Q1 2022 Stanley Black & Decker Inc Earnings Call
Okay.
Welcome to the first quarter of 2020 to Stanley Black <unk> Decker, Inc. Earnings Conference call. My name is Shannon.
For today's call.
At this time all participants are in a listen only mode.
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A question and answer session.
Please note that this conference is being recorded.
Now I'll turn the call over to the Vice President of Investor Relations Dennis Lange, Mr. Lang you may begin.
Thank you Shannon good morning, everyone and thanks for joining us for Stanley Black <unk> Decker's 2022 first quarter conference call on.
On the call. In addition to myself is Jim Loree, CEO and Don Allan President and CFO , 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 2022 first quarter results and various other matters followed by a Q&A session.
Consistent with prior calls we're gonna 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 at 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 different.
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 Act filings I'll now turn the call over to our CEO Jim Loree.
Thanks, Dennis and good morning, everyone.
As you saw from this morning's results, we achieved 20% revenue growth and over 200 basis points of sequential gross margin improvement in the first quarter, we benefited from a sustained strong demand environment significant and growing price realization.
And our new strategic outdoor acquisitions, the first quarter results illustrate the operational focus and agility of our teams in managing through a choppy external environment characterized by supportive demand.
We are executing pricing to offset inflation and restore margins and beginning a very successful integration process with the new outdoor acquisitions.
We will benefit from recent portfolio moves, which render a more focused company anchored by our core tools outdoor and industrial franchises.
In this regard we announced last Friday, the sale of our access technologies business for $900 million in an all cash transaction and a compelling valuation.
It represents the final step in our security divestiture initiative and was preceded by the announced sale of our electronic security business to secure to us.
In the fourth quarter for.
For $3 2 billion. These.
These transactions along with the outdoor acquisitions will further strengthen our position as the number one tools and outdoor company in the world with these acquisitions and the security divestitures. We have created a business portfolio that is extremely well positioned for sustained long term growth and margin expansion as well as one that benefits from <unk>.
Several positive secular trends and competitive advantages.
During the quarter, we also initiated $2.3 billion in share repurchases through an accelerated share repurchase as well as open market buyback activity.
These actions represent significant progress towards achieving our goal of returning $4 billion in capital to our shareholders through repurchases, which we expect to complete.
23.
Taking into account the approximately half a billion dollars in dividends, we expect to pay in 2022, we will have returned $2 8 billion to shareholders by the end of the year a record for Stanley Black <unk> Decker. These important capital allocation actions, along with one hour now demonstrated and continuing ability to achieve.
Substantial price inflation recovery and.
To progress in reducing supply chain constraints will result in higher growth and margin accretion and thus significant value creation in both the short and long term.
To summarize our first quarter revenues were $4 4 billion up 20% driven by our outdoor equipment acquisitions organic revenue was down 1% and customer demand remains strong across many of our global markets and price realization accelerated sequentially from the fourth quarter the.
The volume could have been higher but for.
The supply constrained environment that we continue to make progress on resolving with added supply of semiconductors and electronic components. During this quarter, we expect to be able to alleviate all major electronics related constraints by the end of the quarter.
Our total company operating margin was 11, 5% up 250 basis points sequentially, reflecting the implementation of new pricing actions, but down versus prior year due to cost inflation and supply chain challenges. This resulted in first quarter adjusted EPS of $2 10, which was ahead of our plan.
As we look forward I'd like to share a few comments on what we're seeing in the demand environment and tools and outdoor end user demand across most markets and channels has remained stable led by pro construction absolute dollar sell through in North America retail continues at high levels, especially when measured sequentially <unk> compared with the 2019.
Baseline. Additionally.
Additionally, we believe that we are gaining market share in North America and other geographies for instance.
Just on publicly available disclosures by our top two home center customers. Our 2021 point of sale growth was above category line average for each of them in our end markets today, while the boom global conditions of 'twenty, 'twenty and 2021 have leveled off the fundamentals and secular drivers remain healthy and are still very much intact.
As we look out over the balance of the year, the combination of repair remodel and new residential construction and commercial construction and plenty of runway to continue to drive enduring demand in many of our markets around the world.
Despite the specter of slowing global growth and increasing U S interest rates repair remodel activity is expected to grow at mid to high single digit rates over the next two years due to multiple factors, including an aging housing stock record levels of home equity and strong price appreciation driving big ticket remodeling and tie.
Existing housing supply, leading consumers to invest in existing homes as well as spring demand for new homes in terms of new residential construction the years of under supply of new homes post. The 2008 economic crisis has created a significant housing stock supply issue.
Just as millennials reached the age when they are most likely to purchase a home. We expect that this will continue to support new residential construction activity, even with the interest rate increase is currently being contemplated by the fed.
Commercial construction is still in the early stages of a post COVID-19 recovery in the secular drivers for safe healthy professional working spaces and more efficient buildings will contribute to positive activity levels in 2022, and the coming years.
