Stanley Black & Decker, Inc.

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 Lang. Mr. Lang, 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 Allen, President and CEO, and Corbin Wahlberger, Vice President and Interim CFO, our earnings release, which was issued earlier this morning, and 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 webcasts, we're 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 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 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. 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 and outdoor, as well as our leading industrial business, we continued 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 controls in the back office and the supply chain. These actions generated more than $500 million of free cash flow in the fourth quarter, which supported a corresponding similar amount of reduction in our debt, a key objective of our capital allocation plan in the second half of 2022. Overall, we are making progress and I am confident that our strategy and priorities are positioning the company for a strong, sustainable, long-term growth, cash flow generation, profitability enhancement, and shareholder return. This transformation journey has just started, and significant efforts are still ahead of us. Our success will be dependent on staying agile while maintaining a disciplined approach which ensures we stay focused on our key set of priorities. Our team has seen significant changes over the second half of 2022, and they will lead us through the next phase of the transformation in 2023. I would like to take a moment to thank all of our leaders and employees across the globe and recognize them for their focus, commitment, and hard work, especially over the last 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 and 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 which 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 percent, 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 the 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 the automotive market. We also have powerful secular drivers in tools and 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. 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 and outdoor business. Our 2023 guidance-based 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 in 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 20V 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 inline SDS max chipping hammer and cordless hex breaker 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 tough system solution for storing, charging, and transporting DeWALT 20-volt and flex-volt 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 estimation. 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 innovations. 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 functions. John Lucas joins 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 Wahlberger 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 is nearing completion this quarter, with execution of the plan to follow shortly thereafter. Lastly, we have heightened our focus on manufacturing excellence, reemphasizing SBD Kaizans 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.