Stanley Black & Decker, Inc. Q4 FY2022 Earnings Call

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 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 seven to eight 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 growth in the Industrial segment, and a 7% improvement in price realization. However, these top line growth drivers were partially muted by significant retractions in consumer and DIY demand, as well as certain supply chain constraints we experienced in early 2022. Our margins were significantly impacted by inflation, and when we chose to prioritize inventory reductions by lowering manufacturing production levels in the last four to five months of 2022, this was to allow us to generate solid free cash flow as we experienced in the fourth quarter. These negative profitability impacts resulted in a full year adjusted diluted earnings per share being down year-over-year to $4.62. For the fourth quarter, revenues were in line with the prior year at $4 billion. Demand from our professional end markets remained healthy. With our differentiated offerings and improved product availability, we successfully executed our promotional plans in support of the holiday season for our retail partners. Adjusted EPS for the period was a loss of $0.10, a result of our planned prioritization efforts around inventory reduction and cash generation. Notably, we lowered inventory by $500 million as compared to the end of the third quarter. We entered 2023 prepared to navigate a challenging macroeconomic backdrop as interest rate hikes begin to yield their intended effects. That said, we are committed to advancing our transformation. While there is more work to be done, we have a clear roadmap forward. We are watching the demand environment and global economic dynamics very closely. Although current demand remains consistent with levels experienced in the back half of last year, we are planning for all scenarios that balance the potential continuation of the current trends with the prospect of a further demand slowdown due to intensifying macro pressures. While changes in demand are difficult to predict, our base case or midpoint of guidance assumes a decline in volume versus 2022 as we believe markets will continue to be challenged during 2023 as new housing starts are projected to decline 15% to 25% and repair and remodel activity will decline modestly year-over-year. We are also prepared to respond if revenue impacts are worse or better than our base case to ensure we appropriately manage the risks and opportunities that could arise. This guidance will have a P&L loss in the front half, which is impacted by our strategic choice to continue to reduce our inventory levels. For the full year, we are guiding an adjusted EPS range of zero up to $2. Our free cash flow guidance is much stronger at $500 million up to $1 billion in 2023, well ahead of net income as we drive another $750 million up to $1 billion of inventory reduction during the year. As you have heard me say many times over the past year, we believe the long-term view for the industries which our products serve is very positive with powerful generational shifts in housing, more time at home due to hybrid work, an aging housing stock that needs repair and remodel, the continued improvement in aerospace demand, and the acceleration of electrification within automotive markets. We also have powerful secular drivers in Tools & Outdoor from the shift to cordless power tools and electric powered outdoor equipment as we leverage our brands and innovation to gain market share. Our priorities in 2023 will continue to be aligned with our messaging over the last six months: one, strong focus on cash flow through inventory reduction to assist with ongoing debt deleveraging; two, sequential improvement in our gross margins as we drive further supply chain transformation initiatives; and three, get back to gaining market share in all major categories of our Tools & Outdoor business. Our 2023 guidance base case is planning for an improved profitability performance in the back half of the year as we see more benefits from the transformation program. We believe our annualized EBITDA will achieve a run rate of close to $1.5 billion in the back half. That will be a major step forward in returning our company back to 2019 EBITDA levels, which were just above $2 billion. Given the significant benefits expected to be realized beyond 2023 from our supply chain transformation program, there appears to be a very reasonable glide path to exceed 2019 levels for EBITDA. Our teams around the world remain focused on executing our primary areas of long-term strategic focus, continuing to advance innovation, electrification, and global market penetration to achieve organic growth of two to three times the market growth, streamlining and simplifying the organization, as well as shifting resources to prioritize investments that we believe have a positive and more direct impact for our customers and end users; accelerating the operations and supply chain transformation to return gross margins to historical 35% plus levels while improving fill rates to better match inventory with customer demand; and then prioritizing cash flow generation and inventory optimization. We are making deliberate strategic investments in our businesses to position the company to fully capitalize on these long-term opportunities to gain share within the industries that we serve and to accelerate our organic growth. With that in mind, last year, we invested approximately $350 million in research and development, up over 25% versus 2021 and well ahead of our total sales growth. This increase in R&D will ensure we continue to fund incremental investments beyond our core and breakthrough innovation, electrification across the portfolio, and market leadership, including digital and end user activation. This is an area where we have a long legacy of key investments to maintain our market-leading innovation ecosystem. We clearly took another step forward in 2022, and we will again in 2023. Our business transformation remains on track, and we are