Welcome to the First Quarter 2022 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 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 2022 first quarter conference call. On the call, in addition to myself, is Jim Loree, CEO; and Don Allan, President and CFO. Our earnings release which was issued earlier this morning and a supplemental presentation which we will refer to during the call, are available on the IR section of our website. A replay of this morning's call will also be available beginning at 11 a.m. today. The replay number and the access code are in our press release. This morning, Jim and Don will review our 2022 first quarter 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 based on our current views. As 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 in our most recent '34 Act filing. I'll now turn the call over to our CEO, Jim Loree.

Thanks, Dennis and good morning, everyone. As you saw from this morning's results, we achieved 20% revenue growth and over 200 basis points of sequential gross margin improvement in the first quarter. We benefited from a sustained strong demand environment, significant and growing price realization and our new strategic outdoor acquisitions. The first quarter results illustrate the operational focus and agility of our teams in managing through a choppy external environment characterized by supportive demand. We are executing pricing to offset inflation and restore margins and beginning a very successful integration process with the new outdoor acquisitions. We will benefit from recent portfolio moves which render a more focused company, anchored by our core tools, outdoor and industrial franchises. In this regard, we announced last Friday the sale of our Access Technologies business for $900 million in an all-cash transaction at a compelling valuation. It represents the final step in our security divestiture initiative and was preceded by the announced sale of our Electronic Security business to Securitas in the fourth quarter for $3.2 billion. These transactions, along with the outdoor acquisitions, will further strengthen our position as the number one tools and outdoor company in the world. With these acquisitions and the security divestitures, we have created a business portfolio that is extremely well positioned for sustained long-term growth and margin expansion as well as one that benefits from several positive secular trends and competitive advantages. During the quarter, we also initiated $2.3 billion in share repurchases through an accelerated share repurchase as well as open market buyback activity. These actions represent significant progress towards achieving our goal of returning $4 billion in capital to our shareholders through repurchases which we expect to complete in '23. Taking into account the approximately $0.5 billion in dividends we expect to pay…

Thank you, Jim and good morning, everyone. As Jim mentioned in his comments, our focus remains on ensuring we serve the continued healthy demand and investing in our supply chain to further strengthen our position for sustained growth. As I've highlighted on prior calls, we took multiple actions in 2021 to navigate through the global supply chain challenges and further strengthen our manufacturing capacity, sourcing, operational efficiency and agility. These actions are allowing us to better serve our customers and deliver growth in revenue and cash flow in 2022 and beyond. Key areas of investment included adding capacity consistent with our make where we sell strategy, co-investing with strategic sourcing partners with a focus on batteries and electronic components and deploying our manufacturing 4.0 automation solutions to enhance productivity, labor efficiency and competitive costs. Our investments in this area as well as our electronic component availability continue to progress as expected and remain on track. Demand continues to outpace availability for our hottest products amid this constrained supply chain environment. First, as it relates to inventory, our actions will position us to meet the current demand levels while improving working capital to deliver strong cash flow generation. Greater working capital efficiency and cash flow generation remains a significant opportunity in 2022 and beyond. As a reminder, last year, we made significant investments in inventory to help meet the outsized demand in the tools business. Our 2022 cash flow guidance assumes that we can modestly reduce inventory versus 2021 levels and we expect much of that improvement to occur in the second half of the year once we get through this spring to early summer selling season. Our inventory at the end of Q1 was up approximately $850 million versus the year-end '21 balance. The increase in our first quarter inventory…

Thank you, Don. There is no question that we are operating in one of the more challenging environments in recent times. And to succeed in such an environment, we are intensely focused on the inputs we can control. We've strategically optimized our business portfolio, creating a stronger, faster growing and highly profitable company with distinctive competitive advantages. We've continued our long history of returning excess capital to shareholders through our impressive annual dividend record and share repurchases, together totaling almost $3 billion in 2022 with more to come in 2023. We've reinvested in our core businesses, adding resources to support our growth catalysts in electrification, e-commerce and innovation. This type of focused reinvestment will be an ongoing and consistent approach for us and the company going forward and we've made substantial progress in resolving supply chain constraints, most of which are expected to dissipate during the balance of this year. And we have now proven our ability to offset the impact of hyperinflation through pricing actions that stick. We've made an enormous commitment to ESG as we've shifted our business portfolio to areas that both support growth and benefit our stakeholders and society. For an impressive immersion into this topic, I refer you to our 2021 ESG report which is available online effective today. And we are confident in the strategic positioning of our company and look forward to continuing to demonstrate our ability to thrive in 2022 and beyond by driving top and bottom line growth and shareholder value creation. With that, we are now ready for Q&A. Dennis?

