Welcome to the Second 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 second quarter webcast. On the webcast, in addition to myself, is Don Allan, President and CEO; and Corbin Walburger, Vice Presidentand Interim CFO. Our earnings release which was issued earlier this morning and a supplemental presentation which we will refer to are available on the IR section of our website. A replay of this morning's webcast will be available beginning at 11 a.m. today. This morning, Don and Corbin will review our 2022 second quarter results and various other matters followed by a Q&A session. Consistent with prior calls, we will be just 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 is 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 will now turn the call over to our President and CEO, Don Allan.

Thank you, Dennis and good morning, everyone. As you saw from this morning's results, we continue to navigate a dynamic macro environment including inflation, rising interest rates and now late in the quarter, we started to see these factors impact retail, customer demand across our global Tools & Outdoor markets. The significantly slower demand trends in June combined with a very late start to the Outdoor season due to weather resulted in significant volume pressure versus expectations and revenue, we landed well below our plans. In response to the sudden shift in demand, we have taken immediate corrective cost actions, which are already in progress. We are now expecting demand to normalize closer to 2019 levels for the remainder of 2022. The organization is focused on taking the necessary steps to reduce inventory, generate cash flow and re-size our cost base, through corporate simplification, organizational optimization and supply chain transformation. We will provide more detail on these areas later in our presentation, but we expect these initiatives can deliver pre-tax savings of $1 billion, as well as a significant reduction in inventory, beginning in the second half of 2022, and through the end of 2023. Over the last nine-months, we have executed a number of acquisitions and divestitures that have successfully focused our company around our market-leading Tools & Outdoor businesses, as well as our strongly positioned industrial products business. As you saw last week, our security and access technology transactions successfully closed, and we are using the $3.5 billion in gross cash proceeds net of tax to fund the $2.3 billion share repurchase, from earlier this year, as well as to strengthen the balance sheet and reduce debt levels in the third quarter. We also expect our oil and gas divestiture to close within the third quarter. These transactions…

Thank you, Don and good morning, everyone. Let me walk through the details of our second quarter business results. Beginning with Tools & Outdoor revenue grew 17% as the MTD and Excel acquisitions contributed $900 million of revenue and price realization contributed 7% accelerating approximately 1.5 point sequentially as a result of our third round of global price increases implemented in May. These factors were partially offset by a 16% decline in volume and a negative 2% impact from currency, which both softened as we move through the quarter as interest rates increased and inflation in non-discretionary categories like gas and fuel hit consumers’ wallets. As a result, U.S. retail point of sale demand softened during May and June. That said, our professional customer channels and products remain solid and outperformed our consumer-oriented offerings. On an organic basis, regional performances were flat in the emerging markets down 10% in Europe, and down 11% in North America. Operating margin for the segment was 10.8%. Excluding acquisitions margin was a point better at 11.8%. However, still below the 19.9% level from the same period last year, as the benefit from our price actions was more than offset by inflation, higher supply chain costs and lower volume. Across channels sales were down versus 2021 levels. However, against a pre pandemic 2019 baseline retail was up mid-single digits and commercial and industrial was upload double digits. Turning to the Tools & Outdoor SBUs, power tools and hand tools declined organically by 6% and 8% respectively, driven by the softening of retail demand and against a very strong period in the prior year. Operationally, the teams have been successful and alleviating our semiconductor supply constraints and are beginning to see semiconductor driven fill rate improvements for the previously constrained products. The fill rates are on…

Thank you, Corbin. There is no doubt challenging environments in recent history, which underscores the need to accelerate our strategic transformation that will carry the benefits of increasing agility and improving our responsiveness to customer demand. Our portfolio transformation comes at an ideal time as it enables us to unlock significant value by rapidly pivoting the organizational structure and operating plan towards a more focused company, centered around great franchises within our Tools & Outdoor and industrial businesses. We have an aggressive cost program that we expect will yield $1 billion of savings by the end of next year and approaching a cumulative savings of $2 billion within three years. This will allow us to accelerate investments in our core businesses as the demand environment clears. As we look forward, we have a clear vision, and we believe these actions will reshape our organization and elevate our focus on our customer and end user needs, enabling us to deliver strong shareholder value through long-term growth and enhanced profitability. With that, we are now ready for Q&A, Dennis.

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

Thank you. [Operator Instructions] Our first question comes from Jeffrey Sprague with Vertical Research Partners. Your line is now open.

Thank you. Good morning. I guess my 1 question would be picking up with more kind of Corbin close back to the kind of earnings power question over time. I just want to clarify really how you are defining earnings power relative to 2019. Obviously, we have got Outdoor in. We have got security out. We have got a different share base. Are you suggesting that kind of earnings power is shown by EPS or some other metric is in line with 2019. So maybe just give us a little more color on that and how you see that trajectory to play out through the quarters of 2023.

