Stanley Black & Decker, Inc.

Welcome to the second quarter 2023 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 listening 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 Lang. Mr. Lang, you may begin.

Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2023 second quarter webcast. On the webcast, in addition to myself, is Don Allen, President and CEO, Pat Hallinan, EVP and CFO, and joining us for Q&A this morning is Chris Nelson, COO, EVP, and President of Tools and Outdoor. Our earnings release, which was issued earlier this morning, and a supplemental presentation, which we will refer to, are available on the IR section of our website. A replay of this morning's webcast will also be available beginning at 11 a.m. today. This morning, Don and Pat will review our second quarter results and various other matters, followed by a Q&A session. Consistent with prior webcasts, we are going to be sticking with just one question per caller. And as we normally do, we'll be making some forward-looking statements during the call based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate, and as such, they involve risk and uncertainty. It's therefore possible that the actual results may materially differ from any forward-looking statements that we may make today. We direct you to our cautionary statements in the 8K that we filed with our press release and in our most recent 34 Act filing. I'll now turn the call over to our President and CEO, Don Allen.

Thank you, Dennis, and good morning, everyone. Stanley Black & Decker's second quarter performance represented strong execution across the organization, driving significant progress towards our business transformation objectives on multiple fronts. Before I get into the results, I'm extremely pleased to welcome Chris Nelson to our leadership team, and we have him joining us on the call for Q&A today. Chris started in June as our Chief Operating Officer and President of our Tools and Outdoor Business. Chris is an experienced global business leader with strong industry knowledge and a successful track record of implementing growth strategies, which have delivered customer-centric innovation and profitable market share expansion. I am excited to see Chris assume leadership of the tools in outdoor business. He is bringing new energy and perspective, which will further position us for strong execution and faster profitable growth. Welcome, Chris. With this critical appointment, Stanley Black & Decker's senior leadership team is now in place. Together, we will bring our shared vision to life, optimizing the company around our core businesses and strong portfolio of global brands as we execute our strategy to generate sustainable growth and margin expansion. As you will hear from Pat in a few moments, our cost and supply chain optimization program is ahead of plan through the first six months of 2023 and building momentum. The compelling long-term growth opportunities in the markets we serve, combined with the progress we've made transforming our business, including our improved cost position, gives us the confidence to pursue further growth investments in the second half of this year. Deploying these growth investments as part of our $300 to $500 million target over the next three years is intended to accelerate market share gains. As we drive these investment priorities, we are also maintaining our commitment to return value to our shareholders. And to that end, our Board of Directors approved a modest increase to our quarterly cash dividend amounting to 81 cents per share. Shifting now to our second quarter performance, we demonstrated that we are continuing to advance our transformation journey and ahead of the planned program. Specifically, We reduced inventory by nearly $400 million in Q2, which brings our aggregate program-to-date reduction to $1.4 billion since mid-2022. Our global cost reduction program delivered $230 million of pre-tax run rate savings in the quarter, on track for the expected $1 billion of annualized savings by the end of this year. Adjusted gross margin for the quarter was 23.6%. a sequential improvement of 50 basis points, our second consecutive quarter of gross margin expansion. And all of these actions translated into $200 million of free cash flow in Q2. Second quarter revenue was $4.2 billion, which was down versus the prior year due to lower consumer outdoor and DIY volume, as rising interest rates have tempered consumer spending in addition to the negative year-over-year impact of the oil and gas divestiture completed last year. That said, demand remains solid for the professional side of the market, which represents roughly 70% of our tools business. As it relates to the end markets, the U.S. retail point of sale for our tools and outdoor products remained in a growth position this quarter versus 2019 levels, bolstered by price, and healthy pro-demand. Both tools and outdoor POS through the first four weeks of July is growing versus prior year, a potentially positive signal for the back half of 2023. We are also encouraged by a stabilizing residential construction market despite the rising interest rate cycle. U.S. home starts are running at a pace of 1.4 million units in June, a strong signal the demand for housing remains sound. This is complemented by U.S. permits to build single-family homes rising to a one-year high and positive trends in housing completion. Additionally, contractor backlog in the U.S. remains healthy for repair and remodel activity. The European markets are experiencing similar trends with softer DIY markets balanced with a healthier level of construction activity and professionals with backlogs through the end of this year. And then finally, our channel partners continue to be focused on optimizing inventory levels, and we expect that to be a modest headwind throughout 2023. Across our industrial end markets, we are seeing continued strength in global automotive and aerospace. So while the end markets across Stanley Black & Decker remain relatively stable with pockets of strength, we are monitoring the demand environment and continue to plan for a range of outcomes and will respond accordingly if we see current trends shift. Operationally, we continue to be focused on the prioritization of inventory reduction and cash generation. With 2Q adjusted diluted EPS coming in at a loss of 11 cents, which was better than our plan, due to the solid progress we have made on our key financial goals in the first half, we are narrowing our 2023 full-year adjusted diluted EPS guidance to a range of 70 cents up to $1.30, and narrowing our free cash flow range to $600 to $900 million. Pat will provide more color on this later in our presentation. Now let me walk through the details of our business segment performance. Beginning with tools and outdoor, total revenue was $3.5 billion, down 5% organically versus prior year. That's favorable price realization was more than offset by volume declines. We continued to make progress