Welcome to the Fourth Quarter and Full Year 2022 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 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 Fourth Quarter and Full Year Webcast. On the webcast in addition to myself, Don Allan, President and CEO; and Corbin Walburger, Vice President and Interim CFO. Our earnings release, which was issued earlier this morning and the supplemental presentation, which we will refer to, are available on the IR section of our website. A replay of this morning's webcast will also be available beginning at 11 a.m. today. This morning, Don and Corbin will review our 2022 fourth quarter and full year results and various other matters followed by a Q&A session. Consistent with prior webcast, 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, involve risk and uncertainty. It's therefore possible that the 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-F filing. I'll now turn the call over to our President and CEO, Don Allan.

Thank you, Dennis, and good morning, everyone. Our fourth quarter performance marked another meaningful step forward on our journey to streamline and optimize Stanley Black & Decker. Building on our number one worldwide market position in Tools & Outdoor, as well as our leading Industrial business, we continue to focus on advancing our simplification and transformation strategy. Across the second half of 2022, we improved customer fill rates significantly, reduced inventories by $800 million and realized $200 million in efficiency benefits from our leaner organizational structure as well as enhanced cost control in the back office and the supply chain. These actions generated more than $500 million of free cash flow in the fourth quarter, which supported a corresponding similar amount of reduction in our debt, a key objective of our capital allocation plan in the second half of 2022. Overall, we are making progress, and I am confident that our strategy and priorities are positioning the company for a strong, sustainable, long-term growth, cash flow generation, profitability enhancement and shareholder return. This transformation journey has just started, and significant efforts are still ahead of us. Our success will be dependent on staying agile while maintaining a disciplined approach, which ensures we stay focused on our key set of priorities. Our team has seen significant changes over the second half of 2022, and they will lead us through the next phase of the transformation in 2023. I would like to take a moment to thank all of our leaders and employees across the globe and recognize them for their focus, commitment and hard work, especially over the last 7 months to 8 months. Our 2022 full year revenue reached $16.9 billion, up 11% versus a record of 2021, led by the outdoor power equipment acquisitions as well as 9% organic…

Thank you, Don, and good morning, everyone. Let me walk through the details of our business segment performance. Beginning with Tools & Outdoor, fourth quarter revenues were in line with last year at $3.4 billion, benefiting from a 7% improvement from price actions and an eight-point contribution from the MTD and Excel outdoor acquisitions. Both of these acquisitions are now a part of organic growth beginning in December. These factors were offset by a 12% decline in volume and a negative 3% impact from currency. From a full year perspective, Tools & Outdoor achieved record revenue of $14.4 billion, driven by a 7% improvement from price actions, and 21% growth contributed by our outdoor acquisitions, which was offset by softer consumer demand and currency. Looking at the regions, Latin America achieved 4% organic growth. Although Europe declined 3% organically, performance improved sequentially from the third quarter, and we believe the more significant impacts from UK channel destocking are now behind us. North America was down 7% as a result of lower consumer and DIY market demand, as well as the third quarter carrying heavier holiday promotional shipments compared to last year. US retail point of sale was supported by price increases and professional demand. Compared to a pre-COVID 2019 baseline, the fourth quarter POS growth was consistent with the growth levels experienced in the third quarter of 2022. Aggregate weeks of supply in these channels ended 1.5 weeks below 2019 levels. Adjusted operating margin for the segment was 1% in the quarter as the benefit from price realization was more than offset by commodity inflation, higher supply chain costs, planned production curtailments and lower volume. For the year, operating margin was 8.4%, down versus prior year. Turning to the strategic business units. For the full year, Power Tools declined 5%…

Thank you, Corbin. So in summary, we successfully advanced our cost reduction and business transformation strategy over the last quarter and made meaningful progress on a number of key objectives, including inventory reduction, cash generation, debt reduction and streamlining our organizational structure and supply chain. We have given you an indication today of what annualized EBITDA could be on the first step of this journey. We believe we can build from 2023's back half as our supply chain savings continue to accrue and contribute to the restoration of our gross margin to the 35% plus level. As we look ahead, we aim to get our levels of EBITDA back to 2019 levels and beyond as we continue to transform our business. While the macroeconomic environment is uncertain and 2023 will clearly bring us challenges, we are prepared to navigate forward and believe our actions to reshape, focus and streamline our organization, as well as reinvest in our core businesses will enable us to deliver strong shareholder value over the long-term via robust organic growth and enhanced profitability. With that, we are now ready for Q&A. Dennis?

