Welcome to the Fourth Quarter and Fiscal Year 2021 Stanley Black & Decker, Inc. Earnings Conference Call. My name is Shannon and I will be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to 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 2021 fourth quarter and full year conference call. On the call, in addition to myself, is Jim Loree, CEO; Don Allen, President and CFO. And our earnings release, which was issued earlier this morning and the supplemental presentation, which we'll 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 A.M. today. The replay number and the access code are in our press release. This morning, Jim and Don will review our 2021 fourth quarter and full year results and various other matters followed by a Q&A session. Consistent with prior calls, we are 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 based on our current views. 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 the actual results may materially differ from any forward-looking statements that you may make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent 34 Act filing. I'll now turn the call over to our CEO, Jim Loree.

Good morning and thank you, Dennis. As you saw from our press release, we delivered a record year in ’21 for revenue, organic growth, and EPS. We benefited from extraordinarily strong customer demand, which continues for our innovative products and portfolio of brands, both of which underpin and support our position as the world's number one tool company. I want to thank our colleagues across the globe for their unwavering commitment to serve our customers with the highest quality products as well as for their outstanding effort in helping to deliver this record-setting performance amidst the confluence of COVID era challenges related to supply chain inflation, other external factors. And during the year, we took several significant strategic actions to optimize our business portfolio, completing two outdoor power equipment acquisitions, adding $3 billion of revenue as well as the announced divestiture of our Electronic Security business for 16 times EBITDA, sharpening our focus on tools, outdoor, and industrial. These transactions are reshaping our portfolio into a faster growing, more profitable one with lots of runway to both support and benefit from the ESG movement as well. This portfolio will also benefit from important societal trends, including household formation, increased consumer nesting with focus on the home and garden, electrification, and infrastructure investment. In addition, this month, we plan to begin the return of $4 billion of capital to our shareholders through our previously announced share repurchase program, including as much as $2 billion to $2.5 billion in the first quarter of 2022. We believe these transactions, the acquisitions, the divestiture, and our substantial repurchase will result in significant value creation for investors in the short, medium, and long-term. To summarize our 2021 performance, our revenues were $15.6 billion, up 20%, driven by a record 17% organic growth, with all businesses…

Thank you, Jim, and good morning, everyone. As Jim mentioned, we are focused on serving robust demand and investing in our supply chain to position us for sustained growth. We took multiple actions in 2021 to navigate the global supply chain and position the business to have the capacity, sourcing, operational efficiency and resilience to serve our customers and deliver significant growth in revenue and cash flow in 2022 and beyond. These key investments include adding capacity consistent with our Make Where We Sell strategy, co-investing with strategic sourcing partners with a focus on batteries and semiconductors and investing in automation solutions to support productivity, labor efficiency and competitive costs. Our capacity additions are on track, and we have opened 2 new power tool plants and 1 new hand tool facility in North America, which are now ramping up. These new manufacturing plants will enable shorter lead times and be accompanied by parallel regional development of our supply chain base overtime, enhancing local sourcing and speed to market. As it relates to strategic sourcing, we have added new battery suppliers and made co-investments with key partners that have put us in a great position as we enter 2022. We have the necessary battery supply and capacity to support significant growth in tools and to fuel our electrification strategy in outdoor. The supply environment remains tight for semiconductors and electronic components. This plus the elongated global supply chain, which significantly increased inventory in transit, impacted our ability to generate more volume in the fourth quarter. Semiconductor shortages have been a pain point for many global industrials, and we have been investing to improve supply to enable significant tools growth. For example, adding new Tier 2 and 3 suppliers for chips, co-investing with Tier 1 suppliers to improve their capacity and taking…

