Stanley Black & Decker, Inc. Q1 FY2022 Earnings Call

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 2023. Taking into account the approximately $0.5 billion in dividends we expect to pay in 2022, we will have returned $2.8 billion to shareholders by the end of the year, a record for Stanley Black & Decker. These important capital allocation actions along with, one, our now demonstrated and continuing ability to achieve substantial price inflation recovery; and two, progress in reducing supply chain constraints will result in higher growth and margin accretion and thus, significant value creation in both the short and long term. To summarize our first quarter, revenues were $4.4 billion, up 20% driven by our outdoor equipment acquisitions. Organic revenue was down 1% and customer demand remained strong across many of our global markets and price realization accelerated sequentially from the fourth quarter. The volume could have been higher but for the supply-constrained environment that we continue to make progress on resolving, with added supply of semiconductors and electronic components during this quarter, we expect to be able to alleviate all major electronics-related constraints by the end of the quarter. Our total company operating margin was 11.5%, up 250 basis points sequentially, reflecting the implementation of new pricing actions but down versus prior year due to cost inflation and supply chain challenges. This resulted in first quarter adjusted EPS of $2.10 which was ahead of our plan. As we look forward, I'd like to share a few comments on what we're seeing in the demand environment. In Tools & Outdoor, end-user demand across most markets and channels has remained stable, led by pro construction. Absolute dollar sell-through in North America retail continues at high levels, especially when measured sequentially and/or compared with the 2019 baseline. Additionally, we believe that we are gaining market share in North America and other geographies. For instance, based on publicly available disclosures by our top 2 home center customers, our 2021 point-of-sale growth was above category line average for each of them. In our end markets today, while the boom global conditions of 2020 and 2021 have leveled off, the fundamentals and secular drivers remain healthy and are still very much intact. As we look out over the balance of the year, the combination of repair/remodel, new residential construction and commercial construction have plenty of runway to continue to drive enduring demand in many of our markets around the world. Despite this factor of slowing global growth and increasing U.S. interest rates, repair/remodel activity is expected to grow at mid- to high single-digit rates over the next 2 years due to multiple factors, including an aging housing stock, record levels of home equity and strong price appreciation driving big ticket remodeling and tight existing housing supply leading consumers to invest in existing homes as well as spurring demand for new homes. In terms of new residential construction, the years of undersupply of new homes post the 2008 economic crisis has created a significant housing stock supply issue as just millennials reach the age when they're most likely to purchase a home. We expect that this will continue to support new residential construction activity, even with the interest rate increases currently being contemplated by the Fed. Commercial construction is still in the early stages of a post-COVID recovery and the secular drivers for safe, healthy, professional working spaces and more efficient buildings will contribute to positive activity levels in 2022 and the coming years. And lastly, we have strong backlogs in our industrial businesses and we remain optimistic that cyclical recoveries in the auto and the aerospace sectors are beginning to emerge. This is very meaningful to both revenue growth and profitability for the segment. To size it, we think it is a $300 million to $400 million multiyear growth opportunity with accompanying margins returning to the mid- to high teens over time. And while we see continued momentum within our core markets, we will monitor and respond accordingly if and when we observe any adverse impact from a higher interest rate environment and/or significant elasticity of demand effects following our pricing actions. On top of the market, we continue to reinvest in growth, including leading-edge product innovation, e-commerce and electrification that will position us for sustained share gains. In fact, since the start of the pandemic, we have invested in over 1,500 human resource additions in R&D, commercial and e-commerce functions in Tools & Outdoor. And that is before the impact of any acquisitions. On that note, I'll now address our recent capital allocation and portfolio actions. A key aspect of the Stanley Black & Decker value-creation model is our active approach to portfolio management and commitment to an investor-friendly capital allocation strategy. Over the long term, we look to invest 50% of our excess capital into strategic M&A and return the other 50% to shareholders through a consistent growing dividend and opportunistic share repurchases. The two security divestitures were at trailing EBITDA multiples of mid- to high teens and have a headline price of $4.1 billion in the aggregate, resulting in approximately $3.5 billion of after-tax proceeds. These impressive results validate the investments we made in transforming our security business over the last several years and have enabled significant return of capital to shareholders as well as reinvestment in our highly focused core businesses. Deploying capital into outdoor enabled us to acquire approximately $3 billion of revenue at 8.5x EBITDA and a material opportunity for margin enhancement over time as we fully integrate these businesses and leverage our combined scale, brands, manufacturing expertise, R&D and access to both the retail and the pro channels. Now there has been some noise and misinformation out there about our recent outdoor acquisitions and I'm now going to present you with the facts. We have a sound strategy for outdoor anchored on four pillars: electrification, brand and channel strength, cutting-edge innovation and large-format manufacturing capacity and experience. Overnight, we have assembled a formidable leading player in the $25 billion outdoor power equipment market that is capable of growing 10% to 15% organically at mid-teens operating margin for many years to come. This business will lead the charge in the electrification of both large-format and handheld professional outdoor power equipment. We will also bring our outstanding differentiated line of autonomous electrified products under the DEWALT brand to the professional landscaping channel, where the acquisitions come in a network of independent dealers with 2,500 unique outlets, skewing towards the pro market and representing half of the $25 billion addressable market. Such channel access represents a compelling competitive advantage and it is critical to above-average growth and profitability. I'm also excited about the breakthrough innovations resulting from the integration of the outdoor acquisitions. And even though the new team just completed its first quarter together, they've been working together for several years and will bring to market a strong set of new innovations at attractive margins just ahead of the 2023 outdoor season. We're off to a great start and I have strong conviction in our ability to deliver outstanding cordless and autonomous new products to the market that will result in growth and margin expansion. And the 13.7% operating margin delivered in our first quarter together is just a taste of the profitability potential ahead in the coming years. And lastly, we have added 8 manufacturing locations through our outdoor acquisitions. In addition to the instant capacity to support growing demand, the resulting extensive manufacturing footprint gives us an enormous competitive advantage over our small-format, electric-only competitors. In short, despite what you may have heard, our outdoor acquisitions have enabled us to become the outdoor power equipment leader, best positioned to electrify the industry given our multiple competitive advantages. Our outdoor business is now a powerful growth engine with approximately $4-plus billion in annual revenue with anticipated organic growth of 10% to 15% a year. This is an exciting period for our company with a portfolio focused on core businesses in tools, outdoor and industrial and attractive markets in construction, DIY, automotive and industrial. And I'd now like to turn the call over to Don Allan, who will provide an update on how we're positioning our supply chain for growth as well as more detailed commentary on first quarter actuals and our full year outlook.

