Q4 2023 Stanley Black & Decker Inc Earnings Call

Okay.

Welcome to the fourth quarter and full year 2023 Stanley Black <unk> Decker earnings Conference call. My name is Shannon and I'll be your operator for today's call. At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session.

Note that this conference is being recorded.

I will now turn the call over to 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 2023 fourth quarter and full year webcast. Here. Today. In addition to myself is Don Allen, President and CEO, Chris Nelson T O EVP and president of tools and outdoor and Pat Hallinan E V P.

<unk> and CFO, our earnings release, which was issued earlier this morning, and a supplemental presentation, which we will refer to are available on the IR section of our website a.

A replay of this morning's webcast will also be available beginning at 11 a M. Today.

This morning, Don Chris and Pat will review, our 2023 fourth quarter and full year results and various other matters followed by a Q&A session.

Distant with prior webcast, 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 such statements are based on assumptions of future events that may not prove to be accurate and as such they involve risk and uncertainty. It's therefore possible that the actual results may materially.

Differ from any forward looking statements that we might make today.

We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent 34 Act filing.

Now I'll turn the call over to our President and CEO Don Allen.

Thank you Dennis and good morning, everyone Stanley Black <unk> Decker's performance in 2023 reflects our relentless focus on the execution of our strategic business transformation, which resulted in US building a strong foundation for improved profitability in 2024.

Stanley Black <unk> Decker today is a more streamlined business.

Built on the strength of our people and culture with an intensified focus on our core market leadership positions in tools and outdoor and industrial.

Right, a challenging market backdrop that pressured volumes during the year adjusted gross margin improved in each quarter, and we generated over $850 million of free cash flow.

These results demonstrate significant progress against two of our most important areas of focus during 2023 here.

Here are just a few additional examples of our accomplishments from the past year we.

We improved the health of our cost structure as a result of the momentum from our supply chain transformation.

We achieved our 2023 target and delivered over 1 billion of savings program to date.

We remain on track for the expected $2 billion of savings targeted by the end of 2025, our fourth quarter adjusted gross margin approached 30%.

This result outperformed our plan as our teams accelerated efforts to deliver profit and cash in response to the soft volume environment. Our strong free cash flow generation was primarily the result of $1 1 billion of inventory reduction as we successfully executed our supply chain initiatives, we continue to actively manage our portfolio.

Businesses in December we announced the agreement to sell our infrastructure business.

And currently expect that transaction to close at the end of the first quarter.

This aligns with our simplification efforts and focus on shareholder value creation, while advancing our capital allocation priorities we.

We strengthened our leadership team with the addition of three new highly capable seasoned and respected leaders and Kris Nelson Pascal Van and Jon Lucas each of whom brings a fresh and exciting step a perspective.

Stepping back over the past year and a half we have transform Stanley Black <unk> decker into a different company refocused and Reenergized together, our talented and motivated leadership team along with our diverse and high performing associates across the globe are executing our transformation strategy with urgency and diligence to ensure.

Sure we continue to achieve our goals our performance to date is encouraging and reinforces our confidence in making investments to pursue the compelling long term growth opportunities in the markets that we serve shifting.

Shifting now to our fourth quarter performance revenue was $3 7 billion.

Which was down mid single digits versus the prior year, primarily due to lower outdoor and DIY volume as well as infrastructure customer destocking.

Our profitability exceeded our plan as we recorded adjusted gross margin of 29, 8% in the quarter.

Adjusted gross margin was up over 10 points versus the prior year and improved 220 basis points versus the third quarter.

As a result of our focused efforts. This is the fourth consecutive quarter that we delivered sequential adjusted gross margin improvement.

We also reduced inventory by $240 million this quarter, which brings our total inventory reduction to $1 9 billion since mid 2022, when we began this journey.

'twenty 'twenty four will be the next chapter of transformation and opportunity to demonstrate our ability to further improve profitability and cash flow as we plant the seeds for future growth and success for Stanley Black <unk> Decker.

While it will be a transitional year, we are continuing to strengthen our foundation to create greater future earnings power.

We will remain focused on delivering differentiated product innovation through our portfolio of world class brands implementing cost efficiency measures within our control.

And driving share gain in our core markets all aimed to improve margin earnings and cash flow.

Turning to the markets. We serve our view is that these markets will remain dynamic in 2024.

Overall, we expect relative strength in demand from professional tools and portions of our industrial markets.

However, we believe the consumer and outdoor demand trends will continue to be weak together. This results in a modestly negative outlook in aggregate for all of our markets.

Our global trade weighted GDP estimates are slightly positive.

With U S real GDP growth projected to slow but remain positive in 2024.

Global commercial construction is expected to moderate.

At industrial two markets are expected to remain supportive.

The global industrial fastener categories will be led by aerospace, while automotive and industrial production markets will be relatively flat.

There are a few key macroeconomic indicators that more directly impact our larger markets in North America, which are somewhat mixed examples of this mixed north American tools and outdoor market are as follows new residential builds are forecasted to improve from current levels, yet remained modestly negative year over year.

Residential repair and remodel is currently expected to retract and the outdoor power equipment industry continues to show signs of customer Destocking and we don't expect the pivot to growth during 2024.

In summary, we're focused on the pro user and the healthiest market segments to generate share gains we are prepared for weak consumer and outdoor demand trends to persist the midpoint of our 2024 plan represents a continuation of the current demand environment, which in aggregate is slightly negative for all markets.

We will remain agile and ready to serve incremental demand if it accelerates in the second half, we believe that with our powerful brands and strong innovation machine, we have the opportunity to capture new wins with our customers and outperform the market.

Our plan for the year is underpinned by the continued supply chain cost improvements that are broadly in our control we.

We expect to deliver gross margin accretion earnings growth and strong free cash flow.

Pat will discuss this in more detail in just a few moments.

'twenty 'twenty four will be a year of focus excitement and purpose. It is fitting that we're celebrating the 100 year anniversary of the Walt a noteworthy milestone and a reminder, that we had been revolutionizing job sites for a century.

We will always relentlessly innovate for our pros in all our end users, allowing them to achieve better safer and faster results.

I want to thank our 50000 plus employees around the world for their persistence and commitment to our mission in 2023. They each have contributed to the progress we've made on our transformation journey.

Now stepping into the business segment results.

We'll discuss our industrial business performance and then pass it to Chris Nelson to review the tools and outdoor results.

Fourth quarter industrial revenue declined 4% versus last year price realization was more than offset by lower volume, which was driven by the continuation of customer destocking and infrastructure within the segment engineered fastening fourth quarter organic revenues were up 7%. This includes aerospace growth of 27% and auto growth of 10%.

As we benefit from recoveries in those markets. This growth was partially muted by market softness in general industrial fastener.

Fourth quarter Industrial adjusted segment margin was 11, 1% down 40 basis points versus prior year as lower volume more than offset price realization and cost control for.

For the year, we are very pleased with the performance of our industrial segment, while organic revenue growth was flat engineered fastening, which is our focus moving forward within this segment was up 6% organically behind the strength in automotive and aerospace.

<unk> delivered full year adjusted segment margin of 11, 8% up 210 basis points versus 2022.

This expansion was driven by price realization and cost actions taken to improve productivity throughout the year.

I want to thank the industrial business team for their strong execution in 2023.

And I'd like to especially thank the infrastructure team for their valuable contribution to Stanley Black <unk> Decker.

I'm confident that the business is positioned for a future of innovation and growth without Barak I will now turn the call over to Chris to review, our tools and outdoor performance.

Thank you Don and good morning, everyone now turning to the tools and outdoor fourth quarter operating performance fourth quarter revenue was approximately $3 2 billion down 8% organically versus prior year as a result of lower volumes, primarily from soft consumer outdoor in DIY.

Wind market demand, while price remained flat.

We made substantial progress improving profitability through the year driving adjusted segment margin to 10% in the fourth quarter. This was a sequential step up 70 basis points versus the third quarter, and 900 basis points better than the fourth quarter of 2022.

We achieved this by realizing lower inventory destocking costs, delivering supply chain transformation savings and capturing the benefits of shipping cost deflation, which were partially offset by lower volume now turning to the product lines organic revenue for hand tools declined 6%.

While power tools was up one point organically as pro driven momentum offset pressures in DIY demand outdoor was significantly challenged as customers right size their inventory levels, we expect that trend to continue into the start of the 'twenty 'twenty four selling season.

In tools, we finished the year with a relatively stable market backdrop supported by pro demand for example power tools organic performance improved each quarter in 2023 and exited in a growth position.

This demonstrates the demand for our iconic pro centric to Walt brand and the best in class products that we're bringing to the market.

As the outdoor market achieved post COVID-19 normalization, we are focused on improving our cost structure, while prioritizing investments to capture targeted share gain opportunities with customers and accelerating innovation in handheld electrification, which is a growing and highly profitable category.

Now turning to fourth quarter performance by region.

North America was down 10% organically with the tools product lines down low single digits, the commercial and industrial channel, which has a heavy professional user base grew low single digits organically.

