Q1 2023 Stanley Black & Decker Inc Earnings Call

Speaker 1: 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 Indecker 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.

Speaker 1: as well as shifting resources to prioritize investments that we believe have a positive and more direct impact for our customers and end users. 2. Accelerating the operations and supply chain transformation to return adjusted gross margins to historical 35% plus level, while improving fill rates to better match inventory with customer advance. 3. Prioritizing cash flow generation and inventory optimization. And 4. Continuing to advance innovation, electrification, and global market penetration to achieve organic growth of 2-3 times in the market. Our business transformation remains on track to deliver on these financial commitments as we strive to elevate our customers.

Speaker 1: 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.

Speaker 1: and we are working with our customers to transition to new skews 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.

Speaker 1: 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 expansion, transformations into manufacturing centers of excellence,

Speaker 1: 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.

Speaker 1: Finally, we are increasing our focus on manufacturing excellence and reemphasizing the SPD 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...

Speaker 1: 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.

Speaker 1: A key tenet of our strategy is the acceleration of investment in innovation and electrification.

Speaker 1: 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 coreless 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.

Speaker 1: and carries more runtime and force than prior generation.

Speaker 1: The new cordless pressure washer also joins this line up in addition to the range of other new 20 volt cordless lawn and garden tools.

Speaker 1: 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.

Speaker 1: Additionally, we just received notice that we won 8, 2023 popular mechanics yard and garden best new product awards across the Walt, Craftsman, and Black Indecker. In addition to the Craftsman offerings just highlighted, the DeWalt pruning saw and string trimmer were awarded as best for contractors.

Speaker 1: and the Black and Decker pruning chainsaw was named best for light-through to 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.

Speaker 1: Thank you, Don, and good morning, everyone. I'm honored to join Stanley Black Indecker, the Worldwide Leader in Tools and Updoor at such a pivotal moment in the company's history. I have tremendous respect for the leadership team and Stanley Black Indecker's iconic portfolio of professional and consumer brands.

Speaker 1: During my initial weeks, I have been impressed with the breadth and depth of the company-wide transformation underway, observing the early traction of the multi-year program and the savings capture during the initial phases. It is clear that the company's transformation is progressing rapidly and powerfully.

Speaker 1: I am energized to help accelerate the company's journey forward and to enhance our long legacy of market leading innovation and profit performance.

Speaker 1: Now let me walk through the details of the company's progress towards reducing inventory and improving gross margins.

Speaker 1: We exited last year with 5.9 billion of inventory. We reduced this by over 200 million in the first quarter. Since mid-2022, we have successfully reduced inventory by approximately one billion. This achievement was driven by improved supply chain conditions.

Speaker 1: and planned production curtailments instituted during the back half of 2022, and which continue today. The targeted inventory reduction helped minimize the magnitude of the seasonal working capital build typical of our first quarter.

Speaker 1: As a frame of reference, our first quarter working capital build has averaged 700 million over the last five years, while this quarter it was 200 million, improving our cash performance primarily via inventory reduction.

Speaker 1: We are on track to achieve our expected 500 million of first half inventory reduction as we work down raw material and component inventory while selling out finished goods.

Speaker 1: Our full year 2023 inventory reduction target remains $750 million to $1 billion to drive significant cash flow generation and to pay down debt, strengthen our balance sheet, and back our long-standing commitment to return value to shareholders through cash dividends. Overall, the pace of our inventory reduction will be demand-dependent.

Speaker 1: And in a few moments, I will cover the range of demand scenarios we are considering within our 2023 guidance.

Speaker 1: Turning to gross margins, which are also improving in a manner consistent with our plan. First quarter adjusted gross margins were approximately 23%. Up 360 basis points sequentially versus the fourth quarter 2022, as we saw.

Speaker 1: a smaller headwind from de-stocking actions and as our transformation initiatives provide a greater income statement benefit, something we expect to continue. Production contaminants in the first quarter were at levels relatively similar to those of the back half of last year and the de-stock impacted growth margin by approximately 400 to 500 basis points.

Speaker 1: We expect a similar impact to the second quarter, resulting in second quarter adjusted gross margin Consistent with that of the first quarter

Speaker 1: Our base case guidance anticipates the adverse margin impact from our targeted production curtailments and de-stocking will ease through the year.