And lastly, we have strong backlogs in our industrial businesses and we remain optimistic that cyclical recoveries in the auto and aerospace sectors.
Beginning to emerge.
This is very meaningful to both revenue growth and profitability for the segment to size. It. We think it is a $3 million to $400 million.
Multi year growth opportunity with accompanying margins returning to the mid to high teens over time, and while we see continued momentum within our core markets.
We will monitor and respond accordingly, if and when we observe any adverse impact from a higher interest rate environment <unk> significant elasticity of demand effects following our pricing actions.
On top of the market, we continue to reinvest in growth, including leading edge product innovation E Commerce and electrification that will position us for sustained share gains in fact since the start of the pandemic. We have invested in over 1500 human resource additions in R&D commercial and ecommerce functions and tool.
<unk> and outdoor and that is before the impact of any acquisitions on that note I'll now address our recent capital allocation and portfolio actions.
A key aspect of the Stanley Black <unk> Decker value creation model is our active approach to portfolio management and commitment to an investor friendly capital allocation strategy.
Over the long term, we look to invest 50% of our excess capital into strategic M&A and return the other 50% to shareholders through a consistent growing dividend and opportunistic share repurchases. The two security divestitures, we're at a trailing EBITDA multiples of mid to high teens and have a headline price.
$4 $1 billion in the aggregate, resulting in approximately three and a half billion of after tax proceeds these.
These impressive results validate the investments we made in transforming our security business over the last several years and have enabled significant return of capital to shareholders as well as reinvestment in our highly focused core businesses.
Deploying capital into outdoor.
[noise] enabled us to acquire approximately $3 billion of revenue at eight and a half times EBITDA and a material opportunity for margin enhancement over time as we fully integrate these businesses and leverage our combined scale brands manufacturing expertise R&D and access to both the retail.
And the pro channels now there has been some noise and misinformation out there about our recent outdoor acquisitions and I'm now going to present, you with the facts, we have a sound strategy for outdoor anchored on four pillars electrification.
Brand and channel strength.
Cutting edge innovation and large format manufacturing capacity and experience.
Overnight, we have assembled a formidable leading player in the $25 billion of outdoor power equipment market that is capable of growing 10% to 15% organically at mid teens operating margin for many years to come.
This business will lead the charge in the electrification of both large format and handheld professional outdoor power equipment.
We will also bring our outstanding differentiated line of autonomous electrified products under the <unk> brand to the professional landscaping channel, where the acquisitions comes and network of independent dealers with 2500 unique outlets skewing towards the pro market and representing half of the $25 billion.
Dresses market such channel access represents a compelling competitive advantage and it is critical to above average growth and profitability.
I'm also excited about the breakthrough innovations, resulting from the integration of the outdoor acquisitions and even though the new team just completed its first quarter together they've been working together for several years and we will bring to market a strong set of new innovations at attractive margins. Just ahead of the 2023 outdoor season, we're off to a great start and I'll.
I have strong conviction in our ability to deliver outstanding cordless and autonomous new products to the market that will result in growth and margin expansion.
And the 13, 7% operating margin delivered in our first quarter together as <unk>.
Just a taste of the profitability potential ahead in the coming years.
And lastly, we have added eight manufacturing locations through our outdoor acquisitions. In addition to the incident capacity to support growing demand.
The resulting extensive manufacturing footprint gives us an enormous competitive advantage over our small format electric only competitors in short. Despite what you may have heard our outdoor acquisitions have enabled us to become outdoor power equipment leader best positioned to electrify the industry, giving our given our multiple competitive.
Advantages.
Our outdoor business is now a powerful growth engine with approximately four plus billion dollars in annual revenue with anticipated organic growth of 10% to 15% a year. This is an exciting period for our company with a portfolio focused on core businesses and tools outdoor in industrial in attractive markets and construction DIY auto.
Motive and industrial.
And I'd now like to turn the call over to Don Allan who will provide an update on how we're positioning our supply chain for growth as well as more detailed commentary on first quarter actuals and our full year outlook done. Thanks.
Thank you Jim and good morning, everyone.
As Jim mentioned in his comments our focus remains on ensuring we serve the continued healthy demand and investing in our supply chain to further strengthen our position for sustained growth.
As I have highlighted on prior calls we took multiple actions in 2020 one to navigate through the global supply chain challenges and further strengthen our manufacturing capacity sourcing operational efficiency and agility.
These actions are allowing us to better serve our customers and deliver growth in revenue and cash flow in 2022 and beyond <unk>.
Key areas of investment included adding capacity consistent with our make where we sell strategy co.
Co investing with strategic sourcing partners with a focus on batteries and electronic components.
And deploying our manufacturing floor at auto automation solutions to enhance productivity labor efficiency and competitive costs are.