Great. Thanks, Don. Shannon, we can now start Q&A, please. Thank you.

Thank you. [Operator Instructions] Our first question comes from the line of Julian Mitchell with Barclays. Your line is now open.

Hi, good morning.

Good morning.

Good morning. Maybe just my question would be around -- I guess, two quick parts. One would be, it looks like you're guiding for positive price, I think, in Tools this year, maybe the conviction in that given what seems to be a lot of inventory kind of out there at customers and competitors. And then also, the second part would just be I heard what you said on the annualized EBITDA run rate. Are we still assuming a sort of $7 plus or so of EPS potential at Stanley in the medium-term based off that, or has that view changed?

Yes. So I'll start and then Corbin probably will add a little color too on both of those topics. But I would say that our price model has about 1.5 to 2 points in it for the year for 2023. And based on where we are now with commodity prices, which you've seen some improvement or reduction, but overall, when you look at the basket of commodities for us, we really don't see any significant deflation and a little bit of inflation here in the first half of the year. So we still see based on that, that we can maintain price throughout the year. Now your question on the angle of there's a lot of inventory in the channel, and therefore, we're going to have to take specific promotional actions that might be unusual to drive inventory out of the channel, which, therefore, would impact our price. We don't really see that in our plan today. So we see normal promotional activity in the spring and the Father's Day season and then, of course, in the later stages around Thanksgiving and other holidays at the end of the year. And so at this point, we do not believe there's a need to do anything unusual around pricing activities to push things to the channel. One thing I'll just point out related to inventory levels in the channel. For us specifically, we actually feel where the inventory is in our customers is pretty reasonable at this point, and it's actually down a little bit from 2019 levels. And so probably about a week to two weeks down from those levels, which is a good place to be. And we feel like we've gone into the year with the adequate amount of inventory in their stores. And what we're dealing with is higher levels of inventory in our own distribution network that we have to work through during 2023 and probably some early stages of 2024. But the vast majority of that reduction is going to happen this year in 2023. The second question was related to…

Long-term EPS, medium-term.

Long-term EPS and the $7 and some commentary around that. So I think as you start to dissect the guidance we're providing at the midpoint, you'll see that the back half is getting itself close to a couple of dollars EPS for this year. And if you annualize that and factor in seasonality from the outdoor season that happens in the first half of the year primarily, you're probably trending something for 2024 that's closer to $5. And now that assumes that we deal with an environment that we have guided here, which is the midpoint is pretty muted from a volume perspective. We -- as you heard from Corbin in his presentation, the back half is assuming for the Tools & Outdoor business that the organic performance will be down about three points. And as a result, that's really us seeing a continuation of current trends on the consumer side, but also likely some slowing on the pro side as you start to look at lower housing start numbers, lower repair remodel numbers year-over-year and as -- and we think this year, we'll see a negative organic performance at our base case. Now if that doesn't play out, and the performance is stronger, you heard from Corbin that it could be two to three points better for the year, and obviously, the back half would be a better performance as well. If that played out, and then you went into 2024 with that type of momentum, there could be a case where you actually do work yourself closer back to the $7. So I think we're probably, at this point, somewhere around $5, with it eventually having the possibility, if the volume and demand is stronger than our base case, where it could be higher than that. Anything you want to add to that, Corbin?

No. The only thing, Julian, maybe for your model from a pricing standpoint, we're going to have some price carryover in the first half of a point or two, and then that obviously anniversaries out by the second half.

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

Yeah. Hey, good morning everybody. Thanks for all the details. Don, maybe just following on to your question, or to some of the answers from the last question. Just what are you seeing from the Pro today? And I guess, what -- within the scenarios that you've outlined, I mean, what are you assuming that the Pro does as you work through 2023?