building momentum towards delivering approximately $1 billion in annualized savings by the end of 2023. That will support both gross and operating margin expansion once our inventory destock is complete. Let's spend some time on the topic of innovation. We are continuing to release new products and bring advancements and innovation to our industries. Today, I will highlight a few exciting launches. As it relates to outdoor electrification, we are introducing new CRAFTSMAN and DEWALT outdoor offerings. For the 2023 season, CRAFTSMAN will carry a new range of lithium-ion electric ride-on mowers and an expansion of our 20-volt CRAFTSMAN Outdoor Essentials, notably new brushless string trimmers and blowers as well as a new cordless pressure washer. For the PRO, we are continuing to expand the DEWALT FLEXVOLT 20-volt MAX system, including the addition of a new pruning chainsaw that is lightweight and compact with an 8-inch bar and a high-efficiency brushless motor. Shifting to professional job site products and solutions, this is another key area for long-term growth. We recently debuted a range of revolutionary tools, accessories, and storage solutions for pros in the commercial concrete and construction industries as we continue to electrify the job site. We are expanding the FLEXVOLT product family with the launch of the world's first cordless in-line SCS MAX Chipping Hammer and Cordless Hexbreaker Hammer. We are also introducing the most powerful cordless DEWALT large angle grinder. All three of these new cordless tools include Perform and Protect safety features as well. Additionally, we have a new DEWALT ToughSystem Solution for storing, charging, and transporting DEWALT 20-volt and FLEXVOLT batteries. And lastly, our DEWALT product team partnered with CONVERGE, a leading concrete material and operations optimization company, to develop and unveil new concrete DNA compatible sensors. This new product allows DEWALT pros to begin work sooner as users can directly measure concrete hardening using advanced artificial intelligence rather than relying on estimations. In addition, this product helps reduce cement consumption by tailoring the exact amount needed. Together with CONVERGE, we are helping to tackle the challenge of reducing carbon emissions through our product innovation. As the worldwide leader in tools and outdoor, these are prime examples of the types of core and breakthrough innovations that we expect to continue to introduce to our customers and deliver for our end users. Now, diving a bit deeper into our business transformation. The team has made great progress. We realized $200 million of savings in the second half of 2022 from efficiency benefits, including our organizational changes, as well as indirect cost savings. We expect to deliver cumulative SG&A savings of $500 million by the end of 2023, covering simplification of the corporate structure, streamlined leadership spans of controls and organizational layers and the reduction of indirect spend. Our new organizational structure is now in place, and the teams are activating our priorities. As you saw in our recent announcements, we have brought on two new business leaders who are critical for our transformation. Patrick Hallinan was named our incoming Chief Financial Officer. Patrick is a seasoned executive who has led global high-performing finance functions across top consumer brands. Patrick joins us in April from Fortune Brands Innovations, where he currently serves as their CFO, and is the ideal candidate for the next leader of our finance function. John Lucas joined us as our new CHRO and brings a highly distinguished track record with world-class experience in organizational and human capital management. John will be instrumental to enabling our culture and values and to the long-term success of our business. I want to thank Corbin Walburger and Deborah Wintner for their leadership and significant contributions during this critical transformation period for the company. I look forward to continuing to work with them as key Stanley Black & Decker leaders. Turning to our supply chain transformation. We have line of sight to deliver cumulative savings of $500 million by the end of 2023 and $1.5 billion by 2025. Building off the momentum from last quarter, we activated our transformation with a sense of urgency to optimize our operations, which better serve our customers while also being efficient and agile with our footprint and cost structure. After approving and initiating action on our SKU reductions, we now have approximately 50,000 SKUs that we are no longer manufacturing and are approved for decommission. Throughout 2023, we will work to transition our customers to the products that deliver the most value for our end users. As we shared last quarter, the strategic sourcing team activated quick wins. We are pleased to share that this early traction has already generated $40 million in savings. Wave one is now fully activated and addresses approximately $2 billion of spend, which is covered by 20 RFPs that are due back this quarter. We also successfully advanced our facility optimization and distribution network planning. The detailed feasibility analysis nearing completion this quarter, with execution of the plan to follow shortly thereafter. Lastly, we have heightened our focus on manufacturing excellence, reemphasizing SBD Kaizen and Lean manufacturing practices at our factories. Activation at four plants will be complete this quarter. And in March, we will initiate the next wave. We have exited the acute phase of pandemic-driven supply constraints. And as such, refocusing our plans on continuous improvement rigor will enable the acceleration of value across the network. You can expect us to continue to take strides forward, and we will provide you with updates towards achieving our cumulative $1 billion of savings by the end of 2023 on our path to delivering total program savings of $2 billion by 2025. I will now pass it to Corbin, who will take you through more detailed commentary on the fourth quarter and full-year performance as well as our 2023 guidance.

