages of moving order fulfillment into our own distribution centers.

We're happy to report that our actions to improve customer service levels across the Lenox and Irwin product lines have been successful and we are now experiencing fill rates commensurate with the strong performance of our legacy brands across the portfolio.

In addition our commercial teams around the world are building detailed plans to support future revenue synergies. And we remain optimistic that a meaningful contribution in that area is achievable in 2018 and beyond. Now turning to Craftsman. We are hard at work bringing our vision for this great brand to life.

We continue to make progress on Craftsman product development, supply chain deployment, and commercial strategy. We have now extracted all of our Craftsman supplier management activities from Sears and are fulfilling orders through a new distribution center in Charlotte. Importantly, in the last few weeks, we reached agreement with a major U.S.

retailer on a program which features a 2018 rollout for the new brand. Jeff will provide more color on this in a few minutes. We are excited about the opportunity ahead as we re-Americanize this iconic brand and are looking forward to it coming to life beginning in mid-2018.

So as you can tell there is a growing momentum and continued enthusiasm for both of these transactions as catalysts and we continue to find ways to deliver significant and sustained value to our customers and in turn our shareholders. And I'll now turn it over to Don for a more detailed review of the third quarter results..

Thank you, Jim, and good morning everyone. I'll now take a deeper dive into the results of our business segments which enabled the company to deliver another outstanding performance in the third quarter.

Starting with Tools & Storage, revenues were up 22% in the quarter as 9% organic growth, 13 points of acquisitive growth, and one point of currency combined to more than offset one point impact from divestitures. Pricing was slightly positive for the quarter.

The operating margin for this segment was robust at 17.8% as benefits of volume leverage and productivity more than offset growth investments and commodity inflation, yielding a 40 basis point rate expansion versus the prior year. Importantly, the organic growth and related share gains were experienced across each Tools & Storage region and SBU.

On a geographic basis, North America was up 9% organically with strong performances across all channels, U.S. commercial and retail channels posted high-single-digit growth, while our industrial and auto repair markets generated mid-single-digit growth. Additionally Canada contributes solid organic growth of 10%.

North America's growth continued to be fueled by new product introductions across the portfolio and strong commercial execution. POS was up low-double-digits while inventory within our major customers was in line to slightly below prior year levels, giving us confidence that the strong selling was supported by strong underlying demand.

Europe delivered another solid performance with 5% organic growth. Nine out of the 10 markets grew organically with double-digit performances in Iberia and Central Europe and solid mid-single-digit performances in the UK and France.

The team continues to leverage our portfolio of brands and expand our retail relationships to produce sustained above market organic growth. Finally, as Jim mentioned, the emerging markets delivered an outstanding 16% organic growth.

With mid-teen growth across all regions, diligent pricing actions as well as the ongoing MPP launch across the developing markets continued to support growth. We continue to see the e-commerce channel increase its share of the market and become a larger contributor to the business.

Latin America was very strong headlined by double-digit growth in Brazil, Argentina, Ecuador, and Peru, while Mexico and Chile delivered high-single-digit results. In emerging markets outside of Latin America, we experienced strong performances as well.

For instance, our change to a direct selling model within Turkey and Russia are now paying dividends as both delivered exceptional growth within the quarter. Also India and China posted double-digit growth in Q3.

This emerging market performance is quite impressive considering the team overcame challenges relating to natural disasters and geopolitical events yet still delivered broad-based share gains in the quarter. Within the Tools & Storage SBUs, all lines demonstrated positive growth in the quarter.

The power tool and equipment growth was up 10%, led by professional power tools as well as continued strength on the outdoor segment. This SBU also benefitted from new product introductions reflecting core innovation and FlexVolt and combined with strong commercial execution.

Regarding FlexVolt, this breakthrough innovation continues to deliver growth aligned with our expectations. Based on year-to-date sales and new product launches, we remain confident in our ability to deliver revenues approaching $300 million in 2017, as we discussed last quarter.