Fourth quarter U S retail point of sale demand remained negative versus the prior year, but above 2019 levels supported by price increases and strength in professional tools.

European organic revenue was down 1% with outperformance in the Nordics, and Italy, which generated double digit organic growth as we continue to invest in expanding our professional product offerings and activating new battery powered innovations within the region.

Emerging markets grew mid single digits organically, excluding the impact from the Russia business exits, including this impact organic sales declined 1% solid emerging market performance was led by high teens organic growth in Brazil, marking the seventh consecutive quarter of organic grow.

<unk> in the country.

I want to thank the tools and outdoor team for their focused efforts throughout the year, which has positioned us well as we continue to focus on winning with our customers and capturing long term profitable growth and market share.

Now turning to the next side I would like to now introduce our new groundbreaking equipment system to Walt power shifts.

We are proud to bring this to market later this year as it demonstrates the company's commitment to innovation and electrification for the pros.

The dual wall power shifts system was unveiled at the world of concrete trade show last week and is designed to meet the critical needs of concrete professionals the.

The electrified line will allow the pro to transition away from gas powered equipment without compromising efficiency and performance.

Each of the six concrete tools in this system uses the dual wall power shift 554, what power battery and high speed charger to streamline efficiency.

That is equivalent to six and a half horsepower and is designed to withstand the toughest job site conditions.

Power shift battery Leverages pouch cell technology, which to work first brought to the industry in October of 2021 pouch technology enables the cordless job site of the future, bringing more power run time and efficiency take for example, the Powershop vibrator used for concrete.

Placement it is 85% more efficient than gas vibrators in the market today power shipped by readers deliver 60 continuous minutes of non stop work, which gives me user about 30% more run time than a tank of gas.

There are electrified vibrators in the market today that can only deliver 15 minutes of run time, adding.

Adding to the extended run time. This tool is five pounds lighter than a gas unit and is 10 pounds lighter than any other electrified unit available.

So Walt power shift represents the next edition to the 100 year legacy of the to Walt innovation mission to deliver comprehensive end to end workflow solutions.

Raymond to Waltz founding principles of innovation safety and productivity remain the core ethos of our company today to waltz future remains strong and we will lead the way in empowering trades people to succeed while defining the next era of industry innovation and minimizing environmental impact.

Thank you and with that I'll pass the call over to Pat Hallinan. Thanks.

Thanks, Chris and good morning.

Turning to the next slide.

I would like to highlight the progress we have achieved streamlining the business and transforming our operations.

We are on track to deliver our $2 billion pre tax run rate cost savings target by the end of 2025.

We achieved approximately $160 million pretax run rate cost savings in the fourth quarter, bringing our aggregate savings to over 1 billion since program inception.

This performance is slightly ahead of plan as our teams accelerated savings efforts to offset macroeconomic volume headwind that were greater than expected throughout the year, including during the fourth quarter.

Strategic sourcing initiatives remain the largest contributor to our supply chain transformation to date. In addition to the program freight rate and de merge savings also contributed to margin improvement starting early in 2023 and holding throughout the year.

Consistent with expectations set at transformation inception, we expect strategic sourcing to be the leading contributor to savings and we expect this to be the case in 2024.

Our operations Excellence program continues to leverage lean manufacturing principles to improve productivity across both business segments. This work stream will expand in scope during 'twenty 'twenty four and drive further cost efficiency in our manufacturing base. The footprint related projects are progressing on schedule and production transfers into centers of <unk>.

<unk> are in the various stages of qualification testing and execution. Similarly logistics network optimization programs are also on track with regional distribution Center Redesigns underway.

Turning complexity reduction our teams have identified approximately 85000 skus for discontinuation and are assisting customers as they transition to replacement products.

We have successfully eliminated over 45000 skus as of the end of 2023 with more expected in 2024. These actions are expected to generate approximately a half a billion dollars of savings in 2020 for supporting the funding of additional growth investments in our core business.

As we move into the next phase of our transformation.

<unk> footprint and product changes such as those from platforming will become more important and result in a lumpier cost savings trajectory as you would expect we remain confident that our transformation can't support the sustainable cost efficiency needed to return, our adjusted gross margin to 35% or greater move.

Moving to the next slide two of our primary areas of focus during 2023, where free cash flow generation and gross margin expansion, we reduced inventory by approximately $240 million in the fourth quarter inclusive of approximately 100 million attributable to the infrastructure business held for sale accounting.

This brings our inventory reduction to approximately $1 $1 billion in 2023, and $1 9 billion dollar since the middle of 2022.

Our disciplined inventory reduction efforts throughout the year supported $853 million of free cash flow generation, which we used to fund our dividend and reduce debt by approximately $280 million versus the prior year.

We remain focused on working capital optimization in addition to improving profitability to generate significant free cash flow.

In 'twenty 'twenty, four we plan to reduce inventory by $400 million to $500 million as we continue to prioritize working capital efficiency.

Capex is expected to range between $400 million to $500 million, increasing versus 2023 predominantly in support of the footprint related transformation initiatives planned for 2024.

These items in combination with organic cash generation underpin our full year free cash flow range of $600 million to $800 million. As a reminder, we expect a typical profile for our working capital as we build inventory for the 'twenty 'twenty four tools and outdoor spring selling season, resulting in the typical first.

Quarter operating cash outflow, our priority for capital deployment remains consistent making transformation investment funding.

Funding, our longstanding commitment to return value to shareholders through cash dividends and further strengthening our balance sheet turning to profitability adjusted gross margin of 29, 8% in the fourth quarter was up 10.3 points versus the prior year, driven by lower inventory destocking costs supply chain transformation.

Benefits and lower shipping costs, which more than offset the impact from lower volume.

Adjusted gross margin finished ahead of plan as we intentionally accelerated supply chain transformation actions in 2023, while navigating weak consumer and outdoor demand and channel inventory conservatism to meet our profitability and cash flow objectives. Additionally, pricing was a half a point better than our.

Expectation due to lower promotional mix in the quarter, we will continue our measured and disciplined approach to cost management to moderately improve on our second half 2023 adjusted gross margin gains into the first half of 'twenty 'twenty four while managing the margin pressures that accompany the outdoor selling season.

This is notable given that we're able to deliver second half 2023 adjusted gross margins.

One point above the high end of our initial twenty-three guidance demonstrating the transformation is on our targeted trajectory.

We are planning for adjusted gross margin to approximate 30% for the full year 2024, and expect to exit the year in the low thirties consistent with prior expectations. We are leveraging our half a billion dollars of cost reductions from the supply chain transformation and working hard to navigate another year without a macro.

Economic tailwind, we made significant progress throughout 2023 on our journey to restore our historical 35% plus adjusted gross margin and our efforts are enabling incremental investments to accelerate long term organic revenue growth now lets turn to our 2024 guidance and the remaining key assumptions too.

Reiterate.

We are planning for 'twenty 'twenty four to be another year, where we prioritize cash flow generation and gross margin improvement.

We are initiating our full year free cash flow guidance range of $600 million to $800 million GAAP earnings per share range of $1 60 to $2.85.

And an adjusted earnings per share range of $3 50 to $4 57.

We expect relative strength and demand for professional tools and some of our industrial markets. Conversely, we are prepared for weak consumer and outdoor demand trends to persist.

Together. These dynamics result in a modestly negative outlook in aggregate for our markets. We are planning for organic revenue to be relatively flat at the midpoint supported by targeted share gains in our businesses or.

Operator: Welcome to the fourth quarter and full year 2023 Stanley Black and Decker Earnings Conference Call. My name is Shannon, and I'll be your operator for today's call.

Our EPS range contemplates plus or minus two points of volume growth with the variation representing the market demand scenarios in the plan tool.

Operator: At this time, all participants are in listening mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Vice President of Industrial Relations, Dennis Lange. Mr. Lange, you may begin.

Tools and outdoor organic revenue is expected to be relatively flat at the midpoint behind our focus to win with the pro through industry, leading innovation investments in field resources and consumer share gains leveraging our strong portfolio of brands.

Dennis Lange: Thank you, Shannon. Good morning, everyone. And thanks for joining us for Stanley Black & Decker's 2023 fourth quarter and full year webinar. Here today, in addition to myself, is Don Allen, President and CEO, Chris Nelson, CEO, EVP, and President of Tools and Outdoors, and Pat Hallinan, EVP and CFO. Our earnings release, which was issued earlier this morning, and a supplemental presentation, which we will refer to, are available in the IR section of our website. A replay of this morning's webcast will also be available beginning at 11 a.m.

The industrial segment revenue is expected to be relatively flat to slightly positive organically, primarily driven by aerospace market recovery as well as leveraging our core business model and electrification to deliver share gains.

Industrial growth in 'twenty 'twenty four is expected to be moderated by infrastructure Destocking in Q1 before the closure of the signed divestiture and expected softness in general industrial fastener market.

We will continue to invest for long term organic growth and share gains throughout 'twenty 'twenty, four and plan to invest an incremental $100 million to accelerate innovation market activation and to support our powerful the wall Craftsman and Stanley brands, our planning expectation is that SG&A.