Our investments in this area as well as our electronic component availability continued to progress as expected and remain on track.
Demand continues to outpace availability for our hottest products amid this constrained supply chain environment.
First as it relates to inventory our actions will position us to meet the current demand levels, while improving working capital to deliver strong cash flow generation.
Greater working capital efficiency and cash flow generation remains a significant opportunity in 2022 and beyond.
As a reminder, last year, we made significant investments in inventory to help meet the outsized demand in the tools business.
Our 2022 cash flow guidance assumes that we can modestly reduce inventory versus 2021 levels and we expect much of that improvement to occur in the second half of the year. Once we get through this spring to early summer selling season.
Our inventory at the end of Q1 was up approximately $850 million versus the year end 'twenty one balance.
The increase in our first quarter inventory was primarily due to working capital seasonality to support the peak outdoor buying season spring Merchandizing and father's day fathers day selling season.
This investment in working capital coupled with the earlier timing of certain tax payments contributed to a free cash outflow of $1 4 billion in the first quarter.
This Q1 performance will reverse as we execute on the remaining 2022 working capital initiatives.
Within the supply chain type components supply and elongated transportation times continued to be a challenge.
However, we have seen some signs of stabilization.
For example, our goods in transit for the quarter remained stable and similar to year end level.
The port of L. A has seen improvements with reduced congestion and moving goods from the ports toward D. CS is not a significant source of delays.
As it relates to China, we continue to frequently monitor our end to end supply chain and while there has been some minor COVID-19 driven disruption to date.
It remains manageable at this stage. This is a dynamic situation that we will continue to watch closely in the coming weeks.
As it relates to semiconductors, we continued to see improved supply in line with expectations. Our tier one contract manufacturers received more semiconductors in the first quarter, which will enable us to increase the throughput.
Our professional power tools in Q2.
We are on track for an improvement to our electronic component supply of approximately 20% into Q and further improvement in <unk>, which will support better fill rates customer inventory positions and higher revenues as we progress through the remainder of the year.
So in summary, we are actively managing a very dynamic supply chain and responding with agility to position ourselves to meet the continued strong demand we are experiencing.
Especially within the professional power tool a portion of our business.
Turning to our segment results.
Headline for the first quarter that demand for our products remains healthy and we are executing the necessary pricing actions to mitigate higher input costs.
Until then outdoor we grew revenue 24%.
As the strategic outdoor power equipment acquisitions contributed 27% and price drove five points of growth.
Price realization accelerated sequentially because of the new global price increases implemented in response to commodity and transportation inflation experienced in late 2021. These factors were partially offset by a 6% decline in volume and 2% from currency.
<unk> was impacted by electronic component availability and we have not seen evidence of broad demand destruction related to price elasticity.
We estimate that supply constraints resulted in approximately $200 million and unfulfilled professional power tool opportunities in the first quarter.
Which if realized would have resulted in volume growth and a record prior year performance comp.
We will better position to capitalize on this volume opportunity as we improve supply in the coming two quarters.
Regional organic growth was relatively in line with our expectations with Europe up 2% emerging markets contributing 5% and North America down 3%.
But tools and outdoor operating margin rate for the segment was 14% representing a 260 basis point improvement versus the fourth quarter of 2021, we.
We continue to execute on price to protect our margins and we saw the sequential benefit in Q1 comps.
Comparing the tools and outdoor margin rate versus prior year, we experienced the decline.
As price realization was more than offset by inflation higher transportation costs growth investments and lower volume.
<unk> acquisitions were near line average margin rates for the quarter, representing a very strong start to the year.
U S retail point of sale remains at healthy levels supported by strong professional construction markets.
And our innovation, while the Pos comps were down versus a stimulus aided Q1 2021, the normalized 2019 comparative growth rates accelerated from the levels, we experienced in the back half of 2020 one.
This strengthens our conviction that we continued to experience a very solid demand environment.
Now turning to the tools and outdoor SP use power tools was down 1% organically in the quarter.
We continue to realize benefits from our price increases along with continued demand for our innovative offerings for the pro and trades person.
We have launched a series of products under our industry, leading Craftsman Stanley Fat, Max Black and Decker and dwell brands. Our recent breakthrough dwelled power stack continues to be very well received by end users and is expected to be a multi hundred million dollar contributor to growth in 2022.
Hand tools accessories, and storage declined 1% in the quarter against a very difficult comparable.
Revenue was supported by pricing and new product innovation some of our new innovations include extending a world's first dwell of 20 volt laser platform with the new 20 volt Max laser <unk>.
Expanding our dwell tough system storage to include soft storage solution designed to optimize efficiency and organization and.
And we added a new Irwin straight line tape to our industry, leading tape as your lineup.
Moving to outdoor products.
This business grew 4% organically, while the addition of MTV and excel added over $800 million of revenue.
Growth was driven by price realization expanded distribution.