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

[Operator Instructions] Our first question is from Jeff Sprague with Vertical Research. Your line is open.

Thank you. Good morning. I guess just on price and I guess it's going to be a multipart question. But the argument here is you're pursuing price to offset cost. But based on the bridge, it looks like pricing is aiming at maybe offsetting 1/2 to 1/3 of the cost pressure. So maybe you could put that in some additional context. Perhaps it's the annualization of the way things work through the system. Are you actually targeting full recovery at a run rate with the price actions that you're taking? And separately, I wonder if you could just provide a little bit of color on what you might be doing to try to mitigate the incremental cost pressure that you laid out for us here.

Yes, Jeff. So you're right on the commentary around the timing of the pricing. So the pricing impact in 2022 will be about roughly half the impact of what the annualized amount will be. So there'll be a carryover positive into 2023 related to pricing. And it's really due to the timing of -- as the inflation comes in, you have a timing aspect of being able to get price increases into the market. That can be anywhere from 3 to 4 months depending on the customer or the region. In some cases, it can be faster in certain regions around the globe. And so it's just factoring in that dynamic that is -- like we experienced last year and in early parts of this year as well. The question around -- what was the second part of the question, Dennis?

What are you doing on the cost...

The cost mitigation as you related to, the inflationary costs as they come in, we go through a very similar process, frankly, we experience with our customers which is justification of the cost, what's driving the cost increase. It's got to go through a review process with our GSM procurement organization and then has various approvals that has to go through as well before we can accept the cost increase. The projection that we're putting forth out there related to inflation is based on current spot prices for the most part. And so it assumes these spot prices stay in place for the remainder of the year going into next year. We don't know if that will be the case, they could go up or they could go down. And that's something that we'll see over time. But we manage it through a very robust process on the input side, very similar to what we see what our customers do with us to help justify why we're doing price increases as well.

And just for clarity, I think Don made this clear but I'm just going to emphasize that we are aiming to offset with our fourth price increase now over a 2-year period the entire amount of the inflation. So it's just a matter of timing. We got hit with this latest tranche of $600 million of inflation in the last 2 months. It takes a little time to get that price -- those price increases implemented and that's the dynamic at play here. There's no long-term degradation of margins associated with the hyperinflation because we are absolutely and I'm very, very pleased actually with the ability to implement price and offset the inflation with price increases because, historically, we never had this type of hyperinflation and we never had 100% price coverage of the inflation. And this era that we're in, we've been able to prove that we can do that successfully and that's what we're going to do here and the fourth increase as we go out to market.

Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is open.

Hi, good morning. So I just wanted to home in on that sort of price-cost delta again. So I think pricing was maybe -- I don't know, maybe $200 million or so in Q1. Maybe help us understand what was the gross cost headwind in Q1. And then how do we think about those 2 numbers in the second half? And as you kind of snap the line today, what's the cost headwind looking like for '23 at this point?

Yes. So obviously, we had, as we mentioned in January, a very significant inflationary impact in Q1. And the number approximated a little more than $400 million. We expect probably a very similar number in Q2. And back in January, we were assuming in Q3 and Q4 those numbers were going to become very small. With the new wave of headwinds, we have a number that's about $300 million per quarter in the back half of the year. So that's a large part of the change. You've got certainly a bigger impact in Q2 than what we saw in the January guidance. That's about $400 million, where that was supposed to be ticking down. And then you had close to almost a neutral impact in the January guidance in Q3 and Q4. And now it's going to be roughly $300 million per quarter. The carryover impact, you'll have some inflationary carryover impact, obviously, with this new wave, maybe a quarter to 1.5 quarters of that into next year. And then you'll have a substantial price increase carryover as well that the price should exceed the inflation in 2023.

Thank you. Our next question comes from Michael Rehaut with JPMorgan. Your line is open.

Hey, good morning, everyone. I appreciate taking my question. I wanted to actually -- a lot has been talked about, obviously, pricing, cost and I appreciate all the details. I wanted to actually shift a second to the outdoor business and the comments around the 10% to 15% annual growth that you highlighted. It sounds a little more bullish than before. And I just wanted to make sure that I was thinking about that correctly that this is -- the statement of a double-digit organic growth rate is something new into the equation. What's kind of driving that statement either from organic growth or new product introductions, distribution gains, etcetera? And then just one technical question, if you can lay out the share count progression over the next couple of quarters, understanding there might be some accounting issues that go away for next year. But just from a modeling perspective, that would be very helpful as well.