Yes. I will start and then pass it over to Corbin with a little more detail. But obviously, we have utilized 2019 as a base to compare things to because it was pre-pandemic. And so before all the unusual activities of 2020 and 2021 of a recession in early '20 and then a boom for three or four quarters and now things are starting to shift with potentially a significant recession on the horizon. We believe that we are kind of normalizing back to 2019 levels as a result of what we are seeing right now. The earnings are not at that point yet, as you can see from the back half guidance we are providing. But if you start to think through the cost actions we are taking, some of the temporary pressures that we are going to experience in the back half, as Corbin described around inventory liquidation, you start to build a pass that gets you closer and closer to what the 2019 EPS was which was about $7.25 roughly. Yes, very different comparable as far as Outdoor versus security. But it does give you kind of a guideline of what we are thinking about internally for kind of our initial objectives of where we want to take earnings. And then obviously, with a $2 billion plan over a three year period. If we have a stable environment from a revenue perspective over that three year period or a growth environment over that three year period, which I would expect would occur. You can see a path where earnings really start to improve in a more dramatic way as we get through 2023 and then into 2024. Corbin, Any more color or details you like to get on that?

The only thing I would add is if you think about the second half of 2022 and then you annualize that, that gets you a little over $3 and then if you take the $1 billion of incremental cost in 2023, that gets you a little over $4. And so you get - it is another way to get back to what we did in 2019 at $3 plus $4, a little over $7 a share.

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

Yes. Hey guys good morning. I kind of have a two-parter, but I guess what gives you the confidence that this is really, I guess, a market phenomenon versus something that is more kind of Stanley specific? And as you are thinking about these cost reductions, can you just talk through how you are kind of protecting brand and R&D investments just to make sure there is no long-lasting impact on some of the brand values.

Yes. Thanks, Tim, for the question. When I think about what is happening right now, I mean, there is a lot of information that we have, data we have around POS that is impacting clearly, our business and our products. We also have conversations with many of our customers that we serve. We also have seen some recent earnings releases from other companies that are in spaces where we are as well as - or close to that type of category in the building product space. So I feel like when you triangulate all that information, it definitively says there is a slowing demand environment happening that is occurring. And so we also are looking at it, we have looked at all our pricing, as I mentioned, versus our competitors. And our price points are pretty much at par with all our competitor products in all the major key categories. So we don't see any big gaps where we have premiums that are significant versus our competition. Based on all that factor, it doesn't feel like there is anything unique that is happening related to Stanley Black & Decker that this is truly more of a market phenomenon that that is playing out, which makes sense because a lot of the products that we are providing. There is some discretion associated with those products and certain buying decisions versus some of the other building products that are necessary to build a home, whether that is lumber or whether that is insulation, windows, doors, there is still a fair amount of backlog that exists in the pro market. And although we are starting to see signs that maybe that backlog is dwindling a little bit. And the orders going in there are not as strong as they have been in the…

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

Thanks good morning everyone. If you go back to 2023, obviously, 2023 seems like a long way. But just going back to the comments, Corbin, you made about sort of getting back to a normalized earnings kind of number. And I think you said $6 to $7 when you layer in the cost savings and initiatives and things like that. Number one, is that the right way to read that? And then just around that sort of mathematics, are we seeing any benefit whatsoever from raw material deflation coming through. Obviously, your kind of input costs you laid out in April are well off those levels back in April. But is that part of your supply chain savings? And I'm assuming that the 2023 buyback is off the table at this point, just if you can hit as well.

Yes. I would say that when we go through those questions there, why don't we start with the buyback, we will get to the buyback as soon as we can. But as Corbin said, we are focused on inventory reduction, getting our cash flow performance to higher levels, fairly significant performance in the back half of this year as we both described. Another strong performance next year will be expected for cash flow and we will be focused on that. We will also be focused on getting our debt levels down to where we want them to be, where we have had them historically related to debt-to-EBITDA ratios. When we feel like we are in a good position to do that, we will do the buyback. That could be in 2023 or it could be a little bit later. Time will tell. We will see how things play out. Corbin, maybe you can take the question on the $6 to $7 and 2023 and provide a little more granularity and clarification of that.

Yes, you bet, Nigel. The way that I was thinking about it was if you take the run rate for the second half of which is about $1.50, and you analyze that, that becomes about $3 on an annual basis of an EPS base. And then if you add the $4 which is the $800 million of additional cost savings we plan to get in 2023, that is $4. So the $3 plus $4 gets you to $7, which is close to what the 2019 base is. Just another way to think about 2019 being a baseline for earnings going forward.

Yes. And so the other part of Nigel's question was about commodity trends. So yes, we had a high in the March, April time frame. We have seen commodities pull back significantly, except for lithium. Lithium is still holding in pretty strong because there is still a high demand for batteries across many industries. But a lot of those spot prices have dropped back to levels that are closer to where they were at the beginning of the year. And so we are aggressively pursuing that opportunity. It is unlikely to have an impact on 2022 just because of where we are with inventory at this stage and trying to really liquidate a large portion of our inventory. But as we go into 2023, we have not factored that into our transformation savings. So that is an opportunity that we want to pursue. If these spot levels are maintained where they are, that clearly could be a significant opportunity that would improve the performance that we are talking about that could potentially play out for 2023. But as the year goes on and we get more progress in that area and we begin to see the impact of that in the later stages of 2022 as we start to plan for 2023, we will provide more color, but that is an opportunity that is out there that we will be pursuing as it has really reached a level of significance from a spot rate differential versus where it was in April.