And new product innovations under the black and Decker Craftsman and Dewalt brands our.
Our acquisitions are also benefiting from product innovation, including recent launches such as the redesign hustlers fast track zero turn mower line for commercial use.
And the first semi autonomous zero turn mower with a cub cadet surpass.
Despite the strong start for these acquisitions. This growth was modestly impacted from a later breaking outdoor season due to colder weather in many parts of North America.
We expect these revenues to be recovered in the second and third quarter.
Our first full quarter as one outdoor team was very successful and we remain on track to integrate three assets into a new $4 billion revenue platform as you heard from Jim as.
As the integration progresses, we continue to build conviction around the innovation growth and synergy opportunities.
We are even more excited about the electrification growth opportunity as we work to integrate these organizations and processes.
The team is energized focused and off to a great start.
I want to thank the tools and outdoor organization for their efforts in the first quarter, we made progress against our key operational goals for 2022 with strong price realization improved power to supply.
Actioning a strong plan for working capital reduction as we move throughout the year.
This dynamic environment requires agility and I know, we have the right people with the perseverance and dedication to be successful.
Now shifting to industrial segment revenue declined 2% versus last year as the five points of price realization were more than offset by a 5% volume decline and a 2% negative impact from currency.
Operating margin was six 9% as.
As the benefit from price realization was more than offset by commodity inflation and market driven volume declines in particular in our higher margin automotive business, where our customers remain constrained by their own supply chain challenges.
Looking within this segment engineered fastening organic revenues were down 3% as 5% general industrial or industrial fastener growth was more than offset by lower automotive OEM production.
As well as a modest decline in aerospace.
Our auto fastener business continues to successfully operate in a dynamic environment with customer production fluctuations. Despite this auto fasteners once again demonstrated outperformance versus light vehicle production and.
And the business is also benefiting from accelerating growth and content gains across the electric vehicle production space.
Our industrial fastener business enjoys a healthy backlog and delivered growth at nearly two times global Ipi in the first quarter.
The aerospace fastener business delivered its third consecutive quarter of sequential revenue improvement. This.
This business is focused on capturing the recovery in the OEM production, which is beginning to emerge we expect in 2022 Arrow fasteners will begin to demonstrate organic growth as it starts to cyclical recovery back towards historical levels of revenue.
Infrastructure.
Sure organic revenues were up 4% as 13% growth in attachment tools were partially offset by lower pipeline project activity in oil and gas.
Momentum remains strong and attachment tools driven by record backlogs dealer inventories continuing to trend below targeted levels and elevated market confidence due to the U S infrastructure Bill.
Our industrial team is continuing to make steady progress with its revenue and profitability improvements and we are prime to leverage the cyclical recovery that is on the horizon and capitalize on the auto electrification trend as well.
Turning to the next slide the operating environment continues to be dynamic.
And the recent invasion in the Ukraine by Russia has driven a new wave of inflation versus the backdrop earlier this year.
From an in cost input cost perspective, our updated expectations for 2020 to commodity inflation and cost to serve is now $1 4 billion.
Versus our January expectation of $800 million.
The key drivers of the incremental 600 million.
It reflects significant increases in battery inputs, such as lithium nickel and cobalt oil.
Oil related inputs, such as transport and resins and continued upward movements in other base metals and steel.
Looking at the commodity indices since we issued our initial 2022 guidance lithium nickel and cobalt are all up approximately 90%, 50% and 7% respectively, whereas oil is also up nearly 15%.
If we break down the $600 million increase it isn't primarily four major categories $200 million in batteries $200 million in transportation costs.
$100 million in resins, due to oil prices and $50 million and gas engine costs.
If you look at our commodity basket discretely, the increase to our total direct material spend is up over 30% since the end of 2020.
Nearly half of its total impact occurred in February and March of this year.
While these commodities continued to be volatile today.
We do have solid visibility to the expected sustained impact and we are building this into the plan and taking additional pricing action actions to offset the impact to our margin.
We have executed three rounds of price, which are now in place across our global businesses.
And we are in the process of implementing additional price actions in response to the new wave of inflation that has occurred in the last 60 days.
These new price actions will be on top of the 6% to seven points of price. We included in our prior guidance and we now expect price to contribute high single digits for 2022.
Our teams remain focused on pricing actions to offset the cumulative inflation impacts experienced in the last nine to 10 months.
We believe this will allow us to expand our core margins.
And that will begin to emerge in late 2022.
As a reminder, before diving into the details on slide nine our guidance does not include our security businesses, which are now recorded as discontinued operations.
So moving on to our 2022 guidance, we are planning for total revenue growth in the mid twenties.
<unk> of organic growth of 7%.
We are updating our adjusted earnings per share to a range of $9 50 up to $10 50 on a GAAP basis, we expect the earnings per share range to be $7 20.
Up to $8 30.
Inclusive of onetime charges related to restructuring expenses, a voluntary retirement program the.