We believe the impact of cannibalization on our corded products has been minimal and the program has carried positive benefits across the DᴇWALT brand. This is evidenced by above market growth on our corded products as well as our base 20 volt system. This bodes well for the Tools team's ability to deliver ongoing share gains.

Our Hand Tools, Accessories & Storage organization generated 7% growth on new product introductions while benefiting from strong performances within the construction and industrial end markets. This team continues to deliver a stream of core innovation, while leading the integration activity for our Lenox, Irwin, and Craftsman brands.

So in summary, an outstanding quarter for the Tools & Storage organization continuing its momentum by delivering solid above market organic growth along with operating margin expansion of 40 basis points, an outstanding quarter.

Turning to the Industrial segment which had another impressive quarter of outperformance as well as both the Engineered Fastening and infrastructure businesses delivered strong organic growth well in excess of our expectations.

This top-line performance contributed to 120 basis points expansion and operating margin rate which was driven from volume leverage, productivity, and cost control. Engineered Fastening posted 6% organic growth during the quarter fueled by strong automotive and industrial results up low-double-digits and mid-single-digits respectively.

Within automotive, growth was led by higher than expected system shipments to support new model launches primarily in Europe and Asia. Spare system orders were also stronger than expected driving the overall automotive outperformance.

In auto fastener, sales delivered content gains and outpaced light vehicle production by approximately 500 basis points which was better than our long-term assumption of approximately 300 basis points to 400 basis points of growth ahead of this type of production.

Finally, industrial fastener growth reflected positive market conditions and enhanced commercial actions with our industrial focused customers. Moving to the infrastructure businesses, they posted a solid quarter up 15% organically.

Hydraulic tools grew 37% as they continue to see the benefits from the execution of a successful commercial action as well as an improved market environment. This performance reflects commercial excellence and in action as all regions contributed to the businesses fourth consecutive and highest quarter of organic growth.

Meanwhile oil and gas generated 8% organic growth in the quarter driven by onshore pipeline project extensions in North America and increased global inspection activities. The inspection business continues to outperform as the team's commercial efforts have grown this business over 60% organically year-to-date.

All of these activities more than offset a continued and expected decline in the offshore project activity. Finally, the Security segment delivered flat organic growth for the third quarter as gains in Europe were offset by a decline in North America.

Europe organic growth was up 1%, as strength in the Nordics and UK were offset by anticipated ongoing weakness in France. North America organic growth was down 1% as strong healthcare related growth was more than offset by the impact of customer directed project delays and hurricane disruptions within the commercial electronic security business.

The impact of these external headwinds approximated three points of organic growth for the North American business. Our expectation is that these are timing issues which will resolve themselves over the coming quarters. In terms of the profitability the segment declined 240 basis points year-over-year.

The sale of the mechanical lock business drove approximately 100 basis points of this contraction. The remaining 140 basis points decline was attributable to the previously mentioned customer driven project delays and modest levels of investment to support long-term growth.

The Security team remains focused on innovation along with commercial and operational effectiveness to position the business for future revenue growth and margin expansion. Let's take a look at the quarter's free cash flow performance on the next page.

For the third quarter free cash flow was $266 million which brings our year-to-date performance to $190 million. The lower year-to-date results compared to the prior year relate primarily to higher levels of working capital required to service the stronger organic growth we are experiencing particularly within the Tools & Storage business.

From a working capital term perspective we delivered 6.4 turns in the third quarter, a decrease of 0.7 turns versus the prior year. This decline reflects the impact of our recent portfolio activity, specifically the acquisition of the Lenox, Irwin, and Craftsman Brands. Excluding acquisition and divestures turns were flat versus the prior year.

We remain confident in our ability to deliver strong cash flow in the fourth quarter given our core SFS principles and focused execution on reducing working capital levels in line with Q4 seasonal activity.

For those that have followed our business for the past several years, you know that the fourth quarter Tools & Storage seasonality dynamic is a regular occurrence, given the timing of the sales and the collections that occur within the quarter.