That's an artful one question but we'll take it. Don will take the second part, I'll take the first. We didn't get into this outdoor business because we thought it was low margin, low growth. And we are extremely pleased with what we've acquired and the teams that have come with these acquisitions. The innovation or new product development pipeline is revolutionary and especially in the professional products area and especially as it relates to the large format, zero turns and riders. It is clear that electrification will be an increasing force in this market with the advent of ESG and with the increased energy prices. So one of the factors that has slowed the adoption of electric large format has been the differential between the price for electric and the price for gas. And it historically has been fairly wide but it's coming -- it's converging as electric gets down the cost curve through innovation and cost reduction and energy prices drive higher prices for internal combustion-powered equipment and regulatory action has begun. So in the States, you have heard about regulatory action in several states, led by California. And so there is going to be a very, very significant amount of pressure to convert much of the gasoline to powered unit sales to electric. And we see that accelerating. We see the fact that we have been working together for several years on revolutionary innovation in electric and autonomous. And by the way, the labor shortages that exist all around and the cost of increasing labor are another factor getting us excited about the growth because the autonomous units that we have can literally cut lawns for landscapers without people on the mower. So there's a bunch of factors that make us very excited about what's happening in the market. And then there are the 8 facilities that we own that are up and running that make everything from walk-behind mowers to zero turns to basic riders. So we are poised and ready to go with products, with capacity and with a great team -- management team. So 10% to 15% in a market that has historically grown in the high single digits, mid- to high single digits is something that we think is very achievable. And we're going to make investments to support that.

And your question on shares, Michael, it's -- I think the easiest thing, if you look at the next 3 quarters for the remainder of the year, it will average about $155 million. In the first quarter, it was about $165 million -- shares. Sorry, not dollars, shares [ph].

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

Hey everybody, good morning. Maybe just on the volumes within Tools. It does seem like there's a little bit of a lower assumption there. I think volume kind of on an implied basis might be kind of flat to down now and you had kind of low to mid-single digits before. So could you just maybe walk through the drivers of that, especially since it sounds like POS is still doing pretty well and the inventory in North America is pretty low versus the industry?

Yes. As I have mentioned in some of my comments, Tim, we have done a little bit of a haircut on the volume side versus January. It's down about 3 points from our original assumption. And that's really factored in just more price increases going into the market, maybe being a little more cautious on the impact on volume. It's not necessarily a view that we think demand is slowing. It's just more of with all the price increases going in, you're going to have -- we had almost 5.5% of price in the first quarter. We're going to have somewhere between 7.5% to 8% of price in Q2 and then it's going to get close to 10% in Q3 and Q4. That's a lot of price in the market very quickly. And so we thought it was prudent to just do a modest haircut on the volume side to represent the potential impact of all those price increases. But it is not an assumption that there's some significant slowdown related to overall demand. Other than what's happening in Russia which is relatively modest, it's an annual revenue of about $150 million.

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

Good morning. I think I will keep this to one question. So obviously, Don, you've been chasing the curve on inflation all the way up here. What -- you've kind of reset the inflation expectation. How do you take a step to try and ring-fence the plan now for FY '22? I mean, is there any buffer in there to maybe protect into further inflation? And then broadly speaking, it seems that the China supply chain, the context of the supply chain is really causing a lot of transportation and freight inflation. What steps are you taking to accelerate the transition back to domestic manufacturing?

Yes. I would say that the first question, as I said, we're projecting inflation assuming current indices. And so we're projecting that's going to continue for the remainder of the year. Some people view that as maybe potentially conservative view. It's hard to make that view based on the level of inflation that we've seen over the last 12 months. Like any guidance we provide, we always put some level of contingency in there. It's usually in the $100 million to $150 million range. And I would say that's consistent with this particular guidance we just provided. As far as the China situation, yes, we're obviously watching what's happening very closely from a tactical perspective. But as we had mentioned in previous calls, we did open several plants in the North American markets between U.S. and Mexico to really be able to -- before the pandemic, to really receive a lot of the Asian production, in particular, the China production into those Mexican facilities and some -- and one U.S. facility as well. Because of the volume increase of roughly 20% in '21 and 20% in '22 -- I'm sorry, '21 and '20, you've had a significant spike in the overall output and therefore, it's been difficult to ramp down the Asian production. So we are looking at 2 different things. One, some additional expansion opportunities in both those countries of Mexico and the United States. But we've also been accelerating our manufacturing 4.0 automation and digitization efforts across the supply chain to try to accelerate that. We believe at this point we can make significant progress in this transition over the next 18 to 24 months. We will not completely mitigate the risk in that time frame but we have an accelerated plan based on the current revenue projections as well as the potential for more revenue growth to accelerate that progress over that time frame and we believe we can dramatically mitigate that risk and concern.