The Russian business closure and acquisition related costs.
Our current estimate for pre tax charges in 2022 is approximately $460 million.
On the right side of the slide we have outlined the components of our EPS adjustment versus our prior estimate.
We made two portfolio decisions since January guidance, which reduce EPS by <unk> 45.
The divestiture of our Stanley access technologies business reduces EPS by 30 cents.
And there will be a <unk> 15 impact from the closure of our Russian business there.
Therefore, the January guidance mid point adjusted for these two decisions is $11 80.
Incremental commodity and cost to serve just discussed resulted in a $3.
Cost increase or reduction to EPS.
Dan do you have the offset of the outline price actions.
Which at $1 70 <unk> benefit.
Which isn't a net of a lower volume planning assumption to protect ourselves for any potential demand elasticity.
Below the line items below the line items are relatively neutral as lower as a lower tax rate and other expense assumptions are offset by the impact of shares from an adoption of a new accounting standard in Q1 related to preferred shares. This accounting standard change will only impact 2022 and reverses.
'twenty 'twenty three as these shares will be retired in November of 'twenty two.
Turning to the segments tools and outdoor organic growth is expected to be in the mid to high single digits supported by price core and breakthrough innovation and healthy demand across our end markets.
We expect that our strategic outdoor acquisitions will contribute just over $3 billion in revenue in 2022.
For the full year tools and outdoor consolidated margins are expected to be down on a year over year basis, as inflation and acquisition mix pressure margins as.
Do you think about tools and outdoor margins excluding acquisitions, our plan calls for a relatively similar AUM in the second quarter to what we just delivered in Q1.
We then expect year over year core margins to be up in the back half.
There is a meaningful midterm opportunity to improve margins within the outdoor acquisitions over the coming years and this continues to be a significant priority for us.
We expect high single digit margins this year.
And we see the potential for low double digits.
Low double digit margins over the next few years.
We believe the industrial segment will achieve low double digit organic growth.
Driven by innovation pricing and cyclical recoveries across much of the portfolio.
The industrial margin rate is expected to be positive year over year, leveraging strong revenue growth productivity and price. This segment will experience sequential improvement each quarter in 2022.
Let's now shift to some color on Q2 full year cash flow and our share repurchase program.
We expect the second quarter, adjusted EPS will approximate 21% to 22% of the full year.
This assumes low single digit organic growth and a strong revenue contribution from acquisitions.
Now turning to cash flow as a result of our lower full earnings guidance and higher inventory values at year end due to the additional wave of inflation, we experienced in the last 60 days.
We expect free cash flow to now be in the range of one to $1 5 billion.
This range does still reflect a modest working capital reduction year over year.
We still plan to complete our $4 billion share repurchase program. However, since we see a lower cash flow performance in 2022 for the reasons just articulated.
We'll defer the remaining portion of or $1 7 billion until 2023.
We continue to pursue a disciplined capital allocation approach that aims to balance share repurchase activity with a commitment to dividends and strong investment grade credit ratings.
We are committed to the completion of this repurchase program in 2023.
The organization is focused on execution in this dynamic environment with the key operational priorities centered around the following areas improving.
Supply chain and customer service levels driver.
Driving above market organic growth.
Delivering on our price and cost control measures successfully.
Successfully integrating our strategic outdoor acquisitions.
Closing the two security divestitures later in this year as planned.
And leveraging the SPD operating model to improve our working capital efficiency in 2022 and beyond.
With that I will now turn the call back over to Jim to conclude with a summary of our prepared remarks, Jim. Thank.
Thank you Don.
There is no question that we are operating in one of the more challenging environments in recent times and to succeed in such an environment. We are intensely focused on the inputs we can control we've.
We've strategically optimized our business portfolio, creating a stronger faster growing and highly profitable company with distinct competitive advantages.
We've continued our long history of returning excess capital to shareholders through our impressive annual dividend record and share repurchases together totaling almost $3 billion in 2022 with more to come in 2023, we've reinvested in our core businesses, adding resources to support our growth catalysts in electrification E Commerce and innovation.
This type of focused reinvestment will be an ongoing and consistent.
Approach for us and the company going forward and we've made substantial progress in resolving supply chain constraints, most of which are expected to dissipate during the balance of this year.
And we have now proven our ability to offset the impact of hyper inflation through pricing actions that stick.
We've made an enormous commitment to ESG as we've shifted our business portfolio to areas that both support growth and benefit our stakeholders and society.
For an impressive immersion into this topic I refer you to our 2021 ESG report, which is available online effective today.
And we are confident in the strategic positioning of our company and look forward to continuing to demonstrate our ability to thrive in 2022 and beyond by driving top and bottom line growth and shareholder value creation with that we are now ready for Q&A Dennis great. Thanks, Jim Shannon, we can now open the call.
The Q&A. Please thank you.