Speaker 1: supporting adjusted gross margin expansion into the mid to high 20s for the second half of the year. The timing of normalized production and improved gross margin could shift earlier or later, depending on the demand environment and corresponding speed of inventory reduction.

Speaker 1: We will actively monitor demand and adjust our supply chain to optimize the pace of margin improvement and inventory reduction throughout 2023. An important leading indicator for gross margin is the 110 million of supply chain transformation savings delivered in the first quarter.

Speaker 1: As these savings turn through inventory later this year, Gross Margin will expand further. It is encouraging to see the initial progress towards our multi-year target to return adjusted Gross Margin to the 35 plus percent range. We are prioritizing cash generation, gross margin improvement, and balance sheet strength.

Speaker 2: By executing against these priorities, we are positioning the company for long-term growth and value creation.

Speaker 2: Now, turning to 2023 guidance.

Speaker 2: We are reiterating our full year adjusted earnings per share guidance range of zero to two dollars per share.

Speaker 2: On a GAAP basis, we expect the earnings range per share to be negative $1.65 to 60 cents, inclusive of one-time charges primarily from the global supply chain transformation and outdoor integration. The current pre-taxed

Speaker 2: charges estimate was narrowed to 275 to 325 million with approximately 25% of these expenses being non-cash.

Speaker 2: We continue to target free cash flow generation of 500 million to 1 billion primarily driven by inventory reduction. Consistent with the framework shared in February , we planned and continue to forecast around three 2023 demands in the?? Det meth studios.

Speaker 2: as the macroeconomic outlook remains dynamic.

Speaker 2: Our base case scenario assumes a modestly unfavorable market demand environment compared to what we experienced during the second half of last year. In this scenario, we are assuming total organic growth to be down low to mid-single digits, incorporating the softer start to the outdoor season. Tools and outdoor total organic revenue is expected to be down low to mid-single digits.

Speaker 2: would continue to constrain second quarter operating margins to low single digits. As production returns to normalize levels in the back half of the year, we expect operating margin to improve to the mid-to-high single-digit range resulting in full-year operating margins in the mid-single digits. Finally,

Speaker 2: The base case includes approximately $125 million of annualized reinvestment targeting tools and outdoor growth acceleration and complexity reduction. We plan to be measured with the magnitude and timing of such investments depending on the demand environment.

Speaker 2: The second half acceleration scenario contemplates a stronger demand environment, supporting organic growth in the second half of 2023. In this scenario, we would expect a quicker normalization of inventory levels and gross margin improvement.

Speaker 2: Total organic growth would be relatively flat for the year. This scenario would position the company to deliver high single-digit operating margins in the second half as well as a larger level of reinvestment to accelerate our transformation.

Speaker 2: The downside case reflects a deceleration of demand due to elevated recessionary pressures. If this scenario becomes the macro reality, we would expect full year organic revenues to decline by mid single digits with volume declines in both the tools and outdoor and industrial segments.

Speaker 2: In this scenario, production cutailments would likely remain in place through the end of 2023, extending the timeline of our gross margin recovery.

Speaker 2: With lower demand, we would adjust the level of reinvestment and CAP-X until we have more clarity on the extent and duration of the macro impact.

Speaker 2: We believe it is prudent to maintain these ranges of 2023 demand outcomes, production levels, and approaches to reinvestment as we prioritize our transformation and inventory reduction and cash generation.

Speaker 2: Turning to important remaining elements of guidance. For the full year, we expect the below-the-line expenses in total to be relatively similar to the guidance issued in early February . We are building an expectation for higher interest expense.

Speaker 2: which is offset by a modestly lower 2023 tax expense assumption.

Speaker 2: For the second quarter, we are expecting a sequential improvement in operating profit, primarily from seasonally higher levels of revenue. Adjust the gross margin is planned to be in the low 20s, relatively similar to that of the first quarter. Adjust the DPS is planned to be at a loss of approximately 40 cents per share at the midpoint.

Speaker 2: incorporating an expectation for a higher tax expense versus the first quarter. Free cash flow is expected to be positive in the second quarter, primarily from inventory reduction. Our plan calls for earnings to inflect positively in the second half of the year, generating an annualized EBITDA run rate of approximately 1.3 to 1.7 billion.

Speaker 2: to successfully navigate our path forward as we remain focused on driving above-market, long-term organic growth and margin expansion.