on the tools and outdoor adjusted operating margin, which was 4.5%, up 150 basis points sequentially, driven by benefits from volume leverage and cost control. Versus prior year, our operating margin rate was down as price realization was more than offset by selling through high-cost inventory, planned production curtailment costs, and lower volume. I would now like to provide some more detail on our various tools and outdoor geographies. North America was down mid-single digits organically, weighted by lower consumer outdoor and DIY tool demand, as well as modest customer destocking. Organic revenues were stronger sequentially as we lapped tougher comparables and saw benefits from better order fill rates with our customers while leveraging strength and professional demand. Our European revenue was down 1% organically, with bright spots in the UK and southern regions as they both posted high single-digit organic growth. The emerging markets performance was down 3% organically. However, when you exclude the impact from our Russian business exit, the remaining countries had high single-digit organic growth. This was led by strong demand in Brazil, particularly within the professional channels. Moving to our strategic business unit performance, we experienced an outdoor organic revenue decline of 12%. As widely reported by many in this industry, the challenging start to the outdoor season persisted for the entire season, and we did experience notable softness in POS and replenishment in the quarter, especially surrounding higher price point retail products. The hand tools business was flat organically versus prior year, and overcame softer DIY volume with international growth and certain category strength. Notably, DeWalt's storage solution growth, including the expanded Softline and Tufts System 2.0 portfolio offerings introduced earlier this year. Power tools declined 4% organically as softer consumer market demand persisted and customers remained cautious with inventory levels. This result was notably better than the first quarter as we saw continued pro momentum coupled with positive impacts from a healthier supply chain leading to better service levels and increased promotional opportunities, particularly with DeWalt and Craftsman. Now shifting to our industrial business, which had 3% organic growth in the quarter. The total segment revenue declined 5% versus 2Q 2022 as price realization was more than offset by last year's oil and gas divestiture and currency. We improved adjusted operating margin by 370 basis points versus prior year, including continued price realization and cost actions to deliver adjusted operating margin of 13%. This represents strong execution and a great financial outcome this quarter for our industrial team. Within the segment, engineered fastening organic revenues were up 8%, including aerospace growth of 31% and auto growth of 15% as we captured cyclical rebounds in these markets along with share gains. This favorable performance was partially offset by industrial fastening and attachment tools' organic revenue declines, primarily as a result of customers destocking to optimize their inventory levels. While long-term fundamentals for growth remain solid, We believe temporary channel inventory reductions will continue to impact these industrial businesses in the second half of the year as well. In summary, the team continues to navigate market conditions with several pockets of strength and a few areas of pressure while we continue to improve our margins. I want to thank the entire Stanley Black & Decker organization for your focus on our key priorities. The progress to date is very encouraging and energizing as we take the next several steps of our business transformational journey. Turning to the next slide, I would like to underscore the importance of the strategy that we launched a year ago to transform Stanley Black & Decker to accelerate market share gains and drive consistent organic growth. Our teams around the world are gaining traction and executing on our primary areas of focus. One, 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 end users and various channel customers. Two, accelerating the operations and supply chain transformation to return adjusted gross margins to historical 35% plus levels, while improving fill rates to better match inventory with customer demand. Three, prioritizing cash flow generation and inventory optimization. And four, continuing to advance innovation, electrification, and global market penetration to achieve organic growth of two to three times the market. Our business transformation is our path to continuing to enhance our customer and end user experiences, while delivering on our financial commitments and enabling the pursuit of strategic growth investments behind our iconic brands, innovation engine, electrification, and commercial activations. Key investments and innovation coupled with market activation are being accelerated to maximize the impact of our product launches with our global customers and end users. For example, our fully integrated Craftsman campaign was built to drive traffic to our key retail partners and sent repeat purchases and engage new users. To date, we've shown strong initial results, breaking through the industry clutter. Since the campaign launched in the second quarter, We've driven both online and offline traffic to retail and demonstrated improved tools' point-of-sale run rate versus the prior year to support brand market share growth. We're excited to see continued positive momentum from this exciting Craftsman brand campaign. We are also leveraging the strength of our DeWalt brand with a pro-inspired product roadmap to expand core innovation as we release enhanced product offerings to improve the end-user experience. We recently launched two new DeWalt sealed head ratchets, the 20-volt max XR, as well as the extreme 12-volt max option, delivering power, versatility, and durability. Engineered with the professional in mind, particularly automotive, electrical, and mechanical tradespeople, the innovative design meets the needs of pros across industries on any job site. The new DeWALT 20V MAX XR Brushless Cordless Rivet Tools were also introduced this quarter. Designed for precision fastening and prefabrication, assembly, HVAC, roofing, and automotive applications. These tools have features such as onboard nosepiece storage and a mandrel collector to catch rivets after each shot. Lastly, we introduced a new DeWALT 25-foot LED tape measure. a great example of core innovation within our Tufts Series product line. Our engineering team continues to advance our innovation roadmap with best-in-class products and solutions for our end users as we electrify and enhance safety on the job site, as well as push the bounds of power and performance across our categories. Let me now turn the call over to Pat to share the latest progress updates on our transformation, financial insights on the quarter, and our latest outlook.