Dennis Lange: This morning, Don, Chris, and Pat will review our 2023 fourth quarter and four-year 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 about future events that may not prove to be accurate, and as such, they involve risk and uncertainty.

<unk> as a percentage of sales in 'twenty 'twenty four remains consistent with our recent fourth quarter around 21% which includes investments.

Dennis Lange: It is therefore possible that the actual results may materially differ from any forward-looking statements that we might make. We direct you to the cautionary statements in the 8K that we filed with the press and in our most recent 34 Act filing. I'll now turn the call over to our President and CEO, John Allen. Thank you, Dennis. And good morning, everyone.

Turning to profitability, we expect total company adjusted EBITDA margin to improve to approximately 10% for the full year supported by the benefits of the transformation program.

Segment margin and tools and outdoor is planned to be up year over year also driven by continued momentum from our ongoing strategic transformation.

Donald Allan: Stanley Black & Decker's performance in 2023 reflects our relentless focus on the execution of our strategic business transformation, which resulted in us building a strong foundation for improved profitability in 2025. Stanley Black & Decker today is more streamlined. Built on the strength of our people and culture, with an intensified focus on our core market leadership positions in tools and outdoor, and industrial. Despite a challenging market backdrop that pressured volumes during the year, adjusted gross margin improved in each quarter, and we generated over $860 million in free trade. These results demonstrate significant progress against two of our most important areas of focus for 2020. Here are just a few additional examples of our accomplishments from the past year.

The industrial segment margin is expected to be flat to up slightly versus prior year as operating improvement in engineered fastening is offset by the dilution from the previously announced divestiture of the infrastructure business.

For additional context around infrastructure, our guidance assumes approximately $100 million of first quarter sales with the divestiture closing at the end of the quarter. Thereafter, we have excluded the profit and assumed the proceeds will be used to reduce our commercial paper debt balance with these assumptions we've.

What's the one dollar adjusted EPS range with the largest contributor being market demand variability, we will work to optimize adjusted gross margin through our transformation program, we will manage SG&A thoughtfully throughout the year, given the macro uncertainty, but we will be working hard to preserve investments to position the business.

Donald Allan: We improved the health of our cost structure as a result of the momentum from our supply chain transformation. We achieved our 2023 target and delivered over $1 billion of savings program today. We remain on track for the expected $2 billion of savings targeted by the end of 2021. Our fourth quarter adjusted growth margin approaches 30%. This result outperformed the plan as our teams accelerated efforts to deliver profit and cash in response to the soft-falling environment. Our strong free cash flow generation was primarily the result of 1.1 billion of inventory production as we successfully executed our supply chain engineering. We continue to actively manage our portfolio of businesses. In December, we announced the agreement to sell our infrastructure, and we currently expect that transaction to close at the end of the first quarter. This aligns with our simplification efforts and focus on shareholder value creation while advancing our capital allocation priorities. We strengthened our leadership team with the addition of three new highly capable seasoned and respected leaders in Chris Nelson, Pat Hallinan, and John Lucas, each of whom brings a fresh and exciting set.

For longer term growth turning to the other elements of guidance.

GAAP earnings include pretax non-GAAP adjustments, ranging from $290 million to $340 million largely related to the supply chain transformation program with approximately 25% of these expenses being noncash footprint rationalization costs, our adjusted tax rate is.

Expected to step up in 'twenty, 'twenty, 4% to 10% with the first three quarters generally in the mid twenties discrete tax planning items are expected to reduce the full year rate and we currently expect these to occur in the fourth quarter.

There are 2024 guidance assumptions at the midpoint are noted on the slide to assist with modeling we expect the first quarter adjusted earnings per share to be approximately 13% of the full year at the midpoint. The EPS for the first quarter is impacted by the tax profile I discussed earlier and a heavier contribution from <unk>.

Interest expense associated with the expected first quarter commercial paper debt balance adjusted first quarter EBITDA as a percentage of the full year is expected to be over 20% consistent with pre pandemic history first quarter total company organic sales growth is expected to be down low single digits, primarily due to the <unk>.

Donald Allan: Stepping back, over the past year and a half, we have transformed Stanley Black & Decker into a different company, refocused and re-energized. Together, our talented and motivated leadership team, along with our diverse and high-performing associates across the globe, are executing our transformation strategy with urgency and diligence to ensure we continue to achieve our goal. Our performance to date is encouraging and reinforces our confidence in making investments to pursue the compelling long-term growth opportunities in the market. Moving now to our fourth quarter performance. Revenue was $3.7 billion, which was down mid-single digits versus the prior year, primarily due to lower outdoor and DIY volume, as well as infrastructure customer needs.

Same factors driving fourth quarter twenty-three softness adjusted EBITDA margins are planned to be up strongly versus prior year, leveraging the carryover benefits of the program and Comping the Destocking period.

In summary, 2024 represents another step along our transformation journey with a continued focus on gross margin and cash while targeting share gains in our stable, but tough macro environment. We believe our actions continue to position the company for long term growth and shareholder return with that I'll now pass the call back to Don.

Donald Allan: Our profitability exceeded our plan as we recorded an adjusted growth margin of 29.8% in the quarter. Adjusted growth margin was up over 10 points versus the prior year and improved 220 basis points versus the third quarter. As a result of our focused efforts, this is the fourth consecutive quarter that we delivered sequential adjusted growth margin improvements. We also reduced inventory by $240 million, which brings our total inventory reduction to $1.9 billion since mid 2022.

Thank you Pat we embarked on a bold transformation in the middle of 2022 to set Stanley Black <unk> Decker on a path to drive strong long term shareholder returns through sustainable growth profitability and cash flow improvements.

As we report another quarter of progress are consistent execution against our plan gives us the confidence to increase investments supporting the acceleration of organic growth behind our most powerful brands, particularly dewalt Craftsman and Stanley.

In the face of dynamic markets, we're focused on delivering best in class product innovation implementing cost efficiency measures within our control and driving share gain in our core markets.

Donald Allan: 2024 will be the next chapter of transformation, an opportunity to demonstrate our ability to further improve profitability and cash flow as we plant the seeds for future growth and success for Stanley Black & Decker. While it will be a transitional year, we are continuing to strengthen our foundation to create greater future earnings. We will remain focused on delivering differentiated product innovation through our portfolio of world-class brands. Implementing cost-efficiency measures within our control and driving share gains in our core market, all aim to improve margin, earnings, and capital. Turning to the markets we serve, our view is that these markets will remain dynamic in 2025. Overall, we expect relative strength and demand from professional tools and portions of our industrial market. However, we believe that consumer and outdoor demand trends will continue to be weak.

I am confident that we are creating a stronger and more focused company capable of gaining market share consistently over the long term with the best people. The most iconic brands in the highest quality innovation engine in the industry.

With that we are now ready for Q&A Dennis.

Great. Thanks, Dan Shannon, we can now start the Q&A. Please thank you.

Thank you to ask a question you will need to press star one on your telephone.

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To withdraw your question. Please press star one again.

We ask that you please limit yourself to one question. Please stand by while we compile the Q&A roster.

Donald Allan: Together, this results in a modestly negative outlook in aggregate for all of our markets. However, our global trade-weighted GDP estimates are slightly positive, with U.S. real GDP growth projected to slow but remain positive in 2024. Global commercial construction is expected to moderate, and industrial tool markets are expected to remain supportive. The global industrial fastening categories will be led by aerospace, while automotive and industrial production markets will be relatively. There are a few key macroeconomic indicators that more directly impact our larger markets in North America, which are somewhat mixed. Examples of this mixed North American tools and outdoor market are as follows.

Our first question comes from the line of Julian Mitchell with Barclays. Your line is now open.

Hi, good morning.

Maybe.

Good morning, maybe just a question for me around that rate of improvement as we're going through the year.

Just trying to understand I guess, particularly the gross margin Delta.

And also on the free cash flow progression.

What's the confidence that that gross margin can sort of move up sequentially. As you go through the year to get to that low <unk> exit rate.

Free cash kind of how weighted showed that 700 million mid point would be to the second half. Thank you.

Donald Allan: New residential builds are forecasted to improve from current levels, yet remain modestly negative year-over-year. Residential Repair and Remodel is currently expected to retract, and the outdoor power equipment industry continues to show signs of customer destocking, and we don't expect a pivot to growth during 2020. In summary, we're focused on the pro-user and the healthiest market segments to generate shares. We are prepared for weak consumer and outdoor demand trends to persist.

Hey, Julien it's Pat Thanks for the questions.

Our focus next year is on both of these topics gross gross margin and cash delivery and as we moved through 'twenty three and made very strong progress on gross margin.

We certainly had the benefit in 23 of that progression.

<unk>.

The consumption of high cost inventory off the balance sheet. So throughout 'twenty. Three you saw a very very significant degree of progression throughout the year.