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

Thanks. Good morning and thanks for taking my question. I guess I wanted to focus you had kind of alluded to your competitive positioning earlier, Don. And I know you put a lot of thought and analysis into that. As you look into the back half, I think there was a part where you said you are still considering surgical price increases. And I'm just kind of curious as you look at how the retail sales backdrop is softening and given the level of competition that is out there, what is the ability to hold on to price in the current environment? And as you look into 2023, you had mentioned that a lot of the cost savings don't necessarily come at the expense of the front forwarding, the front-facing part of the business, so to speak. But to the extent that we are in this reverted or more normalized demand backdrop, which is much less than this past 18-months. How do you assess the need to perhaps invest more in the business and plow some of those cost savings back into the company, either through some targeted price reductions or areas of investment in terms of marketing or R&D.

Yes. I think, Michael, it is a good question. As you think about the dynamics, we are navigating here. And I guess I will start with, as we have done three rounds of price. I mentioned in my presentation that our price points are very consistent with our competitor price points in virtually every category. So we feel like the current price environment is a level playing field from that perspective. We did mention surgical price increases as an opportunity in the back half. But that is very modest. That is not a large number we are pursuing. Corbin also mentioned, we are not doing a round for price because of the dynamics we just described around commodity prices and slowing demand playing out as well. We also have to remember there was a big part of a front-end inflationary period last year where we didn't have price recovery for the first six to nine-months in some cases of that cycle. And so as the tale of the cycle plays out, where we start to experience deflation, we tend to hold on to the price through the cycle as that tail plays out. And then once we are starting to capture significant benefits in our P&L from commodity deflation, we begin to look at where are our margins, where do we want our margins to go, where is the pricing versus the market, do we need to make some surgical changes based on that. And we have a very robust team and process that we have created over the last two-years that is 100% dedicated to this work in this type of analysis that allows us to be very fluid and agile, but I always remind people of there is a significant gap we had at the beginning of the cycle, where we had very little recovery of inflation versus price. And at the tail, there will be a period of time where we have the benefit of higher prices as commodity inflation is receding or we are having deflation in this particular case. That is the way it is historically paid out. It is most likely the way this is going to play out. That doesn't mean there won't be occasional surgical promotional things that happened versus those list prices to drive higher levels of volume or performance in certain categories. Those things will happen. But in a general playing field, that is likely how the price versus commodity deflation will play out over the next 12 to 18-months.

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

Hi good morning and thank you. I suppose I just wanted to sort of circle back on to the margin outlook. Just to try and understand what sort of operating margin trajectory you are dialing in for the back half, any major ramp-up in Q4 there. And also as we think about sort of early 2023, which you have alluded to a few times, do we expect a sort of similar margin rate first half of next year to second half of this year? Just trying to get a bit more color around that and sort of the confidence that once those savings and cost actions are realized you can really retain those in your margins and not have to pass them on.

Yes. I will start and then pass it over to Corbin for a little more detail. There is nothing unusual in the margins between the two quarters in the back half of this year. So there is no dramatically low number in Q3 and dramatically high number in Q4. They are relatively consistent overall for the company. Corbin talked about what we expect to do with gross margins as a company as we go into next year and getting into the low 30s with a road map for the longer term of 35-plus percent. We believe that is a model that works very effectively for this portfolio of businesses and products. And that is something that if you look at history, you have a history that would demonstrate that. But really, the model that I described when I laid out kind of the strategy of where we need to go and the focus on investing in innovation, investing in commercial leadership, investing in our supply chain, et cetera, et cetera, all those different areas. That consistent investment model will allow for not only strong growth two to three times the market growth but also allows for higher levels of profitability. One of the benefits of having the Pro market and the Pro brand like the Walt in particular, but some of our other niche brands such as Pacome and Proto our programs as well. Obviously, on the Outdoor side, we have got some great brands with Hustler from the Excel acquisition, Cub Cadet DEWALT as well in that category. Those channels have and always have had high levels of profitability. And so that gives us confidence as well because we are looking to continue to shift, especially on the Outdoor side, more and more into the pro category where the higher levels of profitability are. But Corbin, maybe you give a little bit of color on. SP1.

Julian, the only thing else I would add is that if you think about going into 2023, the benefits that we will start to see from a gross margin standpoint from the supply chain transformation and then from an SG&A standpoint, from the other cost reduction that we laid out, those will be pretty even throughout the course of 2023. So you will start to see both gross margin and operating income margin slowly start to improve throughout the year.

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

Shannon, thanks. We would 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.