We expect by the end of 2017 that we will deliver a 2.5 working capital turn improvement up from the 6.4 turns reported this quarter. This working capital result will generate $575 million of cash flow benefit in Q4 which will enable us to approximate and approach 100% free cash flow conversion.

As a note this conversion rate excludes a net gain from divestitures. So now let's turn to our 2017 guidance on the next slide. As Jim mentioned earlier, we are raising the 2017 adjusted EPS midpoint by $0.10 and tightening the outlook range. Therefore our revised guidance range is $7.33 to $7.43, which is an increase of 13% to 14% versus prior year.

On a GAAP basis this results an $8.20, $8.30 earnings per share which is inclusive of various one-time charges and the gains and losses on the sales of business.

The increase to our outlook range is primarily the result of higher organic growth, now approaching 6% for the full-year, offset partially by increased other net expenses, primarily related to foreign exchange losses and certain balance sheet positions caused by the recent volatility in currency markets.

Turning to the segment outlook on the right side of the page organic growth within Tools & Storage is now expected to be high-single-digits given the solid year-to-date performance and outlook for the fourth quarter. We expect healthy construction markets in the U.S.

combined with continued stable European and emerging market environments to continue for the balance of the year. We believe the top-line growth will translate into an improved margin rates year-over-year as well. We're maintaining the organic growth view on Security of low-single-digits in 2017.

The margin rates of this segment will be down year-over-year due to the divestiture of the mechanical locks business which occurred during the first quarter, along with the impacts of mix both geographic and customer mix as well as the growth investments.

Finally in the Industrial segment we expect organic growth to be up mid-single-digits, modestly higher than our previous expectation. While we did see outperformance in both engineered fastening and infrastructure again in Q3 there are market related pressures which will impact the fourth quarter. These pressures fall into three primary categories.

The first declining North America light vehicle production, second, less automotive system sales due to lower new model introductions, and three, expectations for lower North American oil and gas project activity in the fourth quarter.

We continue to expect operating margins within the Industrial segment to improve for the entire year which will affect the solid year-to-date performance.

So in summary we believe we have a solid path to deliver the full-year revised guidance which contemplates continued above market organic growth and margin expansion while our businesses remain focused on working capital turn improvement in Q4 and acquisition integration.

We also believe we are taking the appropriate actions to position the company for earnings growth, margin expansion, and strong cash flow in 2018 consistent with our long-term financial objectives. With that I would like to turn the call over to Jeff for a brief update on Tools & Storage and some exciting news related to Craftsman..

Thank you, Don. 2017 is shaping up to be a strong year for global Tools & Storage. We delivered organic growth at every region, every strategic business unit, and with all of our top customers. In fact, we've received vendor awards for more than 10 of our largest customers this year. Our brands continued to perform well on a global basis.

With brands like Black & Decker, Stanley, Porter-Cable, and Mac Tools, all up single-digits while brands like Proto, Vidmar, and DᴇWALT all grew double-digits. Innovation is a clear differentiator using DᴇWALT as an example; we've posted 3% growth this year in the declining corded power tool market simply based upon our Made in USA strategy.

Add to this, over 20% year-to-date growth in our world's largest and best 20 volt cordless range, which continues to expand with our cord innovation focus. Finally add over 100% growth in our technologically superior flexible range.

All in all it's a formidable share gain machine from top to bottom as demonstrated by at least two times market POS growth. All of this has occurred concurrent with the integration of the second and fourth largest acquisitions in our company's history namely Irwin, Lenox, and Craftsman brands.

With this as a backdrop, I'm pleased to provide an update on an initiative that will be a catalyst for further organic growth to Craftsman brand. Over the past six months, we built a completely dedicated team to bring our vision of a new re-Americanized Craftsman delight.

This team is responsible for the development of a best ever craftsman product pipeline to reinvigorate the iconic Craftsman brand.

As Jim mentioned earlier, we continue to make great progress on Craftsman product development, supply chain deployment, and commercial strategy which includes the full support of Ace Hardware through their 2,800 stores supporting Craftsman.

Today, we're also pleased to announce that we will roll out the Craftsman brand in the second half of 2018 with Lowe's in the home center channel. We have been more than impressed with the level of commitment and support afforded by Lowe's for the Craftsman brand.