Donald Allan: The midpoint of our 2024 plan represents the continuation of the current demand environment, which is, in aggregate, slightly negative for all markets. However, we will remain agile and ready to serve incremental demand if it accelerates in the second half. We believe that with our powerful brand and strong innovation machine, we have the opportunity to capture new wins with our customers and outperform them. Our plan for the year is underpinned by continued supply chain cost improvements that are broadly in our control. We expect to deliver growth margin accretion, earnings growth, and strong pre-cash flow. Pat will discuss this in more detail in just a few moments.

Throughout 'twenty four we're confident in our plan and we're targeting the 300 basis points roughly of progression throughout the year it will be.

Back half weighted.

And part of that is the low volumes that we saw.

The back half of 'twenty, three and expect to see the front half of 'twenty four but we have every confidence we're going to deliver it and as we started talking to investors the back half of last year.

We guided people to measure our gross margin progress in half year increments.

Donald Allan: 2024 will be a year of focus, excitement, and purpose. It is fitting that we are celebrating the 100-year anniversary of DeWalt, a noteworthy milestone and a reminder that we have been revolutionizing job sites for. We will always relentlessly innovate for our pros and all our end-users, allowing them to achieve better, safer, and faster results. I want to thank our 50,000-plus employees around the world for their perseverance and commitment to our mission in 2023. They have each contributed to the progress we've made on our transformation journey.

And if you look at the back half of 'twenty. Three we were about 28 seven for our back half of 'twenty three progression.

And we expect to be in.

In expansion mode, the front half of 'twenty.

24, it will be modest in the 50 ish basis point range.

And we will be stepping up more significantly in the back half of 'twenty four.

As we accelerate.

Some of the savings efforts we.

We have on the docket for the year quickly.

Donald Allan: Stepping into the business segment, I will discuss our industrial business performance and then pass it to Chris Nelson to review the tools and outdoor results. Fourth quarter industrial revenue declined 4% versus last year. Price realization was more than offset by lower volume, which was driven by the continuation of customer de-stocking and inflation.

Quickly to offset some of the volume softness we've been experiencing the last six to 12 months, but we have every confidence we're going to get there in terms of cash.

Difference in cash year over year.

<unk> is really the difference in the transformation initiatives that are planned for 2020 for what we're doing.

Donald Allan: Within the segment, Engineered Fasting, 4th Quarter Organic Revenues were up 17%. This included aerospace growth of 27% and auto growth of 10% as we benefit from recoveries in those markets. This growth was partially muted by market softness and general industrial conditions. The Fourth Quarter Industrial Adjusted Segment Margin was 11.1%, down 40 basis points versus the prior year as lower volume more than offset price realization. For the year, we are very pleased with the performance of our industrial segment. While organic revenue growth was flat, engineered fastening, which is our focus moving forward within this segment, was up 6% organically, behind the strength in automotive and

A bigger proportion of the footprint moves which are going to drive more capex. During 24, then during 'twenty three of about $100 million and more cash oriented restructuring charges around $50 million. So the big difference year over year and cash drivers are the restructuring agenda.

If you look at the rest of the cash drivers.

We're still targeting pretty meaningful inventory reduction, but less than the $1 billion that we drove off the balance sheet in 'twenty three we're going to be in the 4% to $500 million range.

The difference in inventory reduction is made up by our higher operating profit. So those two things roughly offset each other.

And the drivers are really the difference in year over year, Capex and the difference in year over year cash restructuring charges.

Donald Allan: The team delivered full-year adjusted segment margin of 11.8%, up 210 basis points versus 2020. This expansion was driven by price realization and cost actions taken to improve productivity throughout the year. I want to thank the industrial business team for their strong execution in 2020. And I'd especially thank the infrastructure team for their valuable contribution to Stanley Gleickendeck.

Thank you.

Our next question comes from the line of Tim Walsh with Baird. Your line is now open.

Hey, guys. Good morning, nice job on the margin.

Maybe just two cost question. So so first just on investments Pat.

What are your kind of explicitly investing.

Or at least it was planned to be invested in 'twenty four and how variable are you kind of planning to manage those investments as you go through the year and then secondly, just on cost inflation.

Could you give us just an idea of kind of what youre seeing and kind of key cost inputs and then also what's kind of explicitly baked in for price cost.

Chris Nelson: I am confident that the business is positioned for a future of innovation and growth with Epiroc. I will now turn the call over to Chris to review our tools and outdoor performance. Thank you, Don, and good morning, everyone.

Yes.

So on investments, we're continuing to invest for.

Dominantly.

Innovation, and then in the field and marketing resources to activate it.

Chris Nelson: Now turning to the tools and outdoor fourth quarter operating performance. Fourth quarter revenue was approximately $3.2 billion, down 8% organically versus the prior year as a result of lower volumes, primarily from soft consumer outdoor and DIY market demand, while price remained flat. We made substantial progress improving profitability through the year, driving adjusted segment margin to 10% in the fourth quarter. This was a sequential step-up of 70 basis points versus the third quarter and 900 basis points better than the fourth quarter of 2020. We achieve this by realizing lower inventory to stocking costs, delivering supply chain transformation savings, and capturing the benefits of shipping cost deflation, which was partially offset by lower volume. Now, turning to the product line. Organic revenue for hand tools declined 6%, while power tools were up 1 point organically as pro-driven momentum offset pressures in DIY demand. Outdoor was significantly challenged as customers right-sized their inventory levels.

So the $100 million we're targeting.

For 'twenty for I'd say three quarters or more are around that.

Obviously.

A lot of that in our in our biggest business our tools and outdoor business.

Some of it in industrial as well, it's mostly about innovation and market activation in field resources to support it maybe 20% 25% is another capability building.

To make us a more productive organization.

And then as we go through the year I mean, obviously, we're going into a year.

With.

Pretty muted macro and the uncertainty we've been experiencing the last 12 or 18 months, we're certainly going to be paying close attention to the macro.

Managing our cost structure as we go throughout the year.

To be in step with that macro, but we are really focused on the long term growth of this business and we're going to be working hard as a leadership team and as an organization.

Chris Nelson: We expect that trend to continue into the start of the 2024 selling season. In tools, we finish the year with a relatively stable market backdrop, supported by positive demand. For example, Power Tools' organic performance improved each quarter in 2023 and exited in a growth position. This demonstrates the demand for our iconic, pro-centric DeWalt brand and the best-in-class products that we are bringing to the market. As the outdoor market achieves post-COVID normalization, we are focused on improving our cost structure, while prioritizing investments to capture targeted fair gain opportunities with customers and accelerating innovation in handheld electrification, which is a growing and highly profitable category. Now, turning to its fourth quarter performance by region.

Reserve those investments.

Even if the macro creates a bit more headwinds than we were expecting because.

We're not going to just completely collapsed.

For investment.

At the risk of longer term brand health and brand share gaining power.

In terms of inflation and deflation for the year, our plan expects roughly flat across kind of materials and freight.

You've obviously had some of the battery metals.

Go down an insignificant percentage terms, but in dollar terms those don't drive our basket as much as some others.

There's been some recent upticks.

In.

Deal resins, and we will probably face some marginal pressure from Red Sea freight, but overall, you put metals and freight together roughly flat still kind of a high labor rate environment, but that's embedded in our gross margin and SG&A assumption.

Chris Nelson: North America was down 10% organically, with the tools product line down a low single digit. The commercial and industrial channel, which has a heavy professional user base, grew a low single digit organically. Fourth quarter U.S. retail point-of-sale demand remained negative versus the prior year, but above 2019 levels, supported by price increases and strength in professional tools. European organic revenue was down 1% without performance in the Nordics and Italy, which generated double-digit organic growth as we continue to invest in expanding our professional product offerings and activating new battery-powered innovations within the region. Emerging markets grew mid-single digits organically, excluding the impact from the Russia business. However, including this impact, organic sales declined 1%.

And then finally price cost again roughly neutral.

It will have some carry in price.

Industrial that's to the good offset by just the normalization of promotional cadence.

And tools and outdoor again recall the back half of 'twenty three we're getting back to a normal promotional cadence as our supply chain heel he'll then that will be playing through the front half of 'twenty four as well, but I'd say those two forces together enterprise wide get us to roughly flat.

Rice dynamics for the year and again roughly flat inflation backdrop in total.

Chris Nelson: Solid emerging market performance was led by high-team organic growth in Brazil, marking the seventh consecutive quarter of organic growth in the country. I want to thank the Tools and Outdoor team for their focused efforts throughout the year, which has positioned us well as we continue to focus on winning with our customers and capturing long-term profitable growth in markets. Now, turning to the next slide, I would now like to introduce our new groundbreaking equipment system, DEWALT PowerShield. We are proud to bring this to market later this year as it demonstrates the company's commitment to innovation and electrification for the pros. The DeWalt Powershift System was unveiled at the World of Concrete trade show last week and is designed to meet the critical needs of concrete professionals. The electrified line will allow professionals to transition away from gas-powered equipment without compromising efficiency and performance. Each of the six concrete tools in the system uses the DeWalt PowerShift 554-watt-hour battery and high-speed charger to streamline efficiency. The battery can deliver up to 5,000 watts of continuous power.