Thanks, Don for that immersion into what was a very complicated or complex quarter with a lot of ins and outs in the portfolio and lots of dynamics in the end markets and so on. So thanks for taking the time and really giving a very transparent view there. And so as you've seen and heard, we are focused on continuing to serve the robust demand in our markets. Our multiyear runway for growth is compelling. We talked about adding $2.5 billion of growth in 2021 and then another $4-plus billion in 2022. Our EPS and revenue set records in last year, and we expect more of the same this year. So, we're determined that free cash flow will return to record levels in 2022 as the working capital reverts back to a source of cash. And we're confident in our ability to execute in today's dynamic, volatile environment. Our proven track record of performance over many years supports this. Our 6-year revenue and EPS CAGRs, our 6% for revenue, 10% for EPS, respectively, and a new and improved portfolio and a great strategic setup for 2022 and beyond. We're focused on several tactical operational levers to ensure outstanding near-term execution. First, we're leveraging our price productivity and cost control measures to support a margin rebound throughout the year as Don described that. We're well positioned to achieve price covering the entire $1.4 billion of inflation and cost to serve for the 2-year period 2021, 2022. The unusual cost input increases have stabilized for now, and we are monitoring trends closely to ensure that we respond to trend changes as they develop. We're investing in the supply chain to ensure that we have the necessary capacity and supply to fulfill the strong demand and support significant revenue growth this year and beyond. We're off to a good start integrating the outdoor acquisitions, which are positioned to contribute EPS accretion of $0.85 in total, $0.65 year-over-year and $0.20 ahead of our initial expectations. We're driving working capital reductions, which we expect to translate to an impressive cash flow performance in 2022. And lastly, we're expecting to execute on our $4 billion share repurchase program very, very soon. So I'm confident in our collective ability to deliver another strong year in 2022 with outstanding potential for value creation. With that, Dennis, we are now ready for Q&A.

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

[Operator Instructions] Our first question comes from Julian Mitchell with Barclays. Your line is open.

Hi good morning. A lot of good detail in the slides. Maybe 1 point I wanted to home in on was on the Tools volume side of things. I think it sounds like you're assuming that tools volumes organically at least down maybe mid-high single digit in Q1 after backing out price, so, not too different from the trend year-on-year in Q4. Just wanted to check that that's the case. And then maybe as you think about the balance of the year after Q1, there's clearly a lot going on with people trying to figure out the impact of interest rate increases, maybe we start to see some volume headwind from continuously rising prices. So how conservative do you think your tools volume guide is for the year? I think you're assuming volumes are maybe flattish or down a bit in tools for 2022 overall and down more than that in Q1?

Yeah. I think, Julian, that's a good assessment of where we think we are with the tools and outdoor businesses from a core perspective, obviously, on an organic basis. So we – for the year, we're probably looking at a relatively flat volume performance, with a very strong price performance of 6% to 7%, so they're probably leaning closer to 7%. The Q1 dynamic will be volume probably down 4 or 5 points in the first quarter, and then improvement of that kind of modestly as the year goes on. No real big significant volume expectation in any given quarter at this stage. However, we do see that as an interesting opportunity. I mean, there is a lot of uncertainty to your point about where demand may go, what may happen based on all these inflationary pressures and the prices going into the marketplace. So we think we're well positioned by taking the approach we're taking on the price side. But we also see an opportunity that, if demand is strong, we've adjusted our supply chain to be prepared for that and in particular by Q2 on the semiconductor side. And so if demand is there, we'll be able to really meet that demand and improve the fill rates of our customers as well as the inventory levels in the store.

Yeah. The flattish volume is really more of a financial planning construct than it is in operational execution plan. So we are going for as much volume as makes sense and as much as double-digit volume in terms of what we're programming to try to achieve. However, given the uncertainty in the macro, given what remains to be seen in terms of price elasticity of demand for the products, we're trying to be financially conservative here so that, if any of the types of things that I described become factors that we still have a financial plan that makes a lot of sense.

Our next question comes from Jeff Sprague with Vertical Research. Your line is open.

Thank you. Good morning. Maybe to pick up on that point, right? You delivered what you delivered in 2021 with the semiconductor situation as it was. So Jim, I think you're then implying that with what we heard today on the call about semiconductors, there actually is an opportunity to kind of uncork more volume. I just wonder, if that's kind of the linchpin of the whole kind of volume debate in 2022 and if there are any other particular really pinch points or bottlenecks that you need to work through?

Yeah. Come April, I think we're going to be in a position to really open up that well. So it really is a couple of months of constrained production based on that. And then whatever we can get after that, we've got really good supply definitely enough to support double-digit organic growth beyond that. And of course, the other potential constraint, but it's not going to be an issue for us, would be battery cells, and we've got that one under control with investments that we've made in capacity with major battery suppliers. So, we have the capability come April to open the spigot for volume and produce whatever the market demands.

Our next question comes from Markus Mittermaier with UBS. Your line is open.

Yes, hi. Good morning. Maybe another one on pricing from my side, the 6% to 7%. Can you maybe elaborate a little bit on the various go-to-market channels you have? Has anything changed in your ability to price with the higher proportion of the online business, B2C or the addition of some of the other end markets that you're now going after? How has pricing changed to maybe what we know from the prior cycle?