Speaker 2: With that, I will now turn the call back over to Don.

Speaker 1: Thank you, Pat. We are continuing to forge our path forward. We made solid progress again in the first quarter with strong cost savings, inventory reduction, and advancements across all elements of the transformation plan. As we execute against our strategy in 2023 and over the three-year time horizon, we will continue to make progress in the future.

Speaker 1: to $500 million of these benefits towards faster growth as we strengthen the innovation machine and stimulate demand with enhanced and user activation. We believe our actions to reshape, focus, and streamline our organization as well as reinvest in our core businesses will enable us to deliver strong shareholder value over the long term.

Speaker 1: the aerobus organic growth and enhanced profitability. We have the best people, the best brands, and the most powerful innovation engine in our industry. Combine this with the passion, energy, and commitment I see across the organization every day. And it gives me great confidence that we will focus on what we can control to be successful.

Speaker 1: and we ultimately will recreate a significant market share gaining machine. With that, we are now ready for Q&A. Dennis? Great. Thanks, Don. Shannon, we can now start Q&A, please. Thank you.

Speaker 3: Thank you. To ask a question you will need to press star 11 or your telephone. You will then hear an automated message advising your hand is raised.

Speaker 3: To withdraw your question, please press star one one again. We ask that you please limit yourself to one question. Please stand by when we compile the Q&A roster.

Speaker 3: Our first question comes from the line of Nigel Coe with Wolf Research. Your line is now open.

Speaker 4: Thanks good morning everyone.

Speaker 5: Morning.

Speaker 4: Good morning and Pat look forward to meeting you soon and and Don congratulations on on hiring Chris Nelson He's someone we know really well, so good guy Thank you. So my question is really just maybe just more detail on the tools and storage sales in North America

Speaker 4: You talked about hook point of sales being above 2019 levels, but just wondering how that looked year-to-year, maybe DASAG, the pro and DIY, and the pricing of 2%. To what extent was that a lot of promotional activity around maybe outdoor, and how do you see pricing trending through the year? Thanks.

Speaker 1: Yeah, I'll give a little color on POS and then ask Pat to give a little color on the pricing part of the question. So the POS trends are obviously when you look at them year over year.

Speaker 1: For some of our customers, they're down in the mid.

Speaker 1: single digits to high single digits. Other customers are only down in the low single digits to flat. So you got a mixed bag of different things happening there, but overall we are seeing POS down year over year in Q1 and that trend will likely continue in Q2 at a lesser magnitude because as the comp gets.

Speaker 1: easier from Q1 to Q2, that trend will continue. The trend around pro continues to be very healthy. We're not seeing any major shifts in that dynamic. The consumer side continues to be, um,

Speaker 1: relatively flat sequentially to what we've been experiencing for the last, you know, two or three quarters since the second quarter of last year. No major shifts there, but certainly not any strengthening on the consumer side as people continue to shift their dollars to different areas across the United States. But overall I would say POS is kind of trending the way we would expect.

Speaker 1: Outdoor is a little choppy in the last six to eight weeks as we saw a pretty rough march due to the weather. Things got better. First half to the later stages of April as the weather got better. And then obviously we've seen a little bit of bumpiness in the last week or so as the weather has them in grade.

Speaker 1: in the Midwest and New England and Northeast in that time frame. And not to be a weather forecast, but the weather is looking much better as we go into next week, so hopefully that trend shifts back to a positive. But, you know, it's a little bit of choppiness, I think, you know, all of us, the retailers, our customers, ourselves, are all looking at.

Speaker 1: probably the next month or so as to what the trends will be in POS and that will really ultimately define the success of the season. But I do think we've factored our guidance in a way that allows us to navigate that effectively.

Speaker 2: And Pat, maybe a little color on price. Yeah. The pricing environment has been stable. The price increase dynamic for us that you referenced in the first quarter was largely a carry-in price increase. Broadly in the channels and across competitors, the pricing environment remains stable.

Speaker 2: It appears to us that most in the market are focused on margin enhancement and therefore preserving pricing. We don't expect additional price in our outlook through the balance of the year, so stable pricing. We will be...

Speaker 2: Given the supply chain improvements we've been making, we will be engaging in traditional seasonal promotions throughout the year so that dynamic will be returning, but that's less of a new pricing dynamic and more of a return to traditional seasonal promotions.