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 remain 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 2021 balance. The increase in our first quarter inventory was primarily due to working capital seasonality to support the peak outdoor buying season, spring merchandising and the Father's Day selling season. This investment in working capital, coupled with the earlier timing of certain tax payments, contributed to a free cash outflow of $1.4 billion in the first quarter. This Q1 performance will reverse as we execute on the remaining 2022 working capital initiatives. Within the supply chain, tight component supply and elongated transportation times continue to be a challenge. However, we have seen some signs of stabilization. For example, our goods in transit for the quarter remained stable and similar to year-end levels. The Port of L.A. has seen improvements with reduced congestion and moving goods from the ports to our DCs is not a significant source of delays. As it relates to China, we continue to frequently monitor our end-to-end supply chain. And while there has been some minor COVID-driven disruption to date, it remains manageable at this stage. This is a dynamic situation that we will continue to watch closely in the coming weeks. As it relates to semiconductors, we continue to see improved supply in line with expectations. Our Tier 1 contract manufacturers received more semiconductors in the first quarter which will enable us to increase the throughput for our professional power tools in Q2. We are on track for an improvement to our electronic component supply of approximately 20% in Q2 and further improvement in Q3 which will support better fill rates, customer inventory positions and higher revenues as we progress through the remainder of the year. So in summary, we are actively managing a very dynamic supply chain and responding with agility to position ourselves to meet the continued strong demand we are experiencing, especially within the professional power tool portion of our business. Turning to our segment results. The headline for the first quarter is that demand for our products remains healthy and we are executing the necessary pricing actions to mitigate higher input costs. In Tools & Outdoor, we grew revenue 24% as the strategic outdoor power equipment acquisitions contributed 27% and price drove 5 points of growth. Price realization accelerated sequentially because of the new global price increases implemented in response to commodity and transportation inflation experienced in late 2021. These factors were partially offset by a 6% decline in volume and 2% from currency. Volume was impacted by electronic component availability and we have not seen evidence of broad demand destruction related to price elasticity. We estimate that supply constraints resulted in approximately $200 million in unfulfilled professional power tool opportunities in the first quarter which, if realized, would have resulted in volume growth and a record prior year performance comp. We will be better positioned to capitalize on this volume opportunity as we improve supply in the coming two quarters. Regional organic growth was relatively in line with our expectations, with Europe up 2%, emerging markets contributing 5% and North America down 3%. The Tools & Outdoor operating margin rate for the segment was 14%, representing a 260 basis point improvement versus the fourth quarter of 2021. We continue to execute on price to protect our margins and we saw the sequential benefit in Q1. Comparing the Tools & Outdoor margin rate versus prior year, we experienced a decline as price realization was more than offset by inflation, higher transportation costs, growth investments and lower volume. The outdoor acquisitions delivered near line average margin rates for the quarter, representing a very strong start to the year. U.S. retail point-of-sale remains at healthy levels, supported by strong professional construction markets and our innovation. While the POS comps were down versus a stimulus-aided Q1 2021, the normalized 2019 comparative growth rates accelerated from the levels we experienced in the back half of 2021. This strengthens our conviction that we continue to experience a very solid demand environment. Now turning to the Tools & Outdoor strategic business units. Power tools were down 1% organically in the quarter. We continue to realize benefits from our price increases, along with continued demand for our innovative offerings for the pro and tradesperson. We have launched a