Stanley Black & Decker, Inc.

Welcome to the first 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 list-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 2023 First Quarter Webcast. On the webcast, in addition to myself, Don Allen, President and CEO, and Pat Hallinan, Executive Vice President and 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 Pat will review our 2023 first 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 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, they involve risk and uncertainty. It's therefore possible that actual results may materially differ from any forward-looking statements that we might 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 President and CEO, Don Allen.

Thank you, Dennis, and good morning, everyone. Before we begin, I am extremely pleased to have Patrick Hallinan on board and joining our call today as Stanley Black & Decker's newly appointed Chief Financial Officer. Pat brings to the team a deep track record of delivering business performance, growth, and value creation in complex, competitive, consumer-branded businesses. Following my remarks, Pat will take you through the financial highlights as well as our current outlook. Welcome, Pat. Earlier this week, we also announced that Chris Nelson will be joining the company in mid-June as Chief Operating Officer and Executive Vice President and President of Tools and Outdoor. Chris is an experienced global leader with exceptional industry knowledge and existing relationships with many of our customers. His track record of success implementing growth strategies, which have delivered customer-centric innovation and profitable market share expansion, make him the ideal leader for our Tools and Outdoor business. I look forward to partnering with Pat, Chris, and the entire leadership team to streamline and optimize the company around our core businesses and strong portfolio of global brands as we execute our strategy and generate sustainable growth. In terms of our Q1 performance, we continue to build momentum and make strong progress as the organization remains focused on our business transformation plan. We took additional steps forward in the quarter to better serve our customers and deliver for key stakeholders by reducing inventory, leveraging enhanced cost controls, and optimizing our global supply chain, while continuing to increase our investments in innovation and end-user activation. The Global Cost Reduction Program delivered $230 million in pre-tax run rate savings this quarter, which is modestly ahead of plan. Since we launched the program, we've captured a total of $430 million of annualized savings. This is a great start, and we believe we are on track to achieve the expected $1 billion of total program run rate savings by year end. Inventory reduction is also ahead of plan, with an incremental $200 million improvement in the quarter. Even while we strategically build inventory in some categories to prepare for the upcoming outdoor and Father's Day merchandising season, we have now reduced approximately $1 billion of inventory since mid-2022. I am encouraged by our progress thus far, and I am confident that by executing our strategy, we are positioning the company for a strong long-term growth, cash flow generation, profitability, and shareholder returns. Our first quarter revenue of $3.9 billion was in line with Q4 2022. This was down versus prior year as price realization and solid industrial and professional construction demand was more than offset by lower consumer and DIY volume, currency, and the oil and gas business divestiture. Let me now provide some perspective on end market demand. The US 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. The outdoor season had a slow start in March, but April weekly point-of-sale trends have been encouraging. Adjusted gross margin for the quarter was 23.1%, up 360 basis points sequentially, versus Q4 2022. While there still is more work to be done, we are seeing adjusted gross margin improve as destocking impacts moderate. Adjusted EPS for the period was a loss of 41 cents, significantly impacted by our planned prioritization efforts around inventory reduction. We are committed to advancing our business transformation plan and continuing our journey forward with persistent focus on what is within our control. We are monitoring the demand environment and global economic dynamics and planning for a range of outcomes. which balance the potential continuation of the current trends with the possibility of improvement, as well as the prospect of a further demand slowdown. We have planned for all three of these scenarios and will respond accordingly if we see current trends shift. We are reiterating our 2023 full-year adjusted diluted EPS guidance range of $0 to $2, as well as our free cash flow guidance of $500 million to $1 billion. Pat will provide more color on this later in our presentation. As we generate cost savings, we are continuing to make strategic investments in our iconic brands, innovation engines, electrification, and commercialization activation to position the business for sustainable growth and margin expansion. This includes hiring additional engineers focused on product platforming, electrification, and innovation, as well as speed on the street to elevate user activation activities, which will ensure we extend the leadership positions of these iconic brands. Our priorities in 2023 remain unchanged. One, strong focus on cash flow through inventory reduction to assist with ongoing debt deleveraging. Two, sequential improvement in our adjusted gross margin as we drive further supply chain transformation initiatives. Three, get back to gaining market share in all major categories of our tool and outdoor business. Successfully executing these priorities will result in a stronger balance sheet and significantly improved EBITDA in the second half of 2023 as we head into 2024. Now let me walk through the details of our business segment performance. Beginning with tools and outdoor, revenue was $3.3 billion, a decline of 13%, as price realization was more than offset by a decline in volume and a negative impact from currency. Volume was impacted by lower consumer and DIY market demand, modestly reduced channel inventory, and a slow start to the retail outdoor season due to a cold March with temperatures well below the five-year average. Tools and outdoor adjusted operating margin was 3%. down versus the prior year as price realization was more than offset by inflation, higher supply chain costs, production curtailments, and lower volume. North America and Europe were both down 12% organically, as both regions were impacted by the factors covered for the overall segment. Emerging markets were down 2% organically, but excluding the impacts from our Russian business exit, the region had 6% organic growth. This