Speaker 6: Thank you. Our next question comes from the line of Julian Mitchell with Barclays. She won't let us know open. Thanks very much. Maybe just my question would be around when you think about that uplift of margins from sort of low single digits that needs a high single digits in the second half. Maybe try to pause out how much of that is sort of.

Speaker 2: that margin uplift from the first half to the second half is driven by gross profit margin uplift as opposed to some particularly strong volume or SG&A component. And most of it is as we get into the back half of the year you'll have more

Speaker 2: of the progress and the transformations throwing through the income statement and less of the inventory destock and production curtailment, providing headwinds and that. And the order of magnitude is in the three to 500, three to 500 basis points of SG, gross margin improvement.

Speaker 2: first half to back half.

Speaker 6: to back out. Thank you.

Speaker 6: Our next question comes from the line of Tim Woge with Bayer. Your line is now open. Hey, good morning everybody and welcome, Pat. Maybe just on the channel, I guess what do you, it sounds like you've got varying levels of POS activity between your customers. How does that translate into?

Speaker 1: channel inventory and kind of what they're holding and kind of what their comfort of you know current channel inventory is looking like. Yeah, thanks for asking that question Tim. Because I didn't really get into that when I was talking about POS, but yeah I would say the inventory levels and the channels and our major customers in North America and Europe .

Speaker 1: are still high when you kind of look at traditional historical levels of inventory, but they are starting to come down. And so we're starting to see improvement in that. I think for us in particular, the good news has always been that we weren't starting with a high level of inventory compared to maybe other folks within the industry and other.

Speaker 1: competitors. So when you look at Home Depot as an example, you know, we're not far away from where you traditionally see or then a week or so of what we would typically want it to be and what they would want it to be. You know, those are a little bit higher than that, but those tends to run at a much higher level of inventory as we all know versus Home Depot. So we feel pretty good about it. I think you'll see a continued little bit of work.

Speaker 1: working down of our inventory and our customers in Q2, and maybe a little bit of that into Q3 as we work through the year depending on where demand goes. So I don't think we're done with the de-stocking, but I think it's something that's very manageable for us versus maybe what some of our competitors are dealing with right now.

Speaker 3: Thank you. Our next question comes from the line of Josh Poker-Dwinski with Morgan Stanley . Your line is now open. Your line is now open.

Speaker 3: Thank you. Our next question comes from the line of Josh Poker-Zalinski with Morgan Stanley , your line is now open. Hi, good morning, guys.

Speaker 2: Morning. So Don I just want to maybe follow up on on the SKU reduction. So for what you guys have contemplated and maybe what you've done so far, what has been the drag on organic growth? I guess you know how much of that drops through to you know just kind of you know shelf space loss etc. versus something you can backfill with some more products.

Speaker 1: That's a good question for me to clarify. Thank you for asking that. So, you know, we're being very thoughtful on how we do this. And so, although 60,000 skews is a lot of skews, so when you hear about that, you start to wonder if that's going to have an impact on revenue. But the ones that we've eliminated in the first phase.

Speaker 1: really had very little revenue tied to them and very little inventory in the system. So it was really just eliminating something that hasn't really been selling over the last several years. What you left with now are the ones that, which is about 45,000 skews, that we stopped manufacturing. There's revenue tied to that, and there's inventory in our system tied to it as well.

Speaker 1: And so you need to go through a thoughtful process with all of our customers of conversion from those products to other products that exist.

Speaker 1: in Stanley Black & Decker that are very similar in nature. Now whether that's an upgraded version that has been upgraded through innovation and the customer is still selling the older version, it could be an example of that. It could be an example of a brand being sold under a certain product and that we want to switch that brand over in that particular customer to a similar product.

Speaker 1: the world of inventory. And so far the team has been very successful in doing that, but this is a lot of work ahead of us. We have dedicated resources that are focused on this within our tools and outdoor business. And they have a very good grasp of the commercial aspects of this as well as supply chain. And I think they're doing an effective job so far navigating through it. Thank you.

Speaker 3: Our next question comes from the line of Michael Rehut with JP Morgan. Your line is now open.

Speaker 7: Thanks. Good morning, everyone. And Pat, welcome and nice to see you again, so to speak. Thank you. First, well, I guess my only question.