series of products under our industry-leading CRAFTSMAN, STANLEY FATMAX, Black & Decker and DEWALT brands. Our recent breakthrough, DEWALT POWERSTACK, continues to be very well received by end users and is expected to be a multi-hundred million dollar contributor to growth in 2022. Hand tools, accessories and storage declined 1% in the quarter against a very difficult comparable. Revenue was supported by pricing and new product innovation. Some of our new innovations include extending our world's first DEWALT 20-volt laser platform with the new 20-volt MAX laser, expanding our DEWALT ToughSystem storage to include soft storage solutions designed to optimize efficiency in organization and we added a new IRWIN STRAIT-LINE tape to our industry-leading tape measure lineup. Moving to outdoor products. This business grew 4% organically, while the addition of MTD and Excel added over $800 million of revenue. Growth was driven by price realization, expanded distribution and new product innovations under the Black & Decker CRAFTSMAN and DEWALT brands. Our acquisitions are also benefiting from product innovation, including recent launches such as the redesigned FasTrak zero-turn mower line for commercial use and the first semi-autonomous zero-turn mower with the Cub Cadet SurePath. Despite the strong start for these acquisitions, this growth was modestly impacted from a later breaking outdoor season due to colder weather in many parts of North America. We expect these revenues to be recovered in the second and third quarters. Our first full quarter as one outdoor team was very successful, and we remain on track to integrate three assets into a new $4 billion revenue platform, as you heard from Jim. As the integration progresses, we continue to build conviction around the innovation, growth and synergy opportunities. We are even more excited about the electrification growth opportunity as we work to integrate these organizations and processes. The team is energized, focused and off to a great start. I want to thank the Tools & Outdoor organization for their efforts in the first quarter. We made progress against our key operational goals for 2022 with strong price realization, improved power tool supply and actioning a strong plan for working capital reduction as we move throughout the year. This dynamic environment requires agility, and I know we have the right people with the perseverance and dedication to be successful. Now, shifting to Industrial. Segment revenue declined 2% versus last year as the 5 points of price realization were more than offset by a 5% volume decline and a 2% negative impact from currency. Operating margin was 6.9% as the benefit from price realization was more than offset by commodity inflation and market-driven volume declines, in particular, in our higher-margin automotive business where our customers remain constrained by their own supply chain challenges. Looking within the segment, engineered fastening organic revenues were down 3% as 5% general industrial fastener growth was more than offset by lower automotive OEM production as well as a modest decline in aerospace. Our auto fastener business continues to successfully operate in a dynamic environment with customer production fluctuations. Despite this, auto fasteners once again demonstrated outperformance versus light vehicle production. And the business is also benefiting from accelerating growth and content gains across the electric vehicle production space. Our industrial fastener business enjoys a healthy backlog and delivered growth at nearly 2x global IPI in the first quarter. The aerospace fastener business delivered its third consecutive quarter of sequential revenue improvement. This business is focused on capturing the recovery in the OEM production which is beginning to emerge. We expect in 2022 aero fasteners will begin to demonstrate organic growth as it starts the cyclical recovery back towards historical levels of revenue. Infrastructure organic revenues were up 4% as 13% growth in attachment tools was partially offset by lower pipeline project activity in oil and gas. Momentum remains strong in attachment tools driven by record backlogs, dealer inventories continuing to trend below targeted levels and elevated market confidence due to the U.S. infrastructure bill. Our Industrial team is continuing to make steady progress with its revenue and profitability improvements. And we are primed to leverage the cyclical recovery that is on the horizon and capitalize on the auto electrification trend as well.