Thank you to ask a question you will need to press star one on your telephone withdraw your question press the pound key.
Could you please limit yourself to one question. Please standby, while we compile the Q&A roster.
Our first question is from Jeff Sprague with vertical research your line is open.
Thank you good morning.
I guess just on.
On price and I guess, it's going to be a multipart question, but.
The argument here is you're pursuing price to offset cost, but based on the bridge.
It looks like pricing is aiming at maybe offsetting.
Half to a third of the cost pressure.
So maybe you could put that in some additional context, perhaps it's the annualized nation of the way things work through the system are you actually targeting full recovery at a run rate with the price actions that youre taking.
And separately I Wonder if you could just.
Provide a little bit of color on what you might be doing to try to mitigate the incremental cost pressure that you laid out for us here.
Hey, Jeff so.
Youre right on the commentary around.
The timing of the pricing side of the pricing impact in 2022 will be about roughly half the impact what the annualized amount will be so there'll be a carryover positive into 2023 related to pricing.
And it's really due to the timing of the inflation comes in.
You have a timing aspect of being able to get price increases into the market that can be anywhere from three to four months, depending on the customer of the region. Some cases, it can be faster in certain regions around the globe.
And so it's just factoring in that dynamic that is like.
Like we experienced last year and early parts of this year as well.
The.
The question around.
Was the second part of your question.
Dennis what are you doing on the cost cost cost so cost mitigation as it related to.
The inflationary costs as they come in you know we go through a very similar process.
We experienced with our customers which is.
Justification of the costs, what's driving the cost increase it's got to go through a review process with our GSM procurement organization.
<unk>.
And then it has various approvals that has to go through as well before we can accept the cost increase the.
The projection that we're putting forth out there related to inflation is based on current spot prices for the most part and so it assumes the spot prices stay in place for the remainder of the year going into next year. We don't know if that will be the case that could go up or they could go down and.
That's something that we'll see over time, but we manage it through a very robust process.
On the input side very similar to what we see what our customers do with us.
If I were doing price increases as well.
And just for clarity I think Don made this clear, but I'm just going to emphasize that we.
Our <unk>.
Aiming to offset with our fourth price increase now over a two year period.
The entire amount of the inflation so.
It's just a matter of timing.
Got hit with this.
Latest tranche of $600 million of inflation in the last two months it takes a little time to.
Get that price and those price increases implemented and that's the dynamic at play here, there's no long term degradation of margins associated with.
The hyperinflation.
We are absolutely in a very very.
Pleased actually with the ability to implement price and offset the inflation.
Price increases because historically, we've never had this type of hyper inflation and we never had 100% price cut.
Coverage of the inflation in this era that we're in we've been able to prove that we can do that.
Successfully.
That's what we're going to do here.
Fourth increase as we go out to market.
Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is open.
Yes.
Hi, good morning.
Yeah. So I just wanted to hone in on that sort of price cost delta or again, so I think pricing was maybe.
Maybe 200 million also in Q1.
Maybe help us understand what was the gross cost headwinds.
In Q1.
And then how do we think about those two numbers in the second half.
And as you kind of snap the line today, what's the cost headwind looking like 2003 at this point.
Yeah. So.
Obviously, we had as we mentioned in January are very significant.
Inflationary impact in Q1 and.
The number approximated.
For a little more than $400 million.
We expect probably a very similar number in Q2.
And.
Back in January we were assuming in Q3 and Q4 those numbers, we're going to become very small with the new wave of headwinds we have a number thats about $300 million per quarter in the back half of the year. So that's a large part of the change you've got certainly a bigger impact in Q2.
Then what we saw in the January guidance.
That's about $400 million, but that was supposed to be ticking down.
And then you had close to almost neutral impact from the January guidance in Q3, and Q4 and now it's going to be roughly $300 million per quarter.
The carryover impact you'll have some inflationary carryover impact obviously with this new wave, maybe a quarter or two a quarter and a half of that into next year and then you'll have a substantial price increase carryover as well.
At the price should exceed the inflation in 2023.
Thank you. Our next question comes from Michael Rehaut with Jpmorgan. Your line is open.
Thanks. Good morning, everyone. Appreciate you taking my question.
I wanted to actually lots been talked about obviously pricing cost and I. Appreciate all the detail I wanted to actually shipped a second too.
The outdoor business.
And the comments around that.
The 10% to 15%.
Annual growth that you highlighted.
Sounds a little more bullish than before.
And just wanted to make sure that I was thinking about that correctly.
The statement of a double digit organic growth rate.
Is something new into the equation.
Whats kind of driving that.
Statement.
Either from organic growth.
New product.
Introduction distribution gains et cetera.
And then just one technical question. If you can lay out the share count progression over the next couple of quarters understanding there might be some accounting issues that go away for next year, but just from a modeling perspective that'd be very helpful as well. Thanks.