Speaker 7: What drove the upside on the operating margins, I believe you're looking for something more flatish to fork you? But then secondly, on the guidance, you talk about pro remaining healthy, I was just curious in terms of how you're thinking about pro.

Speaker 7: particularly in the back half and when you think about tools and storage with the guidance and the base case

Speaker 7: if that is looking for a positive inflection or just being more flat and how pro figures in that.

Speaker 2: In terms of the first quarter favorability, we are executing well on the transformation. And so, you know, the transformation is running ahead of plan and we're feeling good, not just about 23, but about the road beyond.

Speaker 2: inventory rolls off your balance sheet. So I would say having guidance that's highly consistent with the original guidance of low 20% gross profit margins of the first half and high 20% gross profit margins in the back half is the way you should think of the business.

Speaker 2: You should have confidence in the transformation delivering that and the way it flows quarter to quarter is always going to depend a little bit on mix and what type of inventory is coming off the balance sheet. So I wouldn't subscribe anything other than that to the first half gross profit margin.

Speaker 2: solid transformation performance and just an update on where the inventory is falling off the balance sheet. In terms of

Speaker 2: the outlook of the end market dynamics in tools and outdoors for the balance of the year. And we would expect.

Speaker 2: what we've seen in the first quarter to persist throughout the balance of the year, which is continued strength in the pro environment and a softer consumer environment, and that dynamic to be relatively consistent across the quarters.

Speaker 2: But as Don mentioned earlier, Q&A, the comp gets easier as we get from the second quarter to the third quarter. So it's less about a change in end market buyer behavior in the last three quarters of the year and it's more the comp easing in the latter part of the year.

Speaker 3: Thank you. Our next question comes from the line of Chris Snyder with UBS. Your line is now open.

Speaker 7: Thank you. So the Q1 inventory reduction certainly seems to be tracking ahead of expectations, but you guys left the 1H D-Stock guide unchanged at $500 million. Does this signal that maybe some of the D-Stock was pulled forward into Q1?

Speaker 7: Or should we think about potential upside on the rate of the first half D stock? Because it does sound like outdoor is improving in April relative to March. Thank you.

Speaker 2: Yeah, you know, I'd start by reiterating that, you know, we're committed to de-stocking $750 million to a billion for the year. And that's the commitment and the team is working through that, you know, given a dynamic macro environment. You know, the reason to not change the flow throughout the first half and the second half is because of the fact that we're committed to de-stocking $750 million to a billion for the year.

Speaker 2: is really, you know, channels remain conservative as you would expect with a dynamic macro environment and relatively high short-term borrowing cost. And so, you know, we'll continue to navigate the same environment that they're facing in a chief of year.

Speaker 2: But right now it's just too soon to change our outlook on the first half of the second year, second half in the two changes.

Speaker 2: But right now it's just too soon to change our outlook on the first half of the second year, second half inventory changes. Thank you.

Speaker 3: Our next question comes from the line of Eric Bashard with Cleveland Research, your line is now open. Thanks. Good morning.

Speaker 8: Patrick, I hear the guidance on the 750 to a billion. I'm curious as you think about solving that in an environment where retail limitaries are a little bit heavy, the demand is where it is. I'm curious as you think about promotions and

Speaker 8: things are slow and the inventories are a bit heavy. Is there a desire to be patient in the pace at which you work through that inventory? Or is there an opportunity to be more aggressive through promotions to clear out that inventory through 23 to be better positioned for 24? How do you navigate or solve through that dynamic?

Speaker 2: No, thanks for the question, Eric. Our inclination is to be more thoughtful around sales and operations planning. It is not our intent except for around the SKU rationalization areas. It's not our intent.

Speaker 2: to drive an inventory change through aggressive pricing. That is not our intent. We're going to be disciplined on pricing, and we're going to be focused on improving margins throughout 23 and beyond 23. So we'll be addressing that, Eric, really by internal planning around.

Speaker 2: production relative to sales, and we'll update the guidance as appropriate as the macro unfolds and as channel behavior unfolds. Thank you. This concludes the question and answer session. I would now like to hand the call back over to Dennis Lang for closing remarks. Thanks, Shannon. We'd like to thank everyone again for their time and participation on the call, obviously. Please contact me if you have any further questions.