Dennis Lange:

Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2024 second quarter webcast. Here today, in addition to myself, is Don Allan, President and CEO; Chris Nelson, COO, EVP, and President of Tools & Outdoor; 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 on the IR section of our website. A replay of this morning's webcast will also be available beginning at 11:00 A.M., today. This morning. Don, Chris and Pat will review our second quarter results and various other matters, followed by a Q&A session. Consistent with prior webcasts, we are going to be sticking with just one question per caller. And as we normally do, we will be making some forward-looking statements during the call based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate, and as such, they involve risk and uncertainty. It's, therefore, possible that 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 our most recent 34 Act filing. Additionally, we may also reference non-GAAP financial measures during the call. For applicable reconciliations to the related GAAP financial measure and additional information, please refer to the appendix of the supplemental presentation and the corresponding press release, which are available on our website under the IR section. I'll now turn the call over to our President and CEO, Don Allan.

Christopher Nelson:

Thank you, Don, and good morning, everyone. Beginning with Tools & Outdoor, second quarter revenue was approximately $3.5 billion with 1% organic growth versus prior year. DEWALT delivered another strong quarter, generating its fifth consecutive quarter of organic growth. DEWALT's performance, combined with a stronger outdoor season drove 2% volume growth. We are particularly encouraged by this result, given the soft consumer backdrop. Total revenue was flat as volume benefits were offset by 1% of currency in addition to 1% of price, which was consistent with our plan to support DEWALT cordless promotions. We are now back in line with historical levels of seasonal promotions. Second quarter adjusted segment margin was 10.4%, a 590 basis point improvement compared to last year. We delivered year-over-year margin expansion through lower inventory destocking costs, supply chain transformation savings and shipping cost reductions, which were partially offset by targeted investments designed to accelerate share gain and organic growth. Turning to product lines for the second quarter. Power tools declined 2% organically, driven by the consumer DIY category. Hand tools organic revenue was flat with new DEWALT product introductions driving increased product listings with our customers. Outdoor organic revenue grew 6% with strong retail volume growth, driven by handheld cordless outdoor power equipment and incremental retail product listings. Turning to Tools & Outdoor performance by region. North America generated 1% organic growth, driven by the same factors as the overall segment. Second quarter US retail point-of-sale demand was up modestly versus the prior year, led by outdoor and regain DEWALT cordless promotions. In Europe organic revenue was down 3% as declines in France and Italy were partially offset by growth in the UK, the Nordics and Iberia. We are prioritizing investments and new product listings to grow market share and overcome the macro softness that is affecting this region's economy. To round out geographic performance for the quarter all other regions in aggregate grew 5% organically. This was driven by double-digit growth in Latin America, led by Brazil, along with high single-digit growth in India. In summary, for Tools & Outdoor, the quarter was highlighted by a return to organic growth with a meaningful step-up to segment margin. Now moving to Industrial. Second quarter Industrial revenue declined 20% versus last year, which was nearly all due to the infrastructure divestiture. Price contributed positive 2% to growth, offset by a 2% currency headwind. The Engineered Fastening business grew 2% organically, driven by aerospace growth, which more than offset the market softness in automotive and customer destocking in general industrial. The Aerospace business grew 24% organically, supported by new business wins and a strong booking rate. The Industrial adjusted segment margin was 13.5%, an improvement of 50 basis points versus prior year, driven by price realization and cost control. I'd like to thank our teams around the world for their dedication to delivering another solid performance in the second quarter. Their focused efforts delivered organic growth and margin expansion across both business segments. Moving to the next slide. As I reflect on my first year here at Stanley Black & Decker, much of my time and energy has been directed towards learning about our end users' and channel partners' priorities and how to both efficiently and effectively accelerate the next phase of Tools & Outdoor organic growth and market share gains. It's clear to me that we have four essential attributes for success. One, an industry with strong long-term growth characteristics. Two, iconic brands. Three, a differentiated innovation engine. And four, deep customer relationships and loyal end users. I have strong conviction that we can create long-term value by capturing the commercial opportunities ahead of us, both now and into the future. To capture these opportunities, we are funding investments both by redirecting existing resources towards the most promising opportunities as well as investing incremental dollars consistent with the $300 million to $500 million range that Don and Pat have referenced on