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

Chris Snyder: Thank you I just wanted to follow up about.

Chris Snyder: The flat lining of gross margin that's expected into the first half relative to the Q4 exit rate.

Chris Snyder: It seems like Theres a lot of savings on the balance sheet that has yet to flow through the P&L.

Chris Snyder: I think the expectation is that those come through on a couple of quarter aligned. So just maybe why is that not coming through in the first half and I understand the outdoor mix will pick up but I would also think that tools gross margin gets better from Q4 into into the first half I think move past the holiday promo so any color on the gross.

Chris Snyder: Margin Delta between those product lines to help understand that mix would be helpful. Thank you.

Yes no.

Speaker Change: Like I said, we do expect.

Speaker Change: Some modest expansion front half to front half.

Speaker Change: Yes, we had as we went through 'twenty, three and we saw volumes being really soft.

I commend the team for is still delivering over $500 million of savings across the volume backdrop that was.

Chris Nelson: That is equivalent to 6 12 horsepower and is designed to withstand the toughest job site conditions. The PowerShift battery leverages pouch cell technology, which DeWalt first brought to the industry in October of 2021. Pouch technology enables the cordless job site of the future, bringing more power, runtime, and efficiency. Take, for example, the PowerShift vibrator used for concrete placement.

For the year about three or 400 basis points below what we expected.

And we got.

Speaker Change: Beyond the high side of our guidance for 23 gross margin. So it came out at quite a strong rate.

As you point out.

The trajectory in the first half is positive even if a bit muted and I'd say a couple of forces of that or one that you pointed to you have a heavier outdoor mix.

Chris Nelson: It is 85% more efficient than gas vibrators in the market today. PowerShift vibrators deliver 60 continuous minutes of non-stop work, which gives the user about 30% more run time than a tank of gas. There are electrified vibrators in the market today that can only deliver 15 minutes of runtime. Added to the extended run time, this tool is 5 pounds lighter than a gas unit and is 10 pounds lighter than any other electrified unit available. DeWalt PowerShift represents the next addition to the 100-year legacy of the DeWalt Innovation Mission to deliver comprehensive end-to-end workflow solutions. Raymond DeWalt's founding principles of innovation, safety, and productivity remain the core ethos of our company today. DeWalt's future remains strong, and we will lead the way in empowering tradespeople to succeed while defining the next era of industry innovation and minimizing environmental impact. Thank you, and with that, I'll pass the call over to Pat Hallinan. Thanks, Chris, and good morning. Turning to the next slide.

Speaker Change: In the first half of the year and you have.

Speaker Change: Some of the under absorption that you that was associated with low volumes from the back half of 'twenty three and those are really the two forces.

And they play out in the front half by muting some of the rate of that progress, but they don't take us off track for the full year savings.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of Rob Wertheimer with Melius Research. Your line is now open.

Thank you good morning, everybody.

Good morning, My question is on dynamics.

The retail channel and if I understood. It right you had a volume is a little soft you had promotional activity down which is good.

I'm just curious about.

About how that works out of market share whether the competition is stepping up promotional activity whether channel inventory is now normalized there is less promotion, maybe just give us a comment on.

On market share on promotions on dynamics of retail thank you.

Sure. Thanks, Rob.

Yes, I think the competitive landscape has not really shifted or changed.

As we went through the end of 'twenty three into the early stages of 24.

Patrick D. Hallinan: I would like to highlight the progress we have achieved, streamlining the business, and transforming our operations. We are on track to deliver our $2 billion pre-tax run rate cost savings target by the end of 2025. We achieved approximately $160 million pre-paxed run rate cost savings in the fourth quarter, bringing our aggregate savings to over $1 billion since program inception.

There is.

Modest movements in certain brands moving across retailers.

But aside from that we're not seeing unusual pricing or discounting happening and for the most part it's really all of us navigating.

Somewhat muted.

Muted market right, now and beginning and continuing to position ourselves for share gain but I'll get as Kris Nelson to give a little more color on what are you seeing yes, I would say that.

Patrick D. Hallinan: This performance is slightly ahead of plan as our teams accelerated savings efforts to offset macroeconomic volume headwinds that were greater than expected throughout the year, including during the fourth quarter. Strategic sourcing initiatives remain the largest contributor to our supply chain transformation to date. In addition to the program, freight rate and demerge savings also contributed to margin improvement, starting early in 2023 and holding throughout the year, consistent with expectations set at Transformation Inception. We expect strategic sourcing to be the leading contributor to savings. And we expect this to be the case in 2024,

You think about the just referencing Paul I would say that the POS played out roughly as we would've planned it in Q4, where we saw it was down year over year, but above 2019 levels and if you think about the kind of buckets, there and we saw strength out of the pro and the expected level.

<unk>.

Kind of.

Difficulties that we are going to see in the consumer and DIY segment. So that's on plan and that's what we're contemplating as we said and moving into this year for that being a fairly stable macro that we're playing the backdrop against.

Patrick D. Hallinan: Our operations excellence program continues to leverage new manufacturing principles to improve productivity across both business segments. This workstream will expand in scope during 2024 and drive further cost efficiency in our manufacturing. The footprint-related projects are progressing on schedule, and production transfers into Centers of Excellence are in the various stages of qualification, testing, and execution. Similarly, logistics network optimization programs are also on track, with regional distribution center redesigns underway. Concerning complexity reduction, our teams have identified approximately 85,000 SKUs for discontinuation and are assisting customers as they transition to a replacement process. We have successfully eliminated over 45,000 SKUs as of the end of 2023, with more expected in 2024.

As Don referenced we're not seeing major changes in the competitive dynamics, what we're seeing and we're excited about is getting back to our normal promotional rhythms as we have been able to take care of our customers and fill our our fill rates have been proved in that.

That's made a big difference in our opportunity to compete well in retail and then I think the final part of your question that you referenced was regarding inventory levels and certainly on a global basis as people take a look at what is somewhat of a dynamic or tepid macro people are thinking about.

Right sizing their inventories for that environment, and we see that in.

Speaker Change: Somewhat anecdotally and in places like Europe, and in some of our professional channels, but where you take a look at the biggest.

<unk> is the inventory, where we have really clean data in our major retailers were at historical levels. We feel good where we are they are positioned and we think that thats going to be.

Patrick D. Hallinan: These actions are expected to generate approximately a half a billion dollars of savings in 2024, supporting the funding of additional growth investments in our core business. As we move into the next phase of our transformation, footprint and product changes, such as those from platforming, will become more important and result in a lumpier cost savings trajectory, as you would expect.

Neutral dynamic heading into 2024.

Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Your line is now open.

Yeah.

Thanks, Good morning, guys.

I believe I know it was actually up.

So the new products pretty pretty impressive I would say so congrats on that launch.

Nigel Coe: On the pricing.

Came in obviously better than last quarter.

Patrick D. Hallinan: We remain confident that our transformation can support the sustainable cost efficiency needed to return our adjusted gross margin to 35% or greater. Moving to the next slide, two of our primary areas of focus during 2023 were free cash flow generation and gross margin. We reduced inventory by approximately $240 million in the fourth quarter, inclusive of approximately $100 million attributable to the infrastructure business Home for Sale Accounts. This brings our inventory reduction to approximately $1.1 billion in 2023 and $1.9 billion since the middle of 2022. Our disciplined inventory reduction efforts throughout the year supported $853 million of free cash flow generation, which we used to fund our dividend and reduce that by approximately $280 million versus the prior year.

Within that though so just wondering if.

You talked about normalization of the promotional activity and I'm just wondering if maybe you pull back in the fourth quarter and perhaps that I kind of put some of the maybe the weakness in <unk>, but.

Speaker Change: Just really curious.

On the footprint changes youre, making with the Capex.

Obviously, we got Trump talking about China. So I'm, just wondering if there's going to be a material change in your sourcing and footprint to you in April.

Yes, so Nigel I'll have Chris answer the first question and then I'll take the.

The second question after you're done.

So from a pricing perspective, Nigel good good to hear from you I'm glad you were able to see the new products, sorry, I missed you there but.

Speaker Change: No we did not see.

Significant pullback in promotional volume what we saw was an overall as we saw as we said more challenge in the overall macro environment that I think contributed to that more than anything and as we transition into next year, we're expecting that pricing dynamic to stay.

Patrick D. Hallinan: We remain focused on working capital optimization, in addition to improving profitability to generate significant free cash. In 2024, we plan to reduce inventory by 400 to $500 million as we continue to prioritize working capital. CapEx is expected to range between $400 to $500 million, increasing versus 2023, predominantly in support of the Footprint-related Transformation Initiative planned for 2023. These items, in combination with organic cash generation, underpin our full year-free cash flow range of $600 to $800 million.

Fairly stable, we feel good about our plans there and overall I think it's fair to say that as Pat pointed out we're at we're kind of at a neutral price cost. We're not we're not banking on a bunch of inflation and as we take a look at in the rearview mirror.

