Stanley Black & Decker, Inc.

Welcome to the fourth quarter and fiscal year 2021 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 emailing 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 Vice President of Investor Relations, Dennis Lang. Mr. Lang, you may begin. Thank you.

Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2021 Fourth Quarter and Full Year Conference Call. On the call, in addition to myself, is Jim Lurie, CEO, Don Allen, President and CFO, and 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 2021 fourth quarter and full year results and various other matters, followed by a Q&A session. Consistent with prior calls, 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 might make today. We direct you to the 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 CEO, Jim Lewis.

Good morning, and thank you, Dennis. As you saw from our press release, we delivered a record year in 21 for revenue, organic growth, and EPS. We benefited from extraordinarily strong customer demand, which continues for our innovative products and portfolio of brands, both of which underpin and support our position as the world's number one tool company. I want to thank our colleagues across the globe for their unwavering commitment to serve our customers with the highest quality products, as well as for their outstanding effort in helping to deliver this record-setting performance amidst the confluence of COVID-era challenges. related to supply chain, inflation, other external factors. And during the year, we took several significant strategic actions to optimize our business portfolio, completing two outdoor power equipment acquisitions, adding $3 billion of revenue, as well as the announced divestiture of our electronic security business for 16 times EBITDA, sharpening our focus on tools, outdoor, and industrials. These transactions are reshaping our portfolio into a faster growing, more profitable one with lots of runway to both support and benefit from the ESG movement as well. This portfolio will also benefit from important societal trends, including household formation, increased consumer nesting with focus on the home and garden, electrification, and infrastructure investment. In addition, This month, we plan to begin the return of $4 billion of capital to our shareholders through our previously announced share repurchase program, including as much as $2 to $2.5 billion in the first quarter of 2022. We believe these transactions, the acquisitions, the divestiture, and our substantial repurchase will result in significant value creation for investors in the short, medium, and long term. To summarize our 2021 performance, our revenues were $15.6 billion, up 20%, driven by a record 17% organic growth, with all businesses contributing. Our total company operating margin rate for the year was 13.9%, down versus prior year due to the growing cost inflation and supply chain challenges that emerged as the year progressed, as we chose to take the necessary steps to deliver for our customers. We see this core margin rate as a temporary trough, given that we expect our continued 2021-2022 pricing actions will be sufficient to fully offset the $1.4 billion of cost growth associated with inflation and increased cost to serve during this same two-year time period. Full-year 2021 adjusted EPS was $10.48, a 30% increase versus 2020. And for the year ahead, we have a proactive plan and approach that is focused on execution, growth, margin improvement, and strong cash flow. Our teams are focused on leveraging our operating model and execution principles that have allowed us to deliver consistent, strong revenue and EPS growth over many years, including in 2021. Although we were pleased with the total year revenue and EPS performance, the fourth quarter was challenging with supply chain and inflationary impacts which impacted working capital. We strategically prioritized building additional inventory in 2021 to capture the strong demand. And in addition, we experienced the impacts from the clogged supply chain, which intensified as the year progressed as component shortages, shipping delays, and inflation drove inventory levels even higher. Accordingly, free cash flow for the year was 144 million, which reflects a $1.8 billion increase in inventory. Suffice it to say, this working capital increase was higher than anticipated, a necessary but partially temporary investment, which will reverse by at least $500 million this year, converting working capital back to a cash generator during the year. Our team has a long history of driving working capital turns improvement and asset efficiency with our SBD operating model. We have comprehensive enterprise-wide plans in place to ensure we serve our customers while also delivering strong cash flow in 2022 and beyond. Looking specifically at the fourth quarter, revenue was up 2% to $4.1 billion with five points of price, six points from acquisitions. Volume was down 8% due to promotional shipment timing in 2020 and was impacted by logistical supply chain challenges as well. Overall, we remain confident in our multi-year growth and margin expansion plans. There are several positive secular demand trends that are benefiting our businesses. We remain bullish on construction, DIY, as well as gradual recoveries in the automotive and aerospace OEM markets. We've developed an array of growth catalysts, including product innovation, e-commerce, and electrification to position our businesses to capture this opportunity. And we are continuing to focus on innovation, manufacturing automation, capacity expansion, and our logistics capabilities to meet the elevated demand in the near term and support strong, sustainable growth over the medium and long term. In this regard, we believe that we are well positioned in 2022 with a target of 7% to 8% organic growth, total revenue growth aggregating over $4 billion, adjusted EPS growth of 15% to 19%, and $2 billion of free cash flow. As noted, our tools and outdoor businesses enjoyed high demand levels across our global markets and channels. And as we think