We continue working with other channel partners to continue to provide them with successful programs to facilitate their growth as well. With this said, I would like to turn the call back over to Jim to wrap up today's presentation..

Thank you, Jeff. Another extraordinarily strong quarter for Tools & Storage and an exciting development in connection with Craftsman brand. To recap for the total company, we delivered strong third quarter results maintaining our trend of above market organic growth and robust operating margin performance.

Facilitated by our continued strong operating results, we increased EPS guidance for the year excluding charges and the gain on the sale of mechanical security we up guidance to $7.38 at the midpoint, a 13% increase over the prior year, and we continue to be excited about the opportunities to deliver value from our recent acquisitions.

And as I mentioned earlier, both the Newell tools and Craftsman brand integrations remain on track and the experienced integration teams are energized to deliver our financial and customer commitments.

Our deep and agile leadership team along with our entire employee base are focused on closing out 2017 with a good set up for 2018 leveraging our SFS 2.0 operating system to deliver strong free cash flow, organic growth with earnings leverage and continuing to successfully integrate the Lenox, Irwin, and Craftsman brands into our portfolio.

We're encouraged by our results thus far in 2017 as we continue to position the company for a strong 2018.

A little over one year into the role as CEO I could not be more pleased with the energy and enthusiasm from the team as we remain focused on delivering top quartile performance becoming known as one of the world's great innovators and demonstrating our commitment to social responsibility.

These are all enablers to achieve our 22/22 vision and to be a great human centered diversified industrial company. And on a final note, I would like to thank Greg Waybright for his many years of dedicated service as our VP of IR. He is retiring at the end of this month to be succeeded by the very capable Dennis Lange.

All the best Greg in your retirement and we're now ready for Q&A..

Thank you..

We can now open the call for Q&A please. Thank you..

Thank you. [Operator Instructions]. Our first question comes from Jeff Sprague with Vertical Research. You may begin..

Good morning. Just looking for a little bit more detail on Craftsman if you could share it, if you have any preliminary thoughts on what channel fill or year one revenue could look like? And also I think you were planning on marrying this with the Craftsman specific e-commerce strategy and I wonder if you flush that out anymore yet? Thank you..

So the advantage of being able to talk about Craftsman at the level we did is that it enables our partner loves to be able to report what could be a material item to their -- in connection with their releases and so forth.

It really we would have preferred actually not to have to disclose as much as we actually did right now just from the standpoint of competitive intelligence, protection of our competitive strategy, and so forth. So it makes it very difficult to go into too much more detail.

But with that I will turn it over to Jeff and he will give you whatever else he can..

Thanks, Jim. I guess the view would be Craftsman is a broad-based brand across North America, plays across so many categories and channels. And given that we serve every geography well over 50,000 discrete customers, we're very proud to announce this partnership with Lowe's in the home center channel.

We are concurrently working through the commercial process across other channels which includes e-commerce. We do well know that Craftsman is the number one search term in e-commerce -- in e-commerce space; it also is a great brand across MRO spaces et cetera.

So a lot of good work to be done as Jim reported, we announced everything we could to this point but Craftsman continues to be a good opportunity across many different customers and channels..

Thank you. Our next question comes from Nigel Coe with Morgan Stanley. You may begin..

Thanks, good morning. Greg congratulations. I just want to say Greg has been -- was one of the best IRs and big loss but Dennis is awesome, so I think you're good. So just want to clarify your FlexVolt conversation, you had previously said $3 million of growth, $2 million in that.

Are we now closer to $300 million net for the year? So if you can just clarify that. My question is really on just a follow-up on Jeff's point on Craftsman; I think your original kind of plan was for 2020 sales of $300 million to $400 million for Craftsman.

Given the conversations you've had with your e-commerce and big-box partner, where do we stand there now? I'm assuming it's higher than that but any sense there would be helpful?.