Well, I think, Markus, the way to think about it is there is really no cycle in history that you can really compare this to. I mean maybe you could go back to the 1970s and the inflationary periods back then. But the world clearly was much different and e-commerce didn't even exist back in the 1970s. So, it's a very different timeframe. And so when you look at this situation where you're dealing with $1.4 billion of headwinds at Stanley Black & Decker, we put a significant amount of price in the market in 2021. We have not seen an impact to demand related to that in any of the channels that you referenced. We're putting more, as I mentioned, price increases in the market here in the first quarter of 2022, anywhere ranging from 5% to 10%, depending on the product family or category, in some cases, even higher than that if we see significant gaps versus our competitors or we see a situation where a particular product is being impacted more heavily by the commodity inflation headwinds. So, we'll watch this very closely. I mean it's why we're taking this approach on the volume side where we're not being overly aggressive in forecasting where the volume might go. But we're prepared, as Jim and I both mentioned, to really pursue higher volume. But we have to watch the pricing impact very closely and see the elasticity impact, but it's different. It's a different cycle. This is not the typical cycle where you're looking at maybe putting 3% to 4% price increase in the market to offset your inflationary pressures. You're talking about something that's more above 10% in many cases. And if you look at our peers and other players in both the building products and industrial space, you're seeing the magnitude of those types of increases across the Board. And we believe that's the right approach at this stage. However, we also have to maintain the flexibility and watch this very closely day-to-day and week-to-week and respond accordingly.

There's an existence theorem for this type of environment, not so much the supply-constrained part of it, but the highly inflationary environment in some of the developing markets. So, for instance, Latin America, which often has massive inflation that comes quickly and often is currency-driven. But in those markets, our history of being able to recover price is excellent, our history of being able to stabilize margins at favorable rates is very good. And the continuation of organic growth and strong organic growth in those markets is something that we've been able to sustain for a long period of time. So if this is -- if this environment response is anything like what we've seen in some of those types of situations, the demand continues. So we don't know as Don said, it's uncharted territory. But we're ready for anything, as Don said.

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

Hey good morning, guys. So just a follow up on the price discussion. I think, Don, you mentioned maybe some potential upside from commodities as some of those roll off. How much of the price equation is really tied to something surcharge related where maybe you give some of that back, or I guess, maybe said differently, what are the surcharges tied to in terms of like price benchmarking? And then I guess sort of related, how would you rate your price capture POS relative to what you've seen out of peers? Do you think you're ahead, behind? Some aspect of the competitive environment would be helpful?

Yes, I think the surcharge component is probably a couple of points of price that we put in place in the fourth quarter. And it was really more heavily tied to the cost to serve aspect. And so, we had these -- as we all experienced this really intense wave of price increases in logistical space transportation in the summer of 2021 and going into the fall, and that surcharge is really in response to that. Those prices on container costs and other logistic costs have not really changed. They dipped down a little bit in the month of December, but then they pop back up to the previous levels in January. So I don't -- we don't really see any significant shifts in that particular area. And I think the supply chain could continue to be a little bit challenging from a cost perspective for a portion of this year. What I was referring to is more on certain commodities are shipping in the last month or 2, where you're seeing steel pull back a little bit and a couple of other commodities as well. Right now, that if those prices held, that could be a $50 million to $100 million opportunity for us later in the year. So that's kind of the sense of the magnitude. It's not a massive move at this stage. If it continued to improve, and obviously, that number could get better. So we're not seeing shifts that have us concerned about the pricing actions we've taken nor the pricing actions we plan to take here in the first quarter. But again, that will be something we closely monitor. And we also have to keep in mind that we – it takes a while to get price actions into many of our customers, and you saw that in 2021 play out. And so we're probably a 3 to 6 month lag versus what you might see in some industrial channels versus the building product channels that we're more heavily weighted to. And as a result, you're probably going to have an upside tail on the back end of this as things start to change. And so that's just something to keep in mind as you think about price, where if you compare it to an industrial peer who may have had priced much quicker in 2021 and price may move down sooner in 2022. The dynamic here will be different just because of what I laid out related to the lag and how it really plays out in the building product space.

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

Thanks. Good morning. You mentioned price elasticity now a couple of times. I'm just wondering if you've seen any signs of that. The POS is strong, but just wondering if you've seen any early signs of that. And it feels like you're prepared to trade lower volumes for higher price. I just want to make sure that's the case. But my real question is, could we just get a bit more definition on how we see the Tools & Storage margins playing out through the year sequentially? It seems like we're starting up at comparable levels to what we saw in 4Q how do we see that building up through the year? Thanks.