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% organically due to weakness in consumer and DIY and front half constraints related to electronic components. These volume impacts were partially offset by the benefits of our price increases and the continued performance of our strong DEWALT cordless innovation across our FLEXVOLT, ATOMIC, and XTREME product families as well as our new and differentiated power stack battery packs. Hand tools declined 5% organically in the year. Consumer-related headwinds were partially offset by price realization as well as new product innovation, notably the DEWALT Impact Connect, which consists of accessories that attach to an impact driver, allowing up faster cutting than standard hand tools. We also benefited from innovation in storage solutions such as mobile tool storage within the DEWALT Tough system and the CRAFTSMAN Premium S2000 metal storage platform. The Outdoor business declined 7% organically on a pro forma basis for 2022 due to the difficult outdoor season outlined earlier in the year. The fourth quarter marked the one-year anniversary of the MTD and Excel acquisitions, and we're pleased with the progress made to advance the outdoor platform integration. We now have a combined dealer channel sales team and launched one go-to-market approach to grow share. We've activated a brand portfolio strategy, leveraging DEWALT, Cub Cadet, and Hustler in the Pro and high-end residential market segment while targeting CRAFTSMAN, Troy-Bilt, WolfGarden, and Black & Decker for the residential end user. I want to acknowledge and thank the entire team for their dedication to this process and ongoing commitment to delivering the best products for our customers. Now, shifting to Industrial, which had another strong quarter, recording 10% organic growth and double-digit adjusted operating margin. Segment revenue declined 1% versus last year as nine points of price realization and one point of volume were offset by five points from currency and six points from the oil and gas divestiture. The team leveraged the price increases and volume growth to overcome commodity inflation and higher supply chain costs to deliver adjusted operating margin of 11.5%, up sequentially 40 basis points and up 220 basis points versus last year. Looking within the segment, Engineered Fastening organic revenues were up 9% in the quarter, led by aerospace growth of 37% and auto growth of 14%, which were partially offset by industrial markets. Aerospace fasteners delivered its sixth consecutive quarter of sequential revenue improvement as the recovery in commercial OEM production continues. The auto fasteners’ strong quarter demonstrated by the business' ability to gain share in a dynamic environment and outpaced global light vehicle production in the quarter and for the full year. Attachment tools organic revenues were up 18%, driven by strategic pricing actions. While orders particularly from our dealer channel partners have been moderating, our backlog remains above 2019 levels. We continue to make progress with our inventory reduction in the fourth quarter, taking out nearly $500 million and resulting in a total second half inventory reduction of $775 million. Our production curtailment actions have been successful, helping to reduce days sales of inventory by approximately 20 days in the quarter and it was good to see the significant inventory reduction in the second half translate into free cash flow generation in the fourth quarter. As we look to the front half of 2023, we are targeting another $500 million reduction with the majority of this progress to be made in the second quarter. Although we typically see a seasonal inventory build as we prepare for the outdoor and spring selling season, we have the ability to work down our input materials and components as well as drive commercial actions to sell through finished goods. Our full year 2023 inventory reduction target is $750 million to $1 billion, which will drive significant cash flow generation that will be used to pay down debt and further strengthen our balance sheet. The timing of this reduction is demand-dependent. In a few moments, I’ll cover how these assumptions impact the 2023 guidance range. Turning to gross margins. We expect the impact of planned production curtailments and higher-cost inventory liquidations will continue to weigh on margins through the first half of 2023, resulting in margins in the low 20s. Production curtailments in the fourth quarter were down approximately 30% versus the long-term average and impacted gross margins by approximately six to seven points in the quarter. In our base case, we expect to improve from these levels but not fully ease production curtailments until the third quarter of 2023, which should support a gross margin recovery into the mid to high 20s in the back half. The normalized production and better gross margins could potentially shift earlier or later in the year depending on the overall demand environment and the speed of destocking. We have the teams focused on inventory reduction, cash generation, and balance sheet health as we work to drive gross margins to our historical 35% plus target level in 2025. I’ll