was led by strength in Brazil, China, and the Middle East. Moving to our strategic business unit performance, power tools and hand tools were primarily impacted by softer consumer demand, declining organically 12% and 6% respectively. The outdoor business declined 16% organically, largely impacted by softer consumer demand and the cooler weather. The slow start to the season pressured our outdoor results versus planned by approximately 5 to 6 points. We are monitoring demand to determine if this could potentially be recaptured in 2023, with encouraging POS in recent weeks signaling the season is now ramping up. A key growth area for outdoor is leveraging the 2,500 pro dealers that we acquired with our acquisition. This channel delivered a strong performance in the quarter and was up double digits year over year. Pro products under our Cub Cadet and Hustler brands had a solid start, and we are building traction with our DeWalt cordless handheld products across the dealer network. Now shifting to our industrial business, which had 3% organic growth in the quarter with double-digit operating margin. Total segment revenue declined 5% versus 2022, as price realization was more than offset by last year's oil and gas divestiture, currency, and volume. The team leveraged price realization and productivity to deliver adjusted operating margin of 11%, up 410 basis points versus the prior year. Within the segment, engineered fastening organic revenues were up 3%, led by aerospace growth of 30% and auto growth of 7%, offset by softer industrial markets. Attachment tools organic revenue were up 5%, driven by strategic pricing actions and continued conversion of this business's significant backlog. In summary, this was a job well done across the board by our team. We continued to reduce inventory and drove improved gross margins in a mixed revenue environment. My thanks to the entire team as we maintained our focus on the right areas, and we are seeing the results of our efforts. On the next slide, I would like to review our long-term strategy that we launched last July as we transformed Stanley Black & Decker to drive consistent organic growth at accelerated levels well above market 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 customers and end users. 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 remains on track to deliver on these financial commitments as we strive to elevate our customer and end-user experiences to world-class levels. The streamlining of our company and the supply chain initiatives are tracking to expectations and continuing to gain momentum. The four value creation streams within our supply chain transformation strategy are advancing with meaningful strides forward and $110 million of savings achieved in the first quarter. Our global team is activating against our strategy with speed. The energy and passion is evident, and I'd like to extend my sincere thanks to our operations associates across the globe. We have made so much progress in the last nine months, and every completed milestone is contributing to our shared vision for the supply chain of the future. Now a few updates in this particular area. Within the SKU rationalization and product platforming value stream, we have approved the reduction of 60,000 SKUs across the portfolio, of which 16,000 are now decommissioned. The remaining balance is no longer being manufactured, and we are working with our customers to transition to new SKUs in the coming quarters. Strategic sourcing has been a strong contributor to savings as we complete the $2 billion first tranche of spend assessment. We are on track to achieve the targeted savings. Our supply base will include both existing and new vendors, with a deliberate intent to improve geographic diversification and consolidation. Our dedicated team is capturing cost savings while deploying new processes to ensure sourcing changes are executed successfully. Our initial announcements related to the manufacturing footprint optimization were made in March, which includes site expansions, transformations into manufacturing centers of excellence, as well as site consolidation. We are on track with our expectations and are taking a holistic approach to our manufacturing base and logistics network to ensure we optimize the efficiency and utilization of our asset base. Finally, we are increasing our focus on manufacturing excellence and reemphasizing the SBD operating model along with lean manufacturing practices at our factories. We deployed this playbook at four plants in the first quarter, and in March we kicked off at nine additional sites. We are seeing strong traction and are capturing improved productivity efficiencies where these tools were activated. We are excited with the progress, and you can expect us to continue to make strides in the coming months and quarters. Turning to SG&A, we captured approximately $120 million of savings this quarter and are on pace for $500 million of pre-tax savings by the end of the year from simplifying the corporate structure, streamlining leadership spans of control and organizational layers, and reducing indirect spend. We are confident in our ability to capture $1 billion of run rate savings by the end of 2023 and $2 billion of annualized savings by 2025 from this program. A key tenet of our strategy is the acceleration of investment in innovation and electrification. We are making deliberate strategic investments to maintain our market-leading innovation ecosystem. A couple highlights from this year's outdoor season. In terms of delivering innovative cordless products, the Craftsman 20-volt lineup is designed for extended runtime and better performance. This includes the new brushless string trimmer that is lighter weight than its gas-powered equivalent and carries more runtime and force than prior generations. The new cordless pressure washer also joins this lineup, in addition to the range of other new 20-volt cordless lawn and garden tools. Continuing to expand our 20-volt system is enabling users to go wherever the work is without the limitation of cords or gas engines. These items are currently available for this season, and we are excited about the initial market reception. Additionally, we just received notice that we won eight 2023 Popular Mechanics Yard and Garden Best New Product Awards across DeWalt, Craftsman, and Black & Decker. In addition to the Craftsman offerings just highlighted, The DeWalt Pruning Saw and String Trimmer were awarded as Best for Contractors, and the Black & Decker Pruning Chainsaw was named Best for Light Duty Use. This is a great recognition of the quality of the innovation we bring to the market and our ability to serve our entire user base from the consumer to the most demanding pro. Let me now turn the call over to Pat for some further financial highlights on the quarter and our latest outlook.