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.

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

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 half to one-third 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. You're correct about the timing of the pricing. The pricing impact in 2022 will be approximately half of what the annualized amount will be. There will be a positive carryover into 2023 related to pricing, primarily because of the timing involved. As inflation rises, there is a delay in implementing price increases in the market, which can vary between three to four months depending on the customer or region. In some instances, it may happen more quickly in certain parts of the world. This is a factor we considered, similar to what we experienced last year and in the early parts of this year. 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 have 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.

To clarify, we are aiming to offset the entire amount of inflation with our fourth price increase over a two-year period. The recent $600 million in inflation we experienced in the last two months will take some time to address with price increases, which is the situation we are facing. There is no long-term decline in margins due to hyperinflation because we are successfully implementing price increases to counter inflation. Historically, we did not experience such severe inflation nor did we achieve full price coverage of it. However, we have shown that we can successfully manage this in the current environment, and we will continue to do so with the upcoming fourth price increase as we enter the market.

Hi, good morning. I wanted to focus on the price-cost difference again. I believe pricing was around $200 million in Q1. Can you explain what the gross cost challenges were in that quarter? How should we view those figures for the second half of the year? Also, as you look at the current situation, what does the cost headwind look like for 2023?

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 one and a half 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.

Good morning, everyone. Thank you for taking my question. I wanted to shift the focus to the outdoor business and the comments you made about the 10% to 15% annual growth that you mentioned. This seems more optimistic than before, and I want to ensure I'm interpreting it correctly. The statement about a double-digit organic growth rate appears to be a new development. What factors are contributing to this statement, such as organic growth, new product launches, or distribution gains? Additionally, could you provide clarity on the share count progression over the next few quarters? I understand there may be some accounting issues that will be resolved next year, but insights from a modeling perspective would be very helpful.

That's a thoughtful question, and we'll address it. Don will cover the second part, and I'll take the first. We didn't enter the outdoor business thinking it would be low margin and low growth. We are very pleased with our acquisitions and the teams that joined us. The innovation and new product development pipeline is groundbreaking, especially in the professional products sector regarding large format, zero turns, and riders. It's evident that electrification will play a significant role in this market due to ESG developments and rising energy prices. One factor that has hindered the adoption of electric large format products has been the price difference between electric and gas. Historically, this gap has been wide, but it is narrowing as the cost of electric options decreases through innovation and cost reductions, while energy prices for internal combustion units rise alongside regulatory measures. In the U.S., you've likely heard about regulatory actions in several states, particularly California. This will create considerable pressure to shift from gasoline-powered sales to electric. We see this trend accelerating. We've collaborated for years on groundbreaking innovations in electric and autonomous technology. Additionally, labor shortages and rising labor costs excite us about growth opportunities because our autonomous units can mow lawns without any operators. Several factors contribute to our enthusiasm for the market. Furthermore, we have eight operational facilities producing everything from walk-behind mowers to zero turns and basic riders. We are well-prepared with products, capacity, and a strong management team. A growth rate of 10% to 15% in a market that has typically seen growth in the high single digits to mid- to high single digits is something we believe is very attainable, and we are committed to making the necessary investments to support that.