Yeah. I would actually say coming out of the gate here in 2023, it was just one month under our belt, we're actually not seeing any slowing of the Pro. So the Pro business continues to be healthy. As we talk to our customers, they say the same thing. What we are, though, forecasting in our model is a slowing down of some of that activity. And when you look at the organic projection that we have for our Tools & Outdoor business, we expect it to slow down as we get deeper into the year and for that to continue in the back half of the year in a modest way. And so I think that's a reasonable assumption when you give -- when you start to look at things like housing starts and the projections for housing starts, repair, remodel, what our customers are saying and their expectations are around likely performance year-over-year and what you hear from many of the peers in the space as well. I mean, everybody seems to be thinking that the market will probably be down somewhere 3% to 5%. And that's kind of where we are with our Tools & Outdoor business. And it aligns very much with the trends you're seeing in construction. And I think it is a good base case to start with, but as I said before, it could be better than that if the Pro doesn't weaken as much as I just described. It also could be worse than that, which I think our downside case covers that as Corbin articulated very well in his presentation.

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

Thanks. Good morning and thanks for the question. Don, on the inventory reduction, I think you're still going to be carrying $5 billion of inventory at year-end. So just wondering why not be even more aggressive on that inventory reduction? And is there a risk that, that this could carry forward into 2024? And maybe just address the dividend. We've got a few questions this morning. Just is there any scenario you look at/or any scenario where you might have to revisit the dividend this year? Thanks for asking the questions.

Sure. I think on the inventory part of your question, I feel like going after $1 billion, $750 million to $1 billion is the reasonable level that we should pursue given where our business model is today and our supply chain is today. Could we, over time, over the next 12 months, get to a number above $1 billion? Yes, that's possible. It probably wouldn't be dramatically above that number, though. Now as you go into 2024, I don't think there's a need for another major step down in inventory. I think what we're going to see, if things go the way we would like them to go in 2023, we'll get a substantial chunk of inventory out in the first half of the year, a lot of that probably in Q2. We'll do some more at the end of the year in the fourth quarter, which tends to be part of the normal routine of our company. And beyond that, I think it's just going to get back to managing and optimizing the supply chain to maximize the efficiency of it. And we'll continue to drive down inventory. But it won't be at the -- having an impact on our production. It will be more managing it efficiently, looking at how we do certain types of activities that drive reductions of $250 million to $500 million each year for maybe the subsequent two years, more in that magnitude. And I think that's the right way to look at it. I really would like to get production levels back to normal in the back half of 2023. That is our goal. We think it's achievable based on our base case right now. And we'll continue to look at that. Obviously, Corbin articulated at the downside case, if we saw demand being even worse then the production levels would have to stay lower probably through the remainder of the year. But in our base case, I think there's a good chance we can get production levels back to normal in the summertime of 2023. On the dividend, very good question. Thank you for asking that. The dividend continues to be a very important part of our capital allocation strategy. We believe that it's a necessary thing for us to maintain the level of the dividend that we have today. We'll continue to evaluate that through the remainder of the year, but there's no change in that strategy at this stage. Obviously, buying back stock is not an opportunity for us given the leverage we have on our balance sheet. And so therefore, returning value back to our shareholders, the main lever we have today is our dividend.

Thank you. Our next question comes from the line of Mike Rehaut with JPMorgan. Your line is now open. Mike Rehaut with JPMorgan, your line is open, please shut your mute button.

Sorry, about that. Appreciate the taking my question. Just wanted to make sure I fully appreciated the base case in terms of -- I think you said earlier that it incorporates a view around repair remodel activity being down also low single-digits. I just want to make sure I understand that's right. I mean, obviously, you have existing home sale turnover trending down 30% year-over-year currently. And I think that might be, at least in our view, a little optimistic. But just wanted to understand your assumptions behind that? And also, if I could just kind of shift gears on the modeling side, I appreciate any views on some of the other line items from a guidance standpoint, corporate expense, interest expense, other net, some of those line items would be helpful? Thanks.

Hey, Mike, I'll take that. On the base case, as we said, the whole company we view in the base cases being down two to three points organically. Volume is more than that. There's some coverage from price. If you look at tools organically, tools will be down about three to five points, volume down a little bit back from price. And then the second half, as Don mentioned, volumes down in the kind of 3% to 3.5%. And from an Industrial standpoint, we see that being up low single digits, both from price and from volume. So that's the case for how we got to the base case.