now walk through how the company is planning for three demand scenarios for our 2023 guidance as the macroeconomic outlook remains dynamic. Our base case scenario assumes a modestly unfavorable market demand environment, compared to what we experienced during the second half of last year. In this scenario, we are assuming total organic growth to be down low single digits with the first quarter being the toughest comp. Tools & Outdoor total organic revenue, inclusive of positive price, is expected to be down low single digits, while Industrial is planned for low single-digit growth. Specifically, for Tools & Outdoor, this would imply a full year volume decline of approximately 5%, ahead of our forecast for the market. For the second half, volume is expected to be down 3% to 3.5%. In this base case, we would maintain our production curtailments with the goal of returning to normalized levels in the third quarter. As a result, the under absorption of fixed manufacturing costs would continue to constrain first half 2023 operating margins to low single digits. As production returns to normalized levels in the back half of the year, we expect operating margin rate to improve to the mid to high single-digit range. While our teams are aggressively focused on capturing deflation, this scenario does not include moderating commodity prices benefiting the P&L until late 2023 after the destock, and can be a positive driver heading into 2024. As we monitor the demand environment, we will be measured in the timing and magnitude of our investments, reinvesting into our businesses at the point of impact as part of our transformation strategy, and our base case scenario includes approximately $125 million of annualized reinvestment targeted at commercial leadership, driving innovation, and complexity reduction. Shifting to our second half acceleration scenario, this contemplates the possibility of a stronger demand environment supporting organic growth in the second half of 2023. Total organic growth would be relatively flat for the year. To support the improved second half demand, production levels would normalize towards the end of the second quarter. This scenario would position us to deliver high single-digit operating margins in the second half as well as an elevated level of reinvestment to accelerate our transformation. Lastly, we are preparing a downside case that reflects a deceleration of demand due to elevated recessionary pressures. In this case, we expect full year organic revenues to decline by mid-single digits with volume declines in both the tools and outdoor and industrial segments. If this were to occur, our production curtailments would likely continue through the end of 2023, extending the timeline of our gross margin recovery. Under this scenario, we would opt to conservatively meter the level of reinvestment until we had more clarity on the extent and duration of the macro impacts and economic cycle. Overall, we feel it's prudent to consider this range of potential 2023 demand possibilities, production, and reinvestment levels as we continue to prioritize inventory reduction and cash generation. As such, we are guiding full year adjusted earnings per share in the range of zero to $2. On a GAAP basis, we expect the earnings per share range to be negative $1.65 to positive $0.85, inclusive of one-time charges from the global supply chain optimization and the remaining outdoor integration-related expenses. The current pre-tax estimate for one-time charges is approximately $225 million to $325 million with $50 million to $100 million in non-cash charges. Now some added quarterly context from our base case. For the first quarter, we're expecting similar levels of operating profit to what we delivered in the fourth quarter. However, we do not expect the discrete tax benefits to repeat, resulting in a first quarter adjusted loss of $0.75 per share at the midpoint. We believe profitability can improve sequentially into the second quarter, resulting in a stronger performance. In total, we expect our actions to translate to positive first half free cash flow driven by $500 million of inventory reduction, most of which will come in the second quarter. As we get through the first half destock, we expect earnings to inflect positively in the second half of the year, generating an annualized EBITDA run rate of approximately $1.3 billion to $1.7 billion. We view this as a jumping-off point to further improve with our transformation. Our guidance calls for $500 million to $1 billion of free cash flow in 2023, primarily from inventory reduction. We're focused on our key priorities; number one, generate strong cash flow through inventory reduction to assist with ongoing debt deleveraging; number two, sequential improvement in our gross margins as we drive further supply chain transformation initiatives; and number three, focus on gaining market share in all major categories. We're planning for the dynamic operating environment to continue and feel we have the strategy in place to successfully navigate our path forward as we remain focused on driving above market long-term organic growth. With that, I will now turn the call back over to Don.