I'll start the FlexVolt and then kick over the Craftsman question to Jeff. But FlexVolt as I indicated we're approaching $300 million for the full-year of 2017. We do not believe we are seeing very much cannibalization I said minimal, probably minimal close to zero and therefore from that perspective, the net number would be $300 million.

Jeff?.

In regard to Craftsman second question was I guess at this point there is still much work yet to be done.

We build a dedicated team of well over 100 folks to do the really good work of building out as we call it a re-Americanized best ever Craftsman platform and what that means is we're starting with a parcel of land overlooking the ocean with no structure on it as an example. So much work to be done.

But the great news is you take a 90-year emotionally charged brand like Craftsman, and you can build it from the ground up very rare that you have that opportunity. So there is so much to be done with thousands of products in development that I think that 2018 looks like really a labor of love to us at this point with much great work to be done.

But we remain on track probably for the second half of next year and we feel really confident about the guidance we previously presented around Craftsman growth..

Thank you. Our next question comes from Ken Zener with KeyBanc. You may begin..

We've recently done a piece on the tool industry noting the consolidation of brands over the last 30-plus-years and obviously think you are well positioned within that environment.

Given the success that Black & Decker merger ultimately provided you're high margins to hand drills indicate that's still an upward trajectory this year and now Craftsman and I walk into Ace Hardware it's pretty much just you all.

And with Lenox and Irwin I mean you’re now into that accessories business which is very well, it's been very okay now it's consolidating. What do you think your appetite for bringing in perhaps another power brand into your portfolio as you look to move into gas; I think that's probably that Jeff touched on at the Investor Day.

You have the brands to get into gas today..

Yes. So let me just sort of circle back and talk about what our strategy is from an M&A perspective and I think that will help put things in context. So the first element of our strategy is protect the core.

And I think you've seen as assets have become available, quality assets in the tool business which is part of our -- significant really most significant part of our core, we had been agile and made some moves that have been designed to not only protect but also enhance the core.

And I think one of the things that's hard for people to understand and I think maybe you got a little bit of it from listening to Jeff is the absolute amount of effort that goes into integrating something like even like a Lenox or a Irwin but when you talk about Craftsman starting from literally nothing more than a brand, a history, and three people which is what we got with that that is an enormous undertaking and we're so pleased with the progress that we’re making along the way here to do the design work and the supply chain work and the commercialization and so forth.

But it is very consuming for the organization and I have never seen including at the time that we integrated Black & Decker and Stanley, I have never seen the organization work so hard, so diligently, and produced so much and so right now it is almost impossible to imagine we get further on down the pike, probably another year, year-and-a-half something like that, when the organization has more bandwidth to think about doing something else in Tools whether the Lawn & Garden which has now become essentially part of the core as a result of the Craftsman acquisition or whether it be some other assets that might be out there available in the future.

And then so the second part of our strategy is really to make sure that we continue our progress to invest in some other areas outside of Tools in -- that are also parts of our core, important parts of our core.

So things areas such as Industrial and in Security and we fully intend to be feeding those segments or those businesses, franchises with capital and allocate the acquisition capital into those segments where it makes sense.

And so one of the nice advantages of being a diversified industrial company is that enables us to direct capital in different parts of the portfolio based on availability of assets but also bandwidth of the organization and financial capacity of the company to absorb.

So hope that's helpful but I think it basically says that it will be a while before we endeavor into something like Lawn & Garden or some other tool areas..

Thank you. Our next question comes from Rich Kwas with Wells Fargo Securities. You may begin..

And Dennis, look forward to continue to work with you.

Just on Craftsman as we think about the next couple of years with limited detail around revenue contribution et cetera and no detail around revenue contribution but as we think big picture incremental for Tools & Storage, should we think about dampening effect at least in the initial years of the launch because of cost and integration, et cetera, and getting up to speed from a marketing standpoint? And just broad, Don or Jim, around how we should amount [ph] of incrementals over the next 12 to 18 months within the segment?.

Sure, I will take that Rich. It's a very good question and a good point. The -- as Jeff and Jim both articulated very well, we're probably excited about this relationship and it's one of many steps as we continue to build out the plan for Craftsman.