It's an artful one question, but we'll take it Don will take the second part I'll take the first.
We didn't get into this outdoor business because we thought it was low margin low growth and.
We are extremely pleased with what we've acquired.
Teams that have come with these acquisitions.
The innovation or new product development pipeline is revolutionary and especially on the professional products area and especially as it relates to the large format zero turns and writers.
It is clear that electrification will be.
An increasing force.
In this market with.
The advent of ESG and with the increased.
Energy prices. So one of the factors that has slowed the adoption of electric electric large format has been the.
Differential between the price for electric and the price for <unk> for gas.
It historically has been.
Fairly wide, but it's coming to its converging.
As electric kits.
It gets down the cost curve through innovation and cost reduction and.
Energy prices drive higher.
Higher prices for internal combustion powered equipment and regulatory action is.
Has begun so in the states.
You have heard about regulatory action in several states led by California, and so there is going to be a very very significant amount of pressure.
To convert much of the gasoline.
Two power unit sales to electric and we see that accelerating we see the fact that we have been working together for several years on revolutionary innovation and electric and autonomous.
And by the way the labor shortages that exist all around.
Cost of increasing labor or another factor.
Getting us excited about the growth because the autonomous units that we have can literally cut ones for landscapers.
People on the on the mower so.
There's a bunch of factors that make us very excited about what's happening in the market and then there are the eight.
<unk> that we own that are up and running that make everything from walk behind mowers to zero turns to.
Basic riders so.
So we are poised and ready to go with products with capacity.
And with.
Great team management team, so 10% to 15% in a in a in a market that has historically.
<unk> grown.
In the high single digits mid to high single digits is something that we think is very achievable and we're going to make investments to support that.
And your question your question on shares Michael It's I think the easiest thing that if you look at the next three quarters for the remainder of the year. It will average about $155 million in this first quarter. It was about 165 million.
Sure Alright, thats not dollars shares.
Thank you. Our next question comes from Tim <unk> with Baird. Your line is open.
Yeah, Hey, Hey, everybody good morning.
Maybe just on the volumes within tools. It does seem like there's a little bit of a lower assumption there I think volte.
Volume kind of on an implied basis might be kind of flat to down now and kind of low to mid single digits. Before so could you just maybe walk through the drivers of that especially since it sounds like POF is still doing pretty well in the <unk>.
Inventory in North America, and it's pretty pretty low versus history.
Yes.
I mentioned some of my comments Tim.
We have done a little bit of a haircut on the volume side versus January it's down about three points from our original assumption and that's really factored in just two more price increases going into the market, maybe being a little more cautious on the impact on volume.
Not necessarily a view that we think demand is slowing it's just more of with all the price increases going in you're going to have we had almost.
Five 5% of price.
In the first quarter, we're going to have somewhere between seven 5% to 8% of price in Q2, and then it's going to get close to 10% in Q3 and Q4.
A lot of price in the market very quickly and so we thought it was prudent to just do a modest haircut on the volume side to represent the potential impact of all those price increases, but it is not an assumption that there is some significant slowdown related to overall demand other than what's happening in Russia, which is relatively modest annual revenue of about 150 million.
Yeah.
Thank you. Our next question comes from Nigel Coe with Wolfe Research.
Line is open.
Good morning.
And I think I think I will keep this to one question.
Yes, Don you've been tasting the teeth.
It could have on inflation on the way up here.
What.
Kind of reset the inflation expectation how do you take.
<unk> taken steps to try and bring fence.
The plan now for FY 'twenty two.
Is there any buffer in that.
Inflation, and then broadly speaking it seems that the China supply chain.
The contact you, obviously there'll be a supply chain is really causing a lot of.
Transportation and freight inflation.
Steps, you're taking to accelerate the transition back to the domestic manufacturing.
Yes, I would say that.
The first question.
As I said, we're projecting inflation assuming current indices.
And so we're projecting that's going to continue for the remainder of the year.
Some people view that as maybe potentially conservative view at tired to make that view based on the level of inflation that we've seen over the last 12 months.
Like any guidance.
The guidance, we provide we always put some level of contingency in there, it's usually in the $100 million to $150 million.
Range and I would say that that's consistent with this particular.
Guidance, we just provided as far as the China situation, Yes, we're obviously watching what's happening very closely from a tactical perspective, but as we had mentioned in previous calls we we did open several plants in the North American markets between U S and Mexico to really be able to before.
Pandemic.
Receive a lot of the Asian production in particular, the China production.
Into those Mexican facilities, and some of them and one U S facility as well.
Because of the volume increase.
Roughly 20% in 'twenty, one and 20% in 'twenty.
Two I'm, sorry, 'twenty one in 'twenty.
<unk> had a significant spike in the overall output and therefore, it's been difficult to ramp down.
Asian production. So we are looking at two different things one.
Some additional expansion opportunities in both of those countries the countries of Mexico, and the United States.