I mean in a perfect world, Nigel, we would want to get our margins back to what they've been historically, and we would want to grow with the market and then in excess of the market, gaining share with our product development and our – all the other growth catalysts that we have. That's what we're aiming to do. Now I've said – I've mentioned price elasticity, because it's a reality of any pricing environment is such that at some point, there is a change in the consumer's willingness to purchase something at a given price, and there's a lot of different economic factors that consumers are dealing with right now. And so that's just an unknown. And it's not something that we're prepared – we're not necessarily prepared to trade volume. Let me put it this way, we're not necessarily prepared to trade market share for price. And we will continue to grow our market share. And so we just need to continue to monitor price elasticity, competitive dynamics, all those different things that one does when one manages in an environment like this.

And you mentioned margins and profitability and tools, Nigel. And so as you saw, we had 11.4% in the fourth quarter operating margin for the Tools & Outdoor segment. I think the first quarter will be kind of in that ballpark, maybe a little bit better than that number. Then you see a fairly substantial jump in Q2 and in the back half. We're getting pretty close to that 18% number, in particular in the fourth quarter. So it's going to be a gradual improvement in operating margin rates with a bit of a pretty sluggish start in the first quarter because of the fact, as I mentioned. The fourth quarter of 2021 and the first quarter of 2022 is really the peak periods for the headwinds. And so you're seeing pretty substantial headwinds in both those quarters, and then they start to recede going forward after that. So that's just something to keep in mind as you factor in your modeling.

Our next question comes from Mike Rehaut with JPMorgan. Your line is open.

Thanks. Thanks for taking my question. Just to make sure – and apologies, if we're beating a dead horse here, but in terms of where you were on last quarter's earnings call, where you're expecting, I believe, mid-single-digit volume growth, and now for Tools & Storage, flattish. I just want to kind of break down the differences between then and now in terms of the expectations. How much is coming from maybe supply chain constraints, which I think you've said you expect to more fully address in the second quarter and going forward versus conservatism from the price increases and that impact on volume in terms of demand elasticity. Just trying to understand where the differences come from. And if there's any other elements that's driving that change in terms of the end market demand for instance. And then secondly, on the price – the price increases of 6% to 7% company-wide if that is – we could think about that kind of a similar impact in terms of against Tools & Outdoor and industrial if it's a similar type of allocation. Thanks.

Yes. So, Michael, I would say that as you think about what we said in October, obviously, we weren't providing guidance or just kind of giving a high-level framework. And -- but as we progress through the fourth quarter and began to finalize and create our guidance for the full year here in January, I guess, now February, we really recognize that there was a pursuing those actions here in the first quarter of 2022. 5% does not get us to where our margins should be, along the lines that Jim described and I described a few minutes ago. And so we really believe we need to take that approach, and that is the right approach. On the volume side, I would say that there's a little bit of the supply constraint dragging over into Q1 for sure. And so we had an expectation of a little bit better performance in Q1 back in October. But given the dynamics that played out during the -- especially November, December, we think the more prudent view of the approach we're taking with the Tools & Storage organic growth in Q1. And then your question on the 6% to 7%, was that more about, Dennis, more about the split between tools and outdoor? What was some?

Yes. So, both segments -- no, tools and industrial.

Tools & Industrial.

Yes, I think it's actually when you look at both of those, they are both going after pretty aggressive price actions and there's not a big deviation between the two of them.

Our next question comes from Joe O’Dea with Wells Fargo. Your line is open. Joe O’Dea: Hi, good morning. It seems like there's a big step up in earnings expected from one 1Q to 2Q and I'm assuming that that's related to the supply chain side of things and you've talked about April getting better, but I wonder if you can just expand on the visibility you have into that because I think you're putting a finer point on it than others in terms of the timing of some of the supply chain getting better. But just how secure that is at this point for the visibility it gives you?

Well, I think when you look at the dynamics of that kind of walk, you obviously have a volume improvement. That's pretty substantial for the reasons that you just touched on around supply chain and semiconductors. You'll see more price flowing through in the second quarter versus the first quarter because of the actions that we're now taking here in Q1. You'll get a bigger benefit in Q2. There's some cost containment actions we've touched on that you get a full quarter benefit of that in Q2 as well. So, -- and then, obviously, some of the headwinds start to level out and recede a little bit versus the prior years. So, all those things together are really driving that improvements from Q1 to Q2. What I would say volume and price being the larger components of those items.

This concludes the question-and-answer session. I would now like to turn the call 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.

This concludes today's conference call. Thank you for your participation. Everyone, have a wonderful day. You may now disconnect.