And it goes beyond just risk management. That's a huge part of it but also working capital management and efficiency. Getting the production closer to the market, within the home market, enables faster cycle times. It enables more ability to respond to volatile changes in demand which is the nature of the world today. And I think as e-commerce becomes more prominent, it's more important to have that production and supply chain closer to the customer, again, for purposes of agility and responsiveness. So there are offensive reasons for doing this as well. So it has a double benefit, a defensive risk management side to it but also an offensive go-to-market advantage in supply chain responsiveness for a changing end market in terms of what's expected and changing channel needs as well.

Thank you. Our next question comes from Joe O'Dea with Wells Fargo. Your line is open.

Hi, good morning. I wanted to circle back to volume. You gave some helpful color on price and cadence over the course of the year and wondered if you could talk a little bit about the volume cadence specifically in Tools. And as you have maybe a little bit of -- I don't know if you call it buffer or cushion in there just related to uncertainties around what the pricing is going to do on demand. But generally, what the framework looks like and whether kind of back half of the year, we're talking volume that's more kind of flattish? Or are you anticipating volume declines in each quarter?

Yes, I would say that you'll see a volume decline again in Q2, mid- to low single-digit decline. You'll see modest growth in volume in the back half, 1 or 2 points in Q3 or Q4 as the supply continues to improve, in particular, in the professional power tools space.

Thank you. Our next question comes from David MacGregor with Longbow Research. Your line is open.

Yes. Good morning, everyone. I guess a question on volume and you made reference to some of the new plants that you were ramping. Just wondering if you could talk about kind of the progress there and whether that's representing a sort of a bottleneck right now because maybe there's supply channel issues associated with supporting those plants as they ramp or if maybe that's not the case, maybe you could address that. And also just talk about the unabsorbed cost of ramping those plants through 2022 and what that might represent.

Yes. The unabsorbed cost is not significant. Those plants have been ramping up for a period of time. And as the year goes on, they're going to continue to become more and more efficient. The main bottleneck is really semiconductors and the electronic components that they go into. As I mentioned in my commentary and Jim's commentary, that's going to continue to get better. There's a big step-up happening in Q2 of about 20% improvement. And we'll see another improvement in the back half of the year as well. And so as that starts to shake loose, we'll be able to meet the current demand levels and hopefully be able to look at other opportunities above and beyond the demand levels at that stage. The capacity in our plants is not really the challenge. The challenge is really in one particular area that I just touched on.

Thank you. Our next question comes from Eric Bosshard with Cleveland Research. Your line is open.

Thanks. You talked about favorable tool market share performance over the last year. And I know this is a point of discussion. Just curious what you think you're doing, what you were affected at in 1Q with tool market share and then what your assumption is for further tool market share progress in the back half of the year, especially with your thoughts on volume and guidance on volume for tools for the back half.

Yes. I mean we've been gaining share year in and year out for a long time. During the pandemic, the competitive dynamics are such that we have been gaining share at a slower rate than one of our other competitors. And we're roughly the same size now in power tools and we're bigger in total with hand tools and other items. But the share dynamics as we look at this year will be very interesting. This competitor ended up buying pretty substantial quantities of batteries and semiconductors prior to the pandemic. They've built several billion dollars’ worth of inventory during the pandemic. They have -- a lot of their business is done on an FOB Asia perspective which means -- they're not reporting sellout. They're reporting sell-in. And a lot of the challenges that we have with the supply chain and the congestion on the Pacific Ocean, in their case, relate to their customer and who bears the burden of, at least for a good part of their business, those challenges. So this supply constraint issue has resulted in their ability to grow share a bit faster in this time period. When that gets resolved, I would bet on our channel access, our product innovation and our growing reinvestment in tools and outdoor and our outdoor platform in general to continue to help us grow the market share. And it will be an interesting couple of years as we go forward. But we're still very, very focused on gaining share, growing above market and continuing to, with our new focused portfolio, compete very, very aggressively and effectively.

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 participating. You may now disconnect.