Regarding your question about shares, Michael, I believe the simplest approach is to consider that for the next three quarters of the year, the average will be around 155 million. In the first quarter, it was approximately 165 million shares.

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 mentioned earlier, we have adjusted our volume expectations slightly downwards compared to January, reducing it by about three points from our original estimate. This change accounts for increased pricing in the market, and we are being more cautious about its potential effect on volume. This does not indicate that we believe demand is decreasing; rather, with the significant price increases—nearly 5.5% in the first quarter, around 7.5% to 8% in Q2, and close to 10% in Q3 and Q4—we felt it was wise to slightly lower the volume forecast to reflect the potential impact of these price hikes. However, this adjustment does not suggest a major slowdown in overall demand, aside from the relatively minor impact from Russia, which generates about $150 million in annual revenue.

Good morning. I will stick to one question. Don, you've been tracking inflation closely. You’ve adjusted the inflation expectations. How do you plan to protect the strategy for fiscal year 2022? Is there any buffer to guard against further inflation? Additionally, it seems that the situation in the China supply chain is significantly driving transportation and freight costs. What are you doing to expedite the return to domestic manufacturing?

Yes. Regarding the first question, we are projecting inflation based on current indices, and we expect this trend to continue for the rest of the year. Some may view this as a potentially conservative outlook, but it's challenging to assert such a perspective given the inflation levels we've experienced over the past year. As with any guidance we provide, we include a contingency amount, typically in the $100 million to $150 million range, which aligns with the guidance we just issued. Concerning the situation in China, we are closely monitoring developments from a tactical standpoint. As mentioned in earlier calls, we opened several facilities in North America, including both U.S. and Mexico locations, to handle a lot of the production that was previously sourced from Asia, particularly China. Due to a significant volume increase of approximately 20% in both 2021 and 2020, it has been challenging to reduce Asian production levels. We are exploring additional expansion opportunities in both Mexico and the United States while also speeding up our manufacturing 4.0 automation and digitization initiatives across the supply chain to enhance this process. We believe we can make substantial progress in this transition within the next 18 to 24 months. While we won't completely eliminate risk in that timeframe, we have an accelerated plan based on current revenue projections and the potential for additional revenue growth to make significant headway in mitigating those risks and concerns.

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.

Hi, good morning. I wanted to revisit the topic of volume. You provided some useful insights on price and timing throughout the year, and I was hoping you could elaborate on the volume trends specifically in Tools. I'm curious whether there’s a buffer or cushion related to the uncertainties surrounding pricing and demand. Overall, what does the framework look like, and for the latter half of the year, should we expect volume to remain relatively stable, or are you predicting 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, one or two points in Q3 or Q4 as the supply continues to improve, in particular, in the professional power tools space.

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.

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.

We have been consistently gaining market share over the years. However, during the pandemic, we've seen a slower rate of growth compared to one of our competitors. Currently, we are about the same size in power tools and larger in hand tools and other products. The dynamics of market share this year will be quite intriguing. This competitor accumulated a significant stock of batteries and semiconductors before the pandemic, resulting in several billion dollars' worth of inventory during that time. Much of their business operates on an FOB Asia basis, meaning they report sell-in numbers rather than sellout. Consequently, their supply chain challenges, particularly with Pacific Ocean congestion, also involve their customers facing the burden of these issues. This supply constraint has allowed them to gain market share at a slightly faster pace. Once these issues are resolved, I am confident that our strong distribution channels, product innovations, and increased investments in tools and our outdoor platform will support our market share growth. The upcoming years will be interesting, but we remain committed to gaining share, growing faster than the market, and competing aggressively with our newly focused portfolio.

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.