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. Our first question comes from Julian Mitchell with Barclays. Your line is now open.

Hi, good morning.

Good morning.

I have two quick questions. First, it seems like you're expecting positive pricing in Tools this year, but given the significant inventory out there with customers and competitors, what gives you confidence in that? Second, regarding the annualized EBITDA run rate, are we still anticipating an EPS potential of around $7 or more at Stanley in the medium term, or has that perspective shifted?

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. Probably about a week to two weeks down from those levels, which is a good place to be. We feel like we've gone into the year with the adequate amount of inventory in their stores. 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 figure come to mind. As you begin to analyze the guidance we're offering at the midpoint, it's clear that the second half is trending towards a couple of dollars EPS for this year. When annualized and considering the seasonality from the outdoor season primarily occurring in the first half of the year, you can expect something closer to $5 for 2024. This is based on the environment we've outlined, which is relatively muted in terms of volume. As mentioned by Corbin in his presentation, the second half anticipates that the Tools & Outdoor business will see organic performance decline by about three points. This reflects a continuation of current consumer trends but also suggests some slowdown on the professional side due to lower housing starts and repair and remodel figures compared to last year, leading us to project a negative organic performance in our base case. However, if performance exceeds our expectations, as Corbin indicated, it could be two to three points better for the year, leading to an improved performance in the second half. If this occurs and we carry that momentum into 2024, there is a possibility of returning closer to the $7 mark. For now, we estimate around $5, with the potential for it to be higher if volume and demand surpass our base case. Corbin, would you like to add anything?

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.

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, within the scenarios that you've outlined, what are you assuming that the Pro does as you work through 2023?

As we begin 2023, with just one month behind us, we are not observing any slowdown in the Pro business, which remains strong. Our customers reflect this sentiment. However, our forecasts indicate a potential decrease in some activity. Looking at our organic projections for the Tools & Outdoor segment, we anticipate a slowdown as the year progresses, continuing modestly in the latter half. This expectation aligns with factors such as housing starts, customer forecasts, and insights from industry peers, who generally believe the market may decline by about 3% to 5%. This aligns with our Tools & Outdoor outlook and mirrors construction trends. While this serves as a solid baseline assumption, the situation could improve if the Pro sector remains robust, or it could worsen, which is covered by our downside scenarios as Corbin explained in his presentation.

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.