But as we enter into the execution of Craftsman, it will clearly be margins that will be below line average initially for various different reasons, we will not be manufacturing a lot of the product initially, we will be using sourcing model in the first year or two, then we will begin the ramp up manufacturing in that same timeframe.

That will help margin and continue to improve them, we will also have launch cost like to do with all major initiatives that will pressure margins as well.

So we don't think it will be major dampening impact in the Tools margin but it certainly will have a modest negative impact in 2018, and likely in at least the first half of 2019 if not the full-year of 2019.

Difficult to quantify the impact at this stage as we're still working through as Jeff mentioned -- exactly how the launch and the timing and what products will go in with Lowe's and with other customers still to be determined.

But over time we will provide more clarity as we get deeper into providing guidance for 2018 and then further into 2018 throughout the year..

Thank you. Our next question comes from Josh Pokrzywinski with Wolfe Research. You may begin..

Just on the Lowe's launch, trying to dig in here on may be some of the opportunity set in ring-fencing that $300 million to $400 million target you have a couple of years out. Given that I think DIY U.S.

for you guys and individual big box retailer would be something north of a billion, one would think that just given some of the limited overlap particularly on Lawn & Garden that you could have a pretty big number initially, just with channel sale, I mean is that an unfair way to think about it or is that the price point so much lower in Lawn & Garden versus Power Tools that it shifts the curve I guess I'm surprised that that number might not be bias to the upside, just given the magnitude of even one big DIY launch?.

I think Jeff said it all, it's early days here and the amount of specifics even as it relates to the Lowe's conversations, our TBD in terms of a lot of work still to be done, so it's hard to really come out and answer that question with anything specific other than say that when we put the $1 billion over 10 years out there on the -- when we announced the acquisition and when our board approved the acquisition on that basis, we really didn't really fully know how the customer conversations would evolve.

So I think it's fair to say that we thought we were being conservative when we put those numbers on the table. But as it relates to the timeframe, the profitability, the ramp, all these types of things, it's just too early but we will keep you posted as we get more clarity as time goes on..

Thank you. Our next question comes from Saliq Khan with Imperial Capital. You may begin..

Hi, Jim, kind of getting away from Craftsman looking at the Security business, could you provide us a bit more detail on what the free cash flow profile looks like and what are some of the efforts and progress that you have in place to help you drive this in new markets and new customer segments, so you can better leverage the channel partnerships particularly as you look into the next year?.

Well it's always; Security is always a great cash flow business for us because we're in the commercial security business and in commercial security the customer pays for the installation as opposed to residential security where historically the vendor, if you will, has paid for the CapEx upfront.

So cash flow is a great stream and the recurring revenue is a dependable stream as well.

So the existing business we will call it the core commercial security business, it's a good business but what's happening in the digital world and I think as everybody knows is the advent of Internet of Things, Artificial Intelligence, Robotics, I could go on we all are familiar with the laundry list of new technologies that are facilitating great value creation for customers be that commercial or otherwise, but in this case I think the fact that they would be commercial is relevant.

And I think we have a really, really great asset that we can leverage to become an integrator for those types of technologies in specific applications, specific areas, and not only that but to also develop recurring revenue streams that are differentiated -- the value proposition are differentiated and recurring revenue streams will continue.

So I think we will end up with a core commercial security business that we have today that will be enhanced through innovation and sustainable for a long period of time. And on top of that, I think we will start to see the emergence of a growth oriented higher technological content business that is scalable and will develop an ecosystem.

That will take some time but we are doing everything on our power to accelerate that and to make sure that as the market unfolds that we have a position deployed in that market..

Thank you. Our next question comes from Chris Belfiore with UBS. You may begin..

Good morning guys. Greg, thanks for all your help, it's been a pleasure. And I look forward to working with Dennis again.

So just kind of wanted you to kind of go talk a little bit on pricing especially in Tools and business -- in Tools & Storage business just lot of the other headwinds you're seeing out there some of the distributors that we cover but it's been relatively flat year-to-date you had commodity headwinds continues, so just kind of a little color on the pricing environment and then maybe kind of how we can expect that to the price cost equation to kind of see as we kind of move into next year?.