We have recouped is significant but not all of the costs that we took on.

As we saw inflation and so keeping that neutral price cost is important for our our gross margin trajectory moving forward as well.

Speaker Change: Yes, the comment on the footprint yes.

Geopolitical dynamics continued to be in <unk>.

Speaker Change: Were you getting an interesting for sure.

Patrick D. Hallinan: As a reminder, we expect a typical profile for our working capital as we build inventory for the 2024 Tools & Outdoors Spring Selling Season, resulting in the typical first quarter operating cash outflow. However, our priority for capital deployment remains consistent, making transformation investments, funding our long-standing commitment to return value to shareholders through tax dividends, and further strengthening our balance. Turning to profitability, adjusted growth margin of 29.8% in the fourth quarter was up 10.3 points versus the prior year, driven by lower inventory de-stocking costs, supply chain transformation benefits, and Laura Fippink, which more than offset the impact from lower bombs. Adjusted Gross Margin finished ahead of plan as we intentionally accelerated supply chain transformation actions in 2023 while navigating meet consumer and outdoor demand and channel inventory conservatism to meet our profitability and cash Additionally, pricing was a half point better than our expectations due to a lower promotional mix in the quarter.

Speaker Change: What may play out in the future, but as it comes to our footprint transformation, we started with an overarching.

Our strategy.

Speaker Change: Finding ways to get closer to our customer.

With our supply base and our manufacturing operations.

As certain types of products that are high volume in particular other products you have to focus more on the low cost location and so you end up with a mixed geography of where you're manufacturing and how you're serving your customers that hasnt really changed we continue to do as part of the transformation now is.

Develop centers of excellence for power tools certain types of hand tools certain types of outdoor products that leverage the expertise we have in these geographies in Asia, and Mexico and in the United States and Eastern Europe.

We will continue to build upon that which gives it eventually will give us the ability to flex.

<unk> from different geographies.

Geopolitical landscape changes radically.

That will take time to do that Thats something that will necessarily occur in the next six to 12 months, but as we continue on this journey and finished this transformation in the next two to three years, that's an outcome that we're looking to achieve and so we believe that's the appropriate way to address what's happening in the dynamic geopolitical.

Patrick D. Hallinan: We will continue our measured and disciplined approach to cost management to moderately improve on our second half 2023 adjusted gross margin gains into the first half of 2024 while managing the margin pressures that accompany outdoor selling. This is notable given that we're able to deliver second half 2023 adjusted growth margins, one point above the high end of our initial 23 guidance. Demonstrating the transformation is on our targeted trajectory. We are planning for adjusted gross margin to approximate 30% for the full year of 2024 and expect to exit the year in the low 30s, consistent with prior expectations. We are leveraging our half a billion dollars of cost reductions from the supply chain transformation and working hard to navigate another year without a macroeconomic tailwind.

Space and we will continue to evaluate that going forward as things shift in countries like the United States if they shift.

And make pivots as necessary.

Thank you.

Our next question comes from the line of.

Adam Baumgarten with Zelman and Associates. Your line is now open.

Hey, guys good morning.

Just on SKU rationalization do you think that had any impact on the volumes in the fourth quarter or even the second half of 'twenty three.

Go ahead Pat.

Adam No I mean.

That program has been very thoughtful.

And weeding out the complexity, that's not creating value for.

End users or for our shareholders and.

Patrick D. Hallinan: We made significant progress throughout 2023 on our journey to restore our historical 35% plus adjusted gross margins, and our efforts are enabling incremental investments to accelerate long-term organic revenue. Now, let's turn to our 2024 guidance and the remaining two assumptions. To reiterate, we are planning for 2024 to be another year where we prioritize cash flow generation and gross margin. We are initiating a four-year pre-taxable guidance range of $600 to $800 million, a gap earnings per share range of $1.60 to $2.85, and an adjusted earnings per share range of $3.50 to $4.00. We expect relative strength in demand for professional tools in some of our industrial markets. Conversely, we are prepared for weak consumer and outdoor demand trends to persist.

Or is there is no major disruption by that by any stretch of the mat.

Speaker Change: Thank you.

Our next question comes from the line of Michael Rehaut with JP Morgan. Your line is now open.

Hi, Thanks, good morning, everyone.

Good morning.

Had a question on the growth investments and just how to think about the cadence of that longer term you talked about a little bit earlier in the call but.

When you talk about in totality I think.

Alongside the 35% plus gross margin and enabling $3 million to $500 million of growth investments I was hoping just to get a sense of what those investments were in 'twenty three.

What you expect them to be in 'twenty, four and 'twenty five.

And how much of that is going to be kind of an ongoing level of investment.

If that would all be on the income statement and the tools and storage or if there will be some incorporate.

Patrick D. Hallinan: Together, these dynamics result in a modestly negative outlook in aggregate for our market. We are planning for organic revenue to be relatively flat at the midpoint, although supported by Targeted Share Games in our business.

Yes.

Yes, Mike.

I'll give you a few points.

Hey.

23 was a bit over 100 will be around 124.

Patrick D. Hallinan: Our EPS range contemplates plus or minus two points of volume growth, with the variation representing the market demand scenarios in the plan. Tools and Outdoor Organic Revenue is expected to be relatively flat at the midpoint, behind our focus on winning with the professional, to industry-leading innovation, investments in field resources, and consumer share gains, leveraging our strong portfolio brand. The industrial segment revenue is expected to be relatively flat to slightly positive organically, primarily driven by the aerospace market recovery, as well as leveraging our core business model and electrification to deliver share gains. Industrial growth in 2024 is expected to be moderated by infrastructure de-stocking in Q1 before the closure of the signed divestiture and expected softness in general industrial fastening. We will continue to invest for long-term organic growth and share gains throughout 2024 and plan to invest an incremental $100 million to accelerate innovation, market activation, and to support our powerful DeWalt, Craftsman, and Stanley brands.

And as I referenced earlier question.

It's about three quarters around innovation, and then the marketing and field resources to activate that effectively in the rest of it is around capability building some of it in our business segments, a relatively small amount of it in corporate.

And I think if youre getting to the broader question of Youre sitting there with a model you are trying to figure out is SG&A permanently at 21% of sales or something else. So thats kind of behind the essence of your question I would say as we get back to share gains.

And as we chart, our brands and our innovation up for a few years I expect in the medium term to be more in the back to the 20% range, if thats kind of what youre trying to unpack.

But I would expect us to be elevated in 'twenty four and potentially.

25, and 26, depending on the.

The macro.

Some of the things we're prioritizing in the medium term around that 20% level and then I think.

Patrick D. Hallinan: Our planning expectation is that SG&A, as a percentage of sales in 2024, remains consistent with our recent fourth quarter, around 21%, which includes investment. Turning to profitability, we expect total company adjusted EBITDA margins to improve to approximately 10% for the full year, supported by the benefits of the transformation program. Segment margin in tools and outdoor is planned to be up year over year, also driven by continued momentum from our ongoing strategic transformation. The industrial segment margin is expected to be flat to slightly up versus the prior year as operating improvement in engineered fastening is offset by the dilution from the previously announced divestiture of the infrastructure. For additional context around infrastructure, our guidance assumes approximately $100 million of first quarter sales with the divestiture closing at the end of the quarter. Thereafter, we have excluded the profit and assume the proceeds will be used to reduce our commercial paper debt balance.

Beyond the medium term.

To the extent, we can be exceptional at driving gross margin improvement.

G&A will move with the rate at which we can drive gross margin improvement.

Thank you.

Our next question comes from the line of.

Speaker Change: Eric Bossard with Cleveland Research. Your line is now open.

Good morning.

You talked about normalizing promotions and you talked about I.

I think volumes relative to 19 I was just curious if you could give us a little bit of insight into promotional activity relative to 19, where we are now.

And what is embedded in the guidance and what Youre seeing in the market in regards to an appetite for promotions either from <unk>.

Consumers professionals or retailers.

Yes.

Eric So I would say that the.

The level of promotional activities. We are at now and we would expect in 'twenty four is probably pretty consistent with what we experienced in 2019.

And so what kind of back to where we were which I think was a healthy balance of normal core operating selling activities and promotional activities.

Patrick D. Hallinan: With these assumptions, we've established a $1 adjusted EPS, with the largest contributor being market demand. We will work to optimize adjusted growth margin through our transformation program. We will manage SG&A thoughtfully throughout the year, given the macro uncertainty, but we will be working hard to preserve investments to position the business for longer-term growth. Turning to the other elements of GATT, Gap earnings include pre-tax, non-gap adjustments ranging from $290 to $340 million, largely related to the Supply Chain Transformation Program, with approximately 25% of these expenses being non-cash footprint rationalization costs. Our adjusted tax rate is expected to step up in 2024 to 10%, with the first three quarters generally in the mid-20s. Discrete tax planning items are expected to reduce the full-year rate, and we currently expect these to occur in the fourth quarter.

As we think about the year.