I think the other thing that I would add is we – if you look back at history of Stanley Black & Decker and if you put the Great Recession in 2009 in a totally different category, because we had a significant amount of overbuild residential inventory, in particular, in housing and say that's an unusual situation that's probably not indicative of where we are today because we don't have that type of overbuild situation and we don't have the same type of leverage issues within the consumer in the housing market as well. The other recessions that Stanley Black & Decker has historically experienced, the average decline has been about 3% to 5%. And so when you think about it from that perspective and recognize that we just went through a period of time where we're dealing with supply constraints and then a bit of a consumer dip in the back half of 2022, now we believe we're going to see a bit of a pro dip here in 2023, we're kind of aligned with our 3% to 5% in 2023 with that historical point of view. There hasn't been many recessions that have impacted housing beyond the 5% except for the one that I mentioned, which was the Great Recession, which is very different than usual. So it's just something that we need to keep in mind as you factor all the different scenarios that Corbin went through in the presentation and really center around our base case. Our base case is very consistent with what history would say.

Hey, Mike, just to touch on your other question around specific line items. As we said, the corporate expenses, we've really targeted to get back to 2019 levels. That's where we expect them and then interest because rates have gone up and the quantum has gone up, you'll probably see an increase in interest expense of about 20%.

Thank you. Our next question comes from the line of Rob Wertheimer with Melius Research. Your line is now open.

Hi. Good morning everybody.

Good morning.

To the extent you can comment, how was your pricing in Tools & Storage achieved in 4Q compare with your channel partners, your home center pricing achieved? I mean, is there still a risk of major discounting to clear out inventory or otherwise reflect an environment, or do you think that we've come close to balance there?

I think as we look at the pricing dynamics in Tools & Outdoor, we are monitoring all the different things that are happening across the different product families and categories related to price. And we really look at what our competitors are doing. We're obviously paying attention to monitoring what we're doing as well and making sure it's consistent with our expectations. But we didn't see any major turbulence in the market around pricing from our competitors during the fourth quarter. We do see here random, kind of, what I would call promotional activities to move inventory through some of our customers' stores. So you saw some of that happen in the fourth quarter. But it didn't dramatically shift the pricing dynamic, the list pricing dynamic in particular in that time horizon. That's something we will continue to monitor here going into 2023 and make sure we stay focused on that throughout the year. And it's always something that we have to factor into our decision-making. But we think the promotional calendar that we've built with our customers so far for this year. And the other activities that we're able to do will allow us to achieve the level of inventory reduction we would like to get to, which is $750 million to $1 billion. And we obviously have to be agile and flexible and look at what happens in the market. But at this stage, we're not seeing any irrational pricing activity.

Thank you. Our next question comes from the line of Chris Snyder with UBS. Your line is now open.

Thank you. So I wanted to ask about the gross margin recovery during 2023. When we see gross margin going from the 20% currently to the mid to high 20s by the back half of the year, could you provide just a bit more color on the buildup here between the improvement of just getting past the destock versus some of the benefits of the Phase 1 supply chain transformation plan starting to come through? Thank you.

Yes, you bet, Chris. So the gross margins, as we said, in the second half of 2022, on average, we're around 22%. And there was probably about four-point penalty driven by the production curtailments and liquidating the high-cost inventory. As we go through the course of 2023, that four-point penalty slowly starts to decline to about 3.5 and then to 2.5 points by the end of the year. And again, it's a mix between -- we don't -- as I mentioned in my view on our guidance, we don't expect production curtailments to continue throughout the whole course of the year. So that will help us. And then as we liquidate the high-cost inventory, that also helps us. So by the end of the year, on an incurred basis, we will see margins slightly above 25%, but there will still be a little bit of penalty that would get us into the high 20s.

Thank you. Our next question comes from the line of Dan Oppenheim with Credit Suisse. Your line is open.