On the inventory question, I believe aiming for a range between $750 million and $1 billion is a reasonable target based on our current business model and supply chain. It's possible we could exceed $1 billion over the next year, but not by a large margin. Moving into 2024, I don’t anticipate needing another significant inventory reduction. If things progress positively in 2023, we expect to reduce a substantial amount of inventory in the first half of the year, particularly in the second quarter, and again in the fourth quarter as part of our regular operations. After that, the focus will shift to managing and optimizing our supply chain to enhance efficiency. We’ll continue to reduce inventory, but it won’t affect our production levels; rather, it will involve improving how we handle certain activities to achieve annual reductions of $250 million to $500 million for the next couple of years. Our goal is to return production levels to normal in the latter half of 2023, which we believe is achievable based on our current outlook. We will monitor this closely. Of course, if demand declines significantly, production may need to remain lower for the rest of the year. However, in our baseline scenario, there's a good chance we can get back to normal production levels by summer 2023. Regarding the dividend, it remains a crucial part of our capital allocation strategy. We view maintaining the current dividend level as essential. We'll reevaluate this throughout the year, but our strategy remains unchanged for now. Given our balance sheet leverage, stock buybacks are not an option, so our primary way to return value to shareholders is through the dividend.

I apologize for that. Thank you for taking my question. I wanted to clarify my understanding of the base case, particularly regarding the repair and remodel activity, which I think you mentioned is projected to be down by low single digits. I want to confirm if that’s correct. Currently, existing home sales are trending down 30% year-over-year, which seems a bit optimistic from our perspective. Could you explain the assumptions behind that? Additionally, if I could shift to the modeling side, I would appreciate any insights on guidance for other line items such as corporate expense, interest expense, and other net items. Thank you.

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%. 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 the 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 haven'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. 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%.

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. 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. 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, Chris. The average gross margins in the second half of 2022 were around 22%. We experienced approximately a four-point penalty due to production cutbacks and the liquidation of high-cost inventory. As we progress through 2023, this penalty is expected to decrease to about 3.5 points and then to 2.5 points by year-end. We don’t anticipate production cutbacks to persist throughout the entire year, which will be beneficial. Additionally, as we move through the liquidation of high-cost inventory, that will also aid us. By the end of the year, on an incurred basis, we expect to see margins slightly above 25%, though there will still be a minor penalty that brings us into the high 20s.

Thank you very much. I was curious about your plans regarding inventory in various scenarios, particularly how these scenarios might impact production. It appears you are not considering altering your target for a $750 million to $1 billion reduction in inventory. Why not consider reducing inventory even further? Is there something within the supply chain that is influencing the decision to maintain a higher inventory level than historically? What is the overall reasoning behind not pursuing a greater reduction in inventory?

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. 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. 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 correlates well with the EPS range, which correlates well to the demand associated with those three different scenarios.

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. 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.

For 2024 and 2025, we believe we will achieve $1 billion in value creation by the end of 2023. An additional $1 billion is expected from our supply chain transformation over the next two years. Our operations and business teams have developed a detailed plan for this $1 billion, which we believe is well-defined. We anticipate that approximately $500 million of this will be realized in each year. We will evaluate as we progress through 2023 whether more value materializes in 2024 or 2025. Given the significant transformation we are undertaking across our supply chain, we need to be strategic about the timing of different phases to avoid major disruptions for our customers, which is why this will take three years. Consequently, we expect the value to be distributed relatively evenly over that period.

Good morning. Thanks. Curious on, Don, you talked about 2024 of $5 to $7 in rough frame. 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?

I would say there are a few factors at play. Firstly, volume remains a challenge, and we expect this to continue throughout 2023. I've mentioned my predictions for the Pro market in 2023, anticipating a mild recession in line with historical trends for Stanley Black & Decker, projected to be a decline of 3% to 5%. This is certainly a key consideration. Additionally, we've opted to expedite our inventory reduction efforts more than we had originally planned three to five months ago. We initially intended to approach this more gradually, but now we're being more proactive. Our goal is to complete a significant portion of this by mid-2023 to normalize production levels in the latter half of the year. These are the main factors contributing to the shift in timing.

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.