about some of the causal factors in North America, many of the traditional drivers of housing and repair-remodel activity are trending in a positive direction. Household formation, driven by millennial first-time home purchasers, as well as the urban exodus, supports strong housing demand. and the low levels of existing housing inventory will continue to be a catalyst for new residential construction. Home prices have appreciated, building home equity, which generally supports home reinvestment growth through repair and remodel activity. In recent years, the consumer mindset and behavior patterns regarding home and garden have shifted as more time is spent in these environments. Home base, for many, has grown in importance, serving multiple purposes, including as a sanctuary. as a locus for increased indoor-outdoor activities and as a workspace for more permanent, remote, and hybrid workers. These behavioral shifts are driving robust project activity for both contractors and DIYers, not only in the U.S., but globally as well. Leading indicators for non-resi construction such as ABI and Dodge rebounded during much of 2021 and have remained positive as construction activity has continued to recover. Industrial production is returning to pre-pandemic levels as manufacturers look to replenish their supply chains. The growth momentum that we built in 2021 in our industrial fastener and attachment tools businesses is expected to continue in 2022, and we expect to benefit from the recently signed $1.2 trillion U.S. infrastructure bill as well. And lastly, we are cautiously optimistic that the cyclical recovery in auto and aero will begin to emerge in 2022, a $300 to $400 million multi-year revenue growth opportunity for industrial. And so while there's much to be excited about within our core markets, we will carefully watch for any impacts from a higher interest rate environment or changes in the elasticity of demand following price increases and react accordingly if things change. To keep our market and brand vitality fresh, we continue to invest selectively in growth catalysts, including innovation, e-commerce, and electrification. These will position us for sustained share gains in the future. These catalysts capitalize on key global trends, many of which are expected to continue in the coming years. Across the board, we have competitive strategic differentiators that make us the world's leading tool company, Our iconic brands, DeWalt, Craftsman, Stanley, Stanley Fat Max, and Black & Decker, our category depth, channel development, and operations excellence are coupled with a track record and commitment to market-leading innovation. Our new PowerStack battery system, launched in December, is enjoying an excellent market reception and has the potential for several hundred million dollars of organic growth in 2022. Popular Science called it, quote, the best cordless power tool battery ever. we've ever used, end of quote. With our sharpened focus and increased innovation investments, our product development plans are robust as we look to nearly double the number of professional power tool products we offer over the next three years. The rapid acceleration and the shift of demand to e-commerce has continued, and we believe that we have at least twice the revenue in this channel as our next closest competitor. In 2021, we continue to enjoy Strong double-digit growth in e-commerce, and it now represents a $2.5 billion channel for us globally, and it's approaching 20% of our tool business revenue. The increased societal focus on ESG and climate and what that means for electrification presents a very attractive multi-year opportunity for outdoor power equipment. Our existing business grew almost 40% in 2021 as we continued to drive the conversion of handheld units and push mowers to cordless electrics. With the addition of MTD and Accel in late 2021, we have assembled a $4 billion outdoor power franchise, which will lead the conversion of larger equipment such as riders and zero turns to electric and autonomous as well. We have the ability to capitalize on the electrification of automotive as well through engineered faceting. This move from internal combustion to plug-in hybrid and EV platforms ultimately results in a three to six times increase and Stanley Black & Decker dollar content per vehicle produced by OEMs. We are also focused on the other growth and revenue synergy opportunities in outdoor, such as global channel expansion and brand development. We have a compelling opportunity to serve the professional customer segment by developing gas and electric offerings under the DeWalt brand, among others. We now have access to more than 2,500 independent equipment dealers across the U.S. that carry leading-edge higher margin products which serve the professional user. This dealer channel opportunity is compelling as it is sized similarly to the retail channel but comes with historically higher profitability. Finally, we have an opportunity in the $4 billion high margin parts and service segment as we build our presence, serve our customers. I'm excited to share that we are updating our expectations for 2022 EPS contribution from these outdoor acquisitions. MTD had a strong finish in 2021 and was able to outperform our initial plan for both revenue and margin. They also remain on track with their margin improvement trajectory as they did a nice job in 2021 implementing price actions to counter inflation and are continuing to do that in 2022. With a higher 21 base and improved forward outlook, we now expect our outdoor acquisitions to contribute 85 cents of EPS in 2022. This represents a 20-cent improvement and a 60-cent year-over-year tailwind for EPS growth. As I sum up my section today, I am excited by the portfolio changes we effected in 2021. The establishment of a high-potential outdoor platform, the security business divestiture, and a commitment to repurchase $4 billion in 2022 all set the stage for value creation this year and beyond. With that, I will turn it over to Don Allen, who will provide some additional insights. Don?