Sure. I will start and then we will pass it over to Jeff to provide a little more color but we had a third quarter that was slightly positive for price in Tools & Storage. Within that if you kind of break it apart; you have a North American business that had kind of a normal promotional activities that occur in the quarter.

So there was some negative price, a lot of close to a point in North America. And then outside of North America we had positive pricing actions that offset that due to various different things such as commodity inflation, currency movements et cetera. And so the net result was a slight positive. So that's just to give you a little more detail.

As we go into next year, we actually see a fair amount of commodity inflation coming into the mix. As I've mentioned before we had about $100 million, it looks like, next year. Now the number looks to be closer to $150 million of commodity inflation.

And we're in the process now of looking at what additional pricing actions we can take in response to that. If you look at our history we probably get anywhere from 60% to 70% of price recovery in year one but we're looking at how we can be more aggressive and make that number much closer to 100%.

But as you all know it's a process that takes quite a bit of time working with our customers.

Jeff any additional color?.

Maybe the only thing to add would be bit on the process. So when it comes to an inflationary environment from a commodity perspective, as Don just described, our first action is to do everything possible inside of our network to drive productivity to attack those costs and the things that we can cover we certainly pass along in the way of price.

So we work with our customers in that regard. We also get smarter as time goes on. So clearly the second and fourth quarter are the biggest promotional periods for any tool company, but probably 25% of all the programming that we do annually is eliminated in one year and change for the next.

So we learned what worked, what didn't work, where we'll spend money, whether we had a good payback on that. And at least a quarter of what we do every year changes as we get smarter get more experience et cetera and we will continue to work those things so that we get the best possible payback for the investment of price that you mentioned..

Thank you. Our next question comes from Rob Wertheimer with Melius Research. You may begin..

Hi good morning. A lot of things happening that seem to be going quite well at once.

Jim could you maybe give an overview of how you think about the process and progress in the breakthrough innovation centers, would you consider the staging whatever the next innovation it might be just given all the opportunities you have at Craftsman maybe there is something at Craftsman I don't know just maybe give us an update on that where I know that is lot percolating behind the scenes?.

Yes. Well I'm actually quite thrilled with the innovation that's come out of our breakthrough innovation teams obviously FlexVolt was pilot and it really was major homerun. Some of the other innovations, a good portion of the other innovations are a little bit more on the periphery of our core.

So an example would be the connected job site that we have put together.

We have the world's best tech connected job site which brings Wi-Fi to construction projects and then it brings Internet of Things to projects and then construction sites and then brings intelligent analytics and interfaces with architectural design systems and even integrate things like augmented reality and so forth.

Very exciting innovation they had worked really hard on it, it’s been piloted three times unsuccessfully on different major construction sites. And so now it's time to scale it.

And that's where I would say our biggest challenge comes in and what we're needing to do with this to make sure that we scale it appropriately is to create a more exponential oriented organization. So in the traditional organization in this case just came out of the power tool business.

So you have power tool commercial people who have a history of great success commercializing power tools and now we're trying to sell connected job sites.

Well it's a different skillset, the customers are the same but it's a different skillset and so we need partners, we need different skillsets in our own organization and we also need to liberate them, so they can go spend more money to scale it faster to the extent that we can afford that in our very measured kind of investment management ways that enables us to both achieve operating leverage on one end at the same time, make investments.

I know there were some people on the phone this morning before the call, some of the analysts were saying well why didn't you get more operating leverage in tools, while we spent more money on investments for the future in tools and that's one of the big reasons and so that's kind of the challenge is really gauging from a financial standpoint but getting them enough capital and expense to liberate them to go often and scale appropriately when they created a great thing like the connect job sites.

And then just providing a little different organizational model which we will talk more and more about in the coming quarters but we're doing some work with breaking out some exponential organizations from the traditional organization and I think that's going to be one of the key elements of the success in commercializing the breakthrough innovations that are not let's say necessarily right in the middle of the fairway.