previous occasions. Along with market-facing priorities, I've also been focused on our team putting in place the right capabilities and skills to execute our strategy. I am pleased to have my new organization established with a leadership team consisting of seasoned Stanley Black & Decker veterans complemented by external talent who bring fresh perspectives. They are all in place in driving forward momentum. The valuable breadth and depth of knowledge across the leadership team and organization is allowing us to activate our strategy with urgency. We are prioritizing our resources on the highest impact opportunities which we believe are serving the professional end user within our most attractive market. Over the past 12 months, as we continue to streamline and focus our business, we've doubled down on being brand-led and are prioritizing DEWALT, CRAFTSMAN and STANLEY. These powerful brands have significant scale in the marketplace and strong brand equity with end users. By continuing to strengthen these brands and maximizing brand health, we can capitalize on their potential for long-term growth, share gain and margin improvement. Turning to innovation. We view our long-standing ability to listen to end users and to deliver purpose-built innovation as a core differentiating capability. We are laser-focused on driving innovation to help solve the most pressing challenges our professional end users face, namely finding ways to improve their safety and productivity on the job site while ensuring they have robust tools to help deliver the high-quality craftsmanship their customers expect. Our core brands have been synonymous with delivering this type of value to job sites for many years, and we will continue to push the boundaries of these solutions as enhancing safety and productivity on the job site has never been more relevant to the professional end user. For example, we announced the next evolution in battery technology this quarter, the DEWALT XR POWERPACK 8 AH Battery with tabless cell technology. This joins the reinvigorated XR line, which houses the best-performing 20-volt MAX batteries and power tools from DEWALT. This battery technology conducts more energy, delivers more power output and has a longer lifespan, which enhances end-user productivity. We also introduced the DEWALT TOUGHSERIES Construction Jack, a tool designed to increase productivity by giving one person, the confidence and security to lift, level and hold material without assistance. With up to 340 pounds of lift capacity and fine-tuning adjustment features, this tool is a must-have for any end user. Market activation is another investment priority and growth opportunity. We are more aggressively activating our core brands through amplified digital product marketing and additional field resources, both with the goal of extending the reach and impact of our brands and innovation. We expect our elevated marketing efforts behind DEWALT, coupled with support to grow the trades through grants, scholarships and tool donations will broaden user engagement and brand ambassadorship. These sales and marketing initiatives are funded with new investment dollars and reallocation of resources, which illustrates our prioritization efforts towards our best prospects for growth. In addition to delivering cost savings and driving margin improvement, which you have heard from Don, our supply chain transformation is also an enabler of growth, enhancing operational efficiency and achieving 35% plus adjusted gross margin unlocks incremental optionality to invest even more behind our brands and to accelerate the virtuous cycle of organic growth. We believe that our emphasis on operational excellence in combination with the structural changes we are making to our production and distribution network which are the crux of our supply chain transformation can become a sustainable growth enabler for the company as we serve our customers and end users with excellence and speed. In addition, the continuous improvement capabilities we are strengthening as a part of this transformation will serve as a sustainable engine to help generate recurring productivity to self-fund the business and our brands. In summary, while the near-term market demand environment remains mixed, we are optimistic about the long-term growth opportunities in our industry. We are aggressively moving forward to accelerate the growth of our powerful brands with our end users and customers around the globe. We have a talented team deployed that is moving with speed and a clear mandate, executing our transformation plan and accelerating share gain. This simple but powerful mandate energizes our team as we work to position ourselves to win in the marketplace. Thank you and I'll now pass the call over to Pat Hallinan.

Donald Allan:

Thank you, Pat. As you heard this morning, the company is making meaningful progress across our key priorities of margin improvement, cash generation and balance sheet health, while also investing in future sustainable growth. We are moving with speed and delivering results in a macro environment that has not been supportive, but we are confident that it will turn from a headwind to a tailwind in the future. Until then, we are focused on consistent execution while positioning the company to deliver higher levels of sustainable organic revenue growth, improved profitability and cash flow to drive strong long-term shareholder returns. We are now ready for Q&A, Dennis.

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Julian Mitchell with Barclays. Your line is now open.

Donald Allan:

Good morning.