Great. Thanks very much. I was wondering of the plans in different scenarios in terms of inventory, where you've talked about those situations and what -- how it impact production, but it doesn't seem as though you would change your goals in terms of that $750 million to $1 billion reduction of inventory. Why not think about reducing inventory by more? Is there something in the supply chain that's leading you to thinking about keeping a higher level than where you've had historically? What's the overall thought there in terms of why not more inventory reduction?

Yes. I would say the range actually is indicative of the range of EPS. So if the low end of range of EPS played out that Corbin articulated, then we'd probably be looking at $750 million of inventory reduction. Even though we would be continuing curtailments, the demand levels would be much lower. And so you have two or three points lower demand versus the base case. On the high end of the case, I think the $1 billion becomes very achievable because you're dealing with much higher levels of demand where organic for Tools & Outdoor would probably be flat year-over-year. And therefore, the $1 billion feels more achievable in that environment, and you're getting your production levels back to normal levels in the back half of the year or maybe sooner. And so that's where the range kind of plays out. As I mentioned earlier in response to Nigel's question, I do think if demand is stronger in the back half, we could see a possible improvement above the $1 billion. I don't think it would be a dramatic number, but a few hundred million dollars above that, it certainly makes sense. And so that's really where that range comes from. It really correlates well with the EPS range, which correlates well to the demand associated with those three different scenarios.

Thank you. Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Your line is now open.

Yeah. Thanks. Good morning guys.

Good morning.

Just to maybe piggyback on one of the earlier questions. Can you just give a little bit more color on the ramp of the cost savings that you guys expect to achieve throughout 2023, would take into the base case? And then any help at all on as we think about 2024 and 2025? It might be a bit early to give us explicit numbers. But is more of the plan coming through in 2024, or is it more back-end loaded towards the end of the three-year period? Thank you.

Hey, Nicole, it's Corbin. I'll take it. So as Don mentioned, in 2022 in the second half, we've got about $200 million of savings. And as we look into 2023, from an SG&A standpoint, we expect to get about $300 million. About 70% of that will come in the front half and about 30% will come in the back half as you lap 2022. And then on the COGS side, we expect about $450 million, and that will build throughout the year. So Q1 will be a little bit higher and then it will build in 2Q, 3Q, and 4Q will be pretty even.

Yeah. And I think for 2024 and 2025, I mean, we're trying -- obviously, with the numbers that you just heard, we believe we'll have $1 billion of value creation by the end of 2023. And then there's another $1 billion related to the supply chain transformation in the subsequent two years of 2024 and 2025. Right now, based on the plan we have that our operations and business teams have collectively worked together on, that $1 billion has a specific level of detail and actions that are associated with it that we believe are close to being rock solid. And, therefore, we do think in those two years, we'll probably get about $500 million or so of that in each year. And we'll see as we get deeper into 2023, whether more comes in 2024 versus 2025, time will tell. But at this stage, it feels like the way that we're phasing this because it is a pretty significant level of transformation that we're doing across our supply chain, and we need to be thoughtful as to when we do different phases of it, so we don't cause any major disruption to our customers, which is why it's going to take three years to do. At the same time, it's also why the value probably would be pretty evenly prorated over a three-year time horizon.

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

Good morning. Thanks. Curious on, Don, you talked about 2024 of $5 to $7 in rough frame. And I know six months ago, that was the concept for 2023. What's so notably different in 2023 that pushed out that level of earnings to 2024?

Yeah. I would say there's a couple of dynamics. I mean, obviously, volume continues to be challenging. We think volume is going to be challenging for 2023. I talked about what I think is going to happen with the Pro market in 2023, and we'll see a modest recession aligned with what the historical recessions are for Stanley Black & Decker of down 3% to 5%. Clearly, that's a significant factor in all of this. We're also -- we've decided to be much more aggressive in the inventory reduction than we were thinking three, five months ago, where we were going to be more methodical in that reduction. We're being more aggressive. We're really trying to get a large part of this done by the middle of 2023 to get production levels, as I said, back to normal in the back half of 2023. And those are probably the two main drivers of the difference in the timing.

Great. That's helpful color.

Thank you.

Thank you. I would now like to turn hand the call back over to Dennis Lange for closing remarks.

Shannon, thanks. We'd like to thank everyone again for their time and participation on the call. Obviously, please contact me if you have further questions. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.