The FlexVolt is a battery system, the power tool commercialization people know how to commercialize battery systems, and the digital marketing folks from the digital accelerator down at Atlanta were very helpful in enabling that digital marketing approach for that project and it was just a fabulous combination of leveraging our existing resources.

And some of the other innovations and not all of them, probably two or three, four of them are really into core and you will see them coming out over time in the traditional organization, but I think some other ones probably see a little different approach more of a silicon valley like approach to commercializing..

Thank you. Our next question comes from Robert Barry with Susquehanna. You may begin..

Actually, just, first, had a quick follow-up on that prior question on price. I know last quarter you had talked about these pricing experiments switching price a little harder and then adjusting the volume impact.

I'm just curious if that continued this quarter and then my question though was really on the core growth outlook, I mean last quarter you raised 50 bps that added $0.10 to EPS, I must say it was a little anti-climatic to see 150 basis points rise this quarter largely offset by this other net.

Can you quantify and provide more color on what's going on there and then how did that line in the model track next year, would that be expected to step down materially in 2018? Thanks..

Okay. I will answer the part related to your question about the experiments, the pricing experiments then I will turn it over to Don. So I have promised myself and actually I promised my team as well never to say the word experiment in connection with pricing again after the brouhaha it created after the last call.

So pricing is an iterative process and I think Jeff kind of addressed it already that Jeff is there anything else you want to say about that before we turn it over to Don for the second part of the question..

No, sir..

Okay.

Then Don?.

Okay. So I will walk through a little of the detail. We had very good operating leverage in the quarter. So if there is a confusion on that we would be happy to walk through it after the call in more detail.

But if you look at the revenue outperformance versus our operating margin outperformance we're pretty much in line with what we previously communicated if we have a point of revenue better than expected, what would drop through to O&M.

So that conversion rate pretty -- which is pretty much in line with what we communicated which is anywhere between 25% and 35%.

What happened in other net which is low operating margin is as I mentioned in my presentation was that we had some currency positions related to balance sheet items that sometimes as they get settled throughout the quarter based on currency movements you experience as gain or losses.

In this case we had about $7 million to $10 million of losses in the third quarter from that activity. That put a little pressure on the additional EPS flow through but still $0.10 outperformance versus expectation versus may be $0.12 to $0.14 expectation, I still think that's an heck of an operating leverage performance.

As far as what it means for next year, I continue to believe that we will grow in line with our long-term financial commitments and objectives, we have 4% to 6% organic growth, 10% to 12% EPS growth, and 100% free cash flow conversion.

Those have been our long term financial objectives and I think next year at this stage even with $150 million of commodity inflation coming in to the mix next year with offsetting pricing actions of some magnitude I believe that we can hit those objectives..

Thank you. Our next question comes from David MacGregor with Longbow Research. You may begin. David MacGregor, your line is open. Please check your mute button..

Our next question comes from Scott Redner with Bellman & Associates. You may begin..

Wanting to go back to LatAm, our emerging market growth in Tools & Storage, I was hoping you guys give a little bit more color kind of what in terms of distribution change was it kind of a one-time bump versus what's it go-forward rate just realizing that that business saw such trend this quarter?.

Yes, it's more of an ongoing growth initiative than a one-time bump because the reason we made these changes is absolutely for the purpose of driving share gain and organic growth in Turkey and in Russia. So if you think about the approach that we used to have, we had a couple of major distributors and that was it.

And I think it was one in Turkey and then a couple in Russia. And instead of blanketing the market with sales reps, end user demand stimulating activities and distribution, physical distribution centers.

So we've gone from a kind of half baked approach to a full-frontal attack on those markets and so that it is a very sustainable approach and we should expect some pretty good growth out of those in regions notwithstanding any geopolitical turmoil that may occur in those very volatile regions in the years to come..

Thank you. This concludes the question-and-answer session. I would now like to turn the conference back over to Dennis Lange for closing remarks..

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 any further questions. Thank you..

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day..