Patrick Hallinan:

Hey, Julian, it's Pat. Yes, you have it correct. That's the correct EPS flow. I'd say the fourth quarter seasonal revenue impact is what drives the revenue and OM in the fourth quarter. So you're slightly north of $3.5 billion in revenue in the fourth quarter. And you're probably in between $300 million and $330 million in the OM range in the quarter with the flow in the third quarter, obviously rounding out the back half of the year. The third quarter is seasonally strong as some of the holiday shipments start humming around the September time frame. In terms of the tax drivers, as we've said before, these were some of the things that were in motion and affecting tax last year in '23, a set of discrete planning items that were put in motion even early stages of COVID and before. And so it will play out through this year and a bit into next year. I'd say for next year, we're probably in the high teens, approaching 20% range would be my guidance for tax for next year. We're obviously not at '25 guidance yet, but that would be kind of the ZIP code I would expect to be in.

Timothy Wojs:

Yeah. Hey, guys. Good morning.

Timothy Wojs:

Nice to see volume growth in tools. Maybe on that kind of topic, Don, just maybe if you can give us a little bit of an update just on the operating environment. It doesn't seem like a lot has changed, but kind of curious on your opinion there and just how your retailers are kind of thinking about kind of the promotional period at the end of the year. And then you guys mentioned in your prepared remarks a few times product listing ads and product focused ads there. If you could maybe just talk about some of the investments and where some of the priorities are and just maybe where you're kind of focused on adding incremental shelf space.

Operator:

Thank you. Our next question comes from the line of Jeffrey Sprague with Vertical Research Partners. Your line is now open.

Donald Allan:

Well, it's actually a very good question, Jeff, because it's something that we spend time actually thinking about as we go into our annual strap planning cycle, which is just beginning now and be part of a Board presentation in October as we think through where we are in the transformation journey, the financial goals that we've established, what's the earnings potential for Stanley Black & Decker over the next three years and beyond. And so when you step back and begin to think that through, we clearly feel very good about where we are in the journey around transformation. We think 35% plus is still very achievable in that time horizon. We do believe as the markets begin to get stronger or stabilize and start to grow and in some time frame, I think, we're all wondering exactly what that time frame is, but let's presume that happens in the next year or so then we really think we're building an operating model around organic growth. As we said, that can grow two times to three times in the market. And so how do you define the market? We've done a lot of different analysis on this, and there's different ways to look at it in the short-term. But over the long-term, if you just look at GDP and say, can we grow two times to three times GDP over the long-term, we definitely think that is achievable. And so that puts you in a mid to high single-digit growth mode depending on GDP over the long-term. And then what's the ultimate leverage you're going to get from that growth or benefit into margins. And I still think this is a 40-ish percent business as you grow and you leverage the effect of that. We will continue to invest. We're seeing the benefits of investing. We said $300 million to $500 million, and it probably is going to trend closer to that $500 million number in the time horizon we've talked about. So the earnings potential is strong. I'm not necessarily going to throw a number out there and say, what do we think we can get to. But to say we can get back to where we were from an earnings point of view as a company does not scare any of us. It's just a question of the time horizon of that.

Adam Baumgarten:

Hey. Good morning, everyone. Just curious if you could give us some color on point-of-sale trends through the quarter and into July, would be helpful.

Operator:

Thank you. Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Your line is now open.

Donald Allan:

Good morning.

Patrick Hallinan:

Yes. We're proud of the progress we made in the front half of the year. That progress was driven both by year-over-year income improvement, but also working capital improvement. The back half of the year is traditionally the strong part of the year. So we expect the drivers in the back half to remain income and working capital, but also a bit of CapEx. And I'd say by the time we get to the end of the year, the drivers of the beat on our initial guidance are going to be a mix of working capital and CapEx. And those drivers are going to be pretty much even between those two, will be roughly on our inventory target for the year. And I would say it's going to be pretty traditionally weighted in that it's going to be pretty balanced across those two quarters with a little bit towards the fourth.

Nigel Coe:

Thanks. Good morning, everyone. I'd be curious if you could just maybe unpack the 2Q -- the 1Q to 2Q gross margin, just given the divestment of infrastructure. I'm not sure if that was gross margin above fleet average or where that was and maybe the mix between the outdoor tool, sorry, the outdoor products versus power tools given that mega mix. Then maybe just looking at the second half of the year. You said 31%, I think, Pat. How do you think that 31% divides between 3Q and 4Q?