Speaker Change: Our customers are not really talking to us about what I would call unusual levels of promotional activities. They are looking for the normal.

Speaker Change: Set of activities and I think that's going to likely be the case.

The year end, we tend to end demand markets like this that are somewhat.

Stable in the sense. So you don't have a lot of growth and you don't have a lot of attraction.

It tends to be a more normal promotional environment in that setting.

Demand retracts.

And a more significant way than promotional activity does pull back a fair amount because.

Because the impact of promotions is not as significant.

Speaker Change: If we see a back half of the year that gets better which we've talked about in our presentation that.

Patrick D. Hallinan: Other 2024 guidance assumptions at the midpoint are noted on the slide to assist with modeling. We expect the first quarter adjusted earnings per share to be approximately 13% of the full year at the midterm. The EPS for the first quarter is impacted by the tax profile I discussed earlier, and a heavier contribution from interest expense associated with the expected first quarter commercial paper debt.

Our guidance doesn't necessarily include that but if the back half.

Demand environment is an improved environment and you could potentially see a little bit of a tick up in promotional activity related to that but at this stage based on our guidance I think it is.

<unk> balance to say that our view is that promotional activity will be consistent with what we saw pre pandemic.

Thank you. This concludes the question and answer session I would now like to hand, the conference back over to Dennis Lange for closing remarks.

Patrick D. Hallinan: Adjusted first quarter EBITDA as a percentage of the full year is expected to be over 20%, consistent with pre-pandemic history. First quarter total company organic sales growth is expected to be down low single digits, primarily due to the same factors driving fourth quarter 23 stock. Adjusted EBITDA margins are planned to be up strongly versus the prior year, leveraging the carryover benefits of the program and comping the destocking. In summary, 2024 represents another step along our transformation journey, with a continued focus on gross margin and cash while targeting share gains in a stable but tough macro environment. We believe our actions continue to position the company for long-term growth and shareholder recovery. With that, I will now pass the call back to Don. Thank you, Pat.

Dennis Lange: Shannon Thanks, 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.

Dennis Lange: This concludes today's conference call. Thank you for your participation you may now disconnect.

Okay.

[music].

Yeah.

Okay.

Okay.

[music].

Okay.

[music].

Donald Allan: We embarked on a bold transformation in the middle of 2022 to set Stanley Black & Decker on a path to drive strong, long-term shareholder returns through sustainable growth, profitability, and cash flow improvement. As we report another quarter of progress, our consistent execution against our plan gives us the confidence to increase investments supporting the acceleration of organic growth behind our most powerful brands, particularly DeWalt, Traftman, and Samson. In the face of dynamic margin,

Donald Allan: We're focused on delivering best-in-class product innovation, implementing cost efficiency measures within our control, and driving share gains in our core market. I am confident that we are creating a stronger and more focused company capable of gaining market share consistently over the long term. We're the best people, the most iconic brands, and the highest quality innovation engine in the universe. With that, we are now ready for Q&A. Great. Thanks, Don. Shannon, we can now start the Q&A, please.

Operator: Thank you. Thank you. To ask a question, you will need to press star 11 on your telephone.

Operator: You will then hear an automated message advising your hand is raised. To withdraw your questions, please press star 11 again. We ask that you please limit yourself to one question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Julian Mitchell with Barclays. Your line is now open. Hi, good morning.

Operator: Maybe just a question for me around that rate of improvement as we go through the year. Just trying to understand, I guess, particularly the gross margin delta and also the free cash flow progression. You know, what's the confidence that that gross margin can sort of move up sequentially as you go through the year to get to that low-30s exit rate? And on free cash, kind of how weighted should that $700 million midpoint be to the second half? Hey, good Pat, thanks for the questions.

Patrick D. Hallinan: You know, our focus next year is on both of these topics, gross margin and cash delivery. And as we moved through 23 and made very strong progress on gross margin, we certainly had the benefit in 23 of that progression being the consumption of high-cost inventory on the balance sheet. So throughout 23, you saw a very, very significant degree of progression throughout the year.

Patrick D. Hallinan: Throughout 24, you know, we're confident in our plan and we're targeting the 300 basis points, roughly, of progression throughout the year. It will be back half-weighted, and part of that is the low volume that we saw in the back half of 23, and expect to see in the front half of 24, but we have every confidence we're going to deliver it. And as we started talking to investors in the back half of last year, you know, we guided people to measure our gross margin progress in half-year increments, and if you look at the back half of 23, we were about 28.7 for our back half of 23 progression, and you know, we expect to be in an expansion mode in the front half of 24.

Patrick D. Hallinan: It'll be modest in the 50-ish basis point range, and we'll be stepping it up more significantly in the back half of 24 as we accelerate some of the savings efforts we have on the docket for the year quickly to offset some of the buy-in softness we've been experiencing the last 6 to 12 months. So we have every confidence we're going to get there.

Patrick D. Hallinan: In terms of cash, you know, the main difference in cash year over year is really the difference in the transformation initiatives that are planned for 2024, where we're doing a bigger proportion of the footprint moves, which are going to drive more CapEx during 24 than during 23, about $100 million, and more cash-oriented restructuring charges, around $50 million. So the big difference year over year in cash drivers is the restructuring agenda. If you look at the rest of the cash drivers, you know, we're still targeting pretty meaningful inventory reduction, but less than the billion dollars that we drove off the balance sheet in 23. We're going to be in the $400 to $500 million range, but that difference in inventory reduction is made up by a higher operating process. So those two things roughly offset each other, and the drivers are really the difference in year over year CapEx and the difference in year over year cash restructuring charges. Thank you. Our next question comes from the line of Tim Wojs with Baird. Your line is now open.

Operator: Hey guys, good morning. Nice to have you here in the morning.

Operator: Maybe just, you know, I have two cost questions. So first, just on investments, Pat, what are you kind of explicitly investing, or at least what's planned to be invested in 24? And, you know, how variable are you kind of planning to manage those investments as you go through the year? And then, secondly, just on cost inflation? Could you give us just an idea of kind of what you're seeing and kind of key cost inputs and then also what's kind of explicitly based on price costs? Yeah.

Patrick D. Hallinan: So on investments, you know, we're continuing to invest predominantly in innovation and then in the field and marketing resources to activate it. So of the 100 million we're targeting for 24, I'd say three quarters or more are around that. Obviously, a lot of that in our biggest business, our tools for our door business, but some in industrial as well. Mostly about innovation and market activation and field resources to support it. You know, maybe 20 to 25 percent is another capability building exercise to make us a more productive organization. And then as we go through the year, I mean, obviously, we're going into a year with a pretty muted macro and the uncertainty we've been experiencing the last 12 or 18 months.

Patrick D. Hallinan: We're certainly going to be paying close attention to the macro and managing our cost structure as we go throughout the year to be in step with that macro. But we are really focused on the long-term growth of this business, and we're going to be working hard as a leadership team and as an organization to preserve those investments, you know, even if the macro creates a bit more headwinds than we're expecting because we're not going to just completely collapse 24 investment, you know, at the risk of longer-term brand health and brand share gains. In terms of inflation and deflation for the year, you know, our plan expects inflation to be roughly flat across kinds of materials and freight. You know, you've obviously had some of the battery metals go down in significant percentage terms, but in dollar terms, those don't drive our basket as much as some others.

Patrick D. Hallinan: You know, there's been some recent upticks in steel, and resins, and we'll probably base some marginal pressure on Red Sea Freight. But overall, you put metals and freight together, roughly flat, still kind of a high labor rate environment, but that's embedded in our gross margin and SDNA assumptions. And then finally, price-cost, again, roughly neutral. It will have some carry-in price in industrial, which is to the good, offset by just the normalization of promotional cadence in tools and outdoor. Again, recall, in the back half of 23, we're getting back to a normal promotional cadence as our supply chain heals, and that will be playing through the front half of 24 as well. But I'd say those two forces together, enterprise-wide, get us to roughly flat price dynamics for the year, and again, a roughly flat inflation backdrop in total. Thank you. Our next question comes from the line of Chris Snyder with UBS. Your line is now open.

Operator: Thank you. I just wanted to follow up about the flatlining of gross margin that's expected in... Relative to the Q4 item range.

Operator: It seems like there's a lot of savings on the balance sheet that is yet to flow through the P&L. And I think the expectation is that those come through on a couple of quarters' lag. So, just maybe why is that not coming through in the first half?

Patrick D. Hallinan: And I understand the outdoor mix will pick up, but I would also think that tools' gross margin gets better from Q4 into the first half as you move past the holiday promos. So, any comment on the gross margin delta between those product lines to help understand that mix would be... Yeah, no, like I said, we do expect some modest expansion from the first half to the second half. You know, we had, as we went through 23, and we saw volumes being really soft, I think I should commend the team for still delivering over $500 million of savings across a volume backdrop that was for the year about 300 or 400 basis points below what we expected. And we got beyond the high side of our guidance for 23 gross margins.