For Dot O automation and Digitization efforts across the supply chain to try to accelerate that.
We will not completely mitigate the risk in that timeframe, but we havent accelerated plan based on the current revenue projections as well as the potential for more revenue growth to accelerate that progress over that timeframe and we believe we can dramatically mitigate that risk and concern and it goes beyond just risk management, that's a huge part of it.
But also working capital management.
Efficiency.
Getting the production closer to the market within the home market.
<unk> faster cycle times that enables more ability to respond to volatile changes in demand, which as you know the nature of the world today.
And I think as e-commerce becomes more prominent it's more important to have that production and supply chain closer to the customer again for purposes of agility and responsiveness. So there are.
Offensive.
Reason for doing this as well so it has.
A double benefit.
Defense of risk management side to it but also an offensive go to market advantage.
And supply chain responsiveness for a changing.
End market in terms of what's expected on changing.
Panel needs as well.
Yeah.
Thank you. Our next question comes from Joe O'dea with Wells Fargo. Your line is now open.
Hi, good morning.
I wanted to circle back to volume you gave some helpful color on price and cadence over the course of the year and wondered if you could talk a little bit about the volume cadence specifically in tools.
As you have maybe a little bit of.
I don't know if you call it buffer or a cushion in there just related to <unk>.
Uncertainties around what the pricing is going to do on demand, but but generally what what the framework looks like and whether kind of back half of the year. We're talking volume that it's more kind of flattish or are you anticipating volume declines in each quarter.
Yeah, I would I would say that youll see a volume decline again in Q2.
Mid to low single digit decline, you'll see modest growth in volume in the back half one or two points in Q3 or Q4.
As the supply continues to improve and particularly in the professional power tool space.
Thank you. Our next question comes from David Macgregor with Longbow Research. Your line is open.
Yes, Hey, good morning, everyone.
Just a question on volume that you'd made reference to some of the new plants.
Uh huh.
Ramping.
Was wondering if you could talk about kind of the progress there and whether that is representing a sort of a bottleneck right now because maybe the supply channel issues associated with supporting those plants as they ramp or maybe that's not the case, maybe you could address that and also just talk about the unabsorbed cost of ramping those plants through 2022, and what that might represent.
Yeah, the unabsorbed cost is not that significant.
The plants have been ramping up for a period of time and.
A year ago, then theyre going to continue to become more and more efficient.
The main the main bottleneck is really semiconductors and electronic components that go into.
As I mentioned in my commentary and Jim's commentary, that's going to continue to get better at it as a big step up happening in Q2 of about 20% improvement.
We'll see another improvement in the back half of the year as well and so as that starts to shake loose.
Be able to meet.
Current demand levels, and hopefully be able to look at other opportunities above and beyond the demand levels at that stage the capacity in.
In our plants is not really the challenge. The challenge is really in one particular area that I just touched on.
Thank you. Our next question comes from Eric Bossard with Cleveland Research. Your line is open.
Thanks, you talked about.
Favorable tool market share performance over the last year and I know this is a point of discussion just curious what you think youre doing what you were effective at an <unk> tool market share and then what your assumption is for further tool market share progress in the back half of the year, especially with.
Your thoughts on volume guidance on volume for tools for the back half.
Yes, I mean, we've been gaining share year in and year out for a long time during the pandemic.
The competitive dynamics are such.
We.
We have been gaining share at a slower rate than one of our other competitors.
And you know were roughly the same size now in power tools and we're bigger in total with hand tools and other.
Other items, but.
Hi.
The share dynamics as we look at this year will be we will be very interesting.
This competitor.
Ended up.
Buying pretty substantial quantities of batteries.
In semiconductors prior to the pandemic they've built a several billion dollars worth of inventory during the pandemic they have.
A lot of there.
Business is done on an Fob Asia.
Perspective, which means.
Theyre not theyre.
We're not reporting sell out there reporting sell in.
And a lot of the challenges that we have with the supply chain and congestion on the Pacific Ocean and their case relate.
Two.
Their customer.
Who bears the burden of at least for a good part of their business.
Those challenges. So this supply constraint issue has resulted in their ability to grow share a bit faster.
In this time period, when when that gets resolved.
I would bet on our channel access.
Our product.
Innovation.
And our growing reinvestment in tools and outdoor and our outdoor platform in general to.
To continue to help us grow the market share and it'll be a it'll.
It'll be an interesting.
Couple of years as we go forward.
But you know we're still.
Very very fair.
Focused on gaining.
<unk> share growing above market and continuing to with our new focused portfolio.
Compete very very aggressively and effectively.
Thank you. This concludes the question and answer session I would now like to turn the call back over to Dennis Lange for closing remarks.
Shannon Thanks, we'd like to thank everyone again for calling in this morning and for your participation on the call. Obviously, please contact me if you have any further questions. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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