Patrick D. Hallinan: So we came out at quite a strong rate. As you point out, the trajectory in the first half is positive, even if it's a bit muted. And I'd say the couple forces of that are one that you pointed out. You have a heavier outdoor mix in the first half of the year. And you have some of the underabsorption that was associated with low volumes from the back half of 23. And those are really the two forces.

Patrick D. Hallinan: And they play out in the front half by muting some of the rate of that progress, but they don't take us off track for the full year of savings. Thank you. Our next question comes from the line of Rob Wertheimer with Melody's Research. Your line is now open.

Operator: Thank you. Good morning, everybody. The question is on dynamics.

Operator: Thank you. It's a retail channel, and if I understand it right, you had a volume that was a little soft.

Operator: You had promotional activity down, which is good. And I'm just curious about how that works out in market share, whether the competition is stepping up promotional activity, whether channel inventory is now normalized, and there are fewer promotions. Maybe just give us a comment on market share, on promotions, on Dynamics retail. Sure. Thanks, Rob.

Donald Allan: I think the competitive landscape has not really shifted or changed as we went through the end of 23 into the early stages of 24. There are modest movements and certain brands moving across retailers. But aside from that, we're not seeing unusual pricing or discounting happening. For the most part, it's really all of us navigating a somewhat muted market right now and continuing to position ourselves for share gain. But I'll get to ask Chris Nelson to get a little more color on what he's seeing.

Chris Nelson: Yeah. I'd say that if you think about just referencing POS, I would say that POS played out roughly as we would have planned it in Q4, where we saw it was down year over year but above 2019 levels. And if you think about the kind of buckets therein, we saw strength in the professional and the expected level of difficulties that we were going to see in the consumer and DIY segments. So that's on plan.

Chris Nelson: And what we're contemplating, as we've said, moving into this year with that being a fairly stable macro that we're playing a backdrop against. As Don referenced, we're not seeing major changes in the competitive dynamics. What we are seeing and we're excited about is getting back to our normal promotional rhythms as we have been able to take care of our customers, and our fill rates have still improved. And that's made a big difference in our opportunity to compete well in retail. And then I think the final part of your question that you referenced was regarding inventory levels. And certainly, on a global basis, as people take a look at what is somewhat of a dynamic or tepid macroeconomic environment, people are thinking about right-sizing their inventories for that environment.

Chris Nelson: And we see that somewhat anecdotally in places like Europe and some of our professional channels, but where you take a look at the biggest chunks of the inventory where we have really clean data in our major retailers, we're at historical levels. We feel good where we are at in position, and we think that that's going to be kind of a neutral dynamic heading into 2024. Thank you. Our next question comes from the line of Nigel Coe of Wolf Research. Your line is now open.

Operator: Thanks. Good morning, guys. Believe it or not, I was actually up until, well, frankly, I saw the new product. Pretty impressed with that today. So congrats on that launch. Just on the pricing, it came in, you know, obviously, better than last quarter with Susan Abdul. So just wondering, you talk about normalizing promotional activity, and I'm just wondering if maybe you pull back in the fourth quarter and perhaps that can afford some of the, maybe the weakness in Susan Outdoor. But just, I'd really be curious about the footprint changes you're making with the CapEx. Obviously, we've got Trump talking about China tariffs. I'm just wondering if there's going to be a material change in your sourcing and footprints during 2024. So Nigel, I'll let Chris answer the first question, and then I'll take the second question after he's done.

Donald Allan: So, from a pricing perspective, Nigel, it's good to hear from you. I'm glad you were able to see the new product. Sorry I missed you there.

Chris Nelson: But, no, we did not see a significant pullback in the promotional volume. What we saw was an overall, as we saw, as we said, more challenge in the overall macro environment, which I think contributed to that more than anything. And as we transition into next year, we're expecting that pricing dynamic to stay fairly stable. We feel good about our plans there. And overall, I think it's fair to say that, as Pat pointed out, we're kind of at a neutral price cost. We're not banking on a bunch of inflation.

Donald Allan: And as we take a look in the rear view mirror, we have recouped a significant, but not all, of the cost that we took on as we saw inflation. And so keeping that neutral price cost is important for our gross margin trajectory moving forward as well. Yeah, the comment on the footprint, I mean, yeah, the geopolitical dynamics continue to be intriguing and interesting for sure, what may play out in the future. But, you know, as it comes to our footprint transformation, we started with an overarching strategy of finding ways to get closer to our customers with our supply base and our manufacturing operations, for certain types of products that are high volume, in particular. For other products, you have to focus more on the low-cost location, and so you end up with a mixed geography of where you're manufacturing and how you're serving your customers. That hasn't really changed.

Donald Allan: What we continue to do as part of the transformation, though, is develop centers of excellence for power tools, certain types of hand tools, and certain types of outdoor products that leverage the expertise we have in these geographies in Asia, in Mexico, and in the United States and Eastern Europe. We will continue to build upon that, which eventually will give us the ability to flex supply from different geographies if the geopolitical landscape changes radically. That will take time to do. That's not something that will necessarily occur in the next 6 to 12 months, but as we continue on this journey and finish this transformation in the next 2 to 3 years, that's an outcome that we're looking to achieve. And so we believe that's the appropriate way to address what's happening in the dynamic geopolitical space, and we'll continue to evaluate that going forward as things shift in countries like the United States, if they shift, and make contributions as necessary. Thank you. Our next question comes from the line of... Adam Baumgarten, Rob Zellman & Associates, Jelani Snow, Hey guys, good morning. Just a few rationalizations.

Operator: Do you think that had any impact on the volumes in the fourth quarter or even the second half of 2020? I don't know. I mean, that program has been very thoughtful in weeding out complexity that's not creating value for end-users or for our shareholders. And, you know, there's no major disruption by that, by any stretch of the imagination.

Operator: ...

Operator: Thank you. Our next question comes from the line of Michael Rehaut with J.P. Morgan. You might as well open it.

Operator: Thanks, good morning everyone. Good morning. I had a question on the growth investments and just how to think about the cadence of that longer term. I think you talked about it a little bit earlier in the call, but when you talk about them in totality, I think..., you know, alongside the 35% plus gross margin. I was hoping just to get a sense of what those investments were in 23, what you expect them to be in 24 and 25, and how much of that is going to be kind of an ongoing level of investment. And, you know, if that would all be on the income statement under the rules of storage or if there would be some in corporate. Yeah, Mike. I'll give you a few points.

Patrick D. Hallinan: I'd say, I'd say, you know, 23 was a bit over 100, will be around 100 for 24. And as I referenced our earlier question, you know, it's about three quarters around innovation, and then the marketing and field resources to activate that effectively. And the rest of it is around capability building. Some of it in our business segments, a relatively small amount of it in corporate. And, you know, I think if you're getting to the broader question of, you're sitting there with a model, you're trying to figure out is SG&A permanently at 21% of sales or something else, if that's kind of behind the essence of your question, I'd say, as we get back to share gains, and as we, you know, jolt our brands and our innovation up for a few years, you know, I expect in the medium term to be more in the back to the 20th percent range, if that's kind of what you're trying to unpack.

Patrick D. Hallinan: But I would expect us to be elevated in 24 and potentially in 25 and 26, depending on the macro and some of the things we're prioritizing in the medium term around that 20th percent level. And then I think, you know, beyond the medium term, to the extent we can be exceptional at driving gross margin improvement, SG&A will move with the rate at which we can drive gross margin improvement. Thank you. Our next question comes from the line of. Eric Bouchard with Cleveland Research, Hermione Smoak, and me this morning.

Operator: You talked about normalizing promotions and you talked about, I think, volumes relative to 19. I'm just curious if you could give us a little bit of insight into promotional activity relative to 19, where we are now, and what is embedded in the guidance and what you're seeing in the market in regards to an appetite for promotions either from consumers, professionals, or retailers. Yeah, good morning, Eric.

Donald Allan: So I would say that the level of promotional activities we're at now and what we would expect in 24, it's probably pretty consistent with what we experienced in 2019. And so we're kind of back to where we were, which I think was a healthy balance of normal core operating selling activities and promotional activities. As we think about the year ahead, you know, our customers are not really talking to us about what I would call unusual levels of promotional activities. They're looking for the normal set of activities. And I think that's gonna likely be the case throughout the year. And we tend to, in demand markets like this, that is somewhat. Stable in the sense that you don't have a lot of growth and you don't have a lot of retraction, you know; it tends to be a more normal promotional environment in that setting.

Donald Allan: If, you know, demand retracts in a more significant way, then promotional activity does pull back a fair amount because the impact of promotions is not as significant. If we see a back half of the year that gets better, which, you know, we talked about in that presentation, that. You know, our guidance doesn't necessarily include that, but it's a backup. Demand Environment is an improved environment, and you could potentially see a little bit of a pickup in promotional activity related to that, but at this stage, based on our guidance, I think it's... It's probably fair to say that our view is that promotional activity will be consistent with what we saw pre-pandemic.

Dennis Lange: Thank you. This concludes the question and answer session. I would now like to hand the conference back over to Dennis Lange for closing remarks. Thank you. 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. Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.