Operator:

Thank you. Our next question comes from the line of Rob Wertheimer with Melius Research. Your line is now open.

Christopher Nelson:

Thanks, Rob. This is Chris. I mean we certainly have seen a continuance of the trend that we've seen where the professional is relatively stronger than the consumer. And we would expect that to continue. We have certainly, as you would expect in this environment, seeing consumers respond much more favorably to promotions, and that's good for us because we're -- we have an opportunity as we get back up to our normal run rate on promotions to benefit from that and benefit with accretive business. So we feel good about that and what we see from the opportunity with our merchandising in the back half. As far as what we see looking forward, I mean, it's going to be an uneven environment as we go forward. And we're going to stay really focused on our mission to execute against the supply chain transformation as well as we know the things that we're investing in with our major brands and specifically targeting the professional provides us some upside to the market that we're going to continue to stay diligent as we pursue. So we're excited about where we're heading and do see that dynamic that you referenced with the consumer.

Michael Rehaut:

Thanks. Good morning and congrats on the results. Just wanted to dial in a couple of areas, if I could. First, just to get a better understanding of it looks like a slight reduction of the midpoint of organic sales growth for the full year to down 50 basis points from maybe flattish before. And it would appear, correct me if I'm wrong, that perhaps you're also looking for tools and storage to go slightly negative again in the back half. So I just wanted to understand the drivers of that and if I'm correct on the back half. And then secondly, you also mentioned SG&A, mid-21% and maybe going to the higher end of the $300 million to $500 million in reinvestment. I was wondering if you had any early view on what 2025 SG&A could be given those comments around higher reinvestment into the business.

Operator:

Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is now open.

Patrick Hallinan:

Good morning.

Joe Ritchie:

So I've got a near-term and a longer-term question. On the near-term side, the commentary around getting to gross margins of approximately 31% by the third quarter, can you maybe just parse that out a little bit. If I look at things historically, it tends to be a seasonally lighter quarter and you typically don't see that much improvement 2Q to 3Q. And so I'd love to hear a little bit more about that. And then just the longer-term question is really more around like getting comfort with the timing of an eventual like volume inflection. And specifically like is there a way that you guys are tracking a replacement cycle and ultimately when we could see the timing of an inflection? Thank you.

Christopher Nelson:

All right. And for the second one, I think what I -- this is Chris. What I would say is that, first and foremost, we really like the end markets that we serve and we like them in the long-term. And we think that there's, as Don referenced, some really nice long-term GDP plus growth potential in those markets. But whether -- especially when you're talking about the professional and it's linked to whether it's residential or commercial and industrial construction. But I think it's safe to say that whether it's professional or the consumer, which you could argue, partially driven by repair and remodel are all fairly interest rate sensitive businesses, and that would be the precursor to what we think would be -- start the inflection point. And while it wouldn't be instantaneous, we think that is kind of the first thing in the cycle we'd want to see change that would then start to unlock some of that longer-term potential that we do see for those end markets that we serve.

Dennis Lange:

Thanks, Shannon. We'd like to thank everyone again for their time and participation on the call. Obviously please contact me if you have further questions. Thank you.

Dennis Lange:

Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2024 First Quarter Webcast. Here today, in addition to myself is Don Allan, President and CEO; and Chris Nelson, COO, EVP and President of Tools & Outdoor; and Pat Hallinan, EVP and CFO.

Christopher Nelson:

Thank you, Don, and good morning, everyone. Beginning with Tools & Outdoor, First quarter revenue was approximately $3.3 billion, down 1% organically versus prior year, as growth in DEWALT was more than offset by muted consumer and DIY demand, which pressured volume.

Patrick Hallinan:

Thanks, Chris, and good morning. Turning to the next slide. I would like to highlight the progress we've made along our transformation journey in the first quarter. We achieved approximately $145 million pretax run rate cost savings in the period, bringing our aggregate savings to approximately $1.2 billion since program inception.

Donald Allan:

Thank you, Pat. As we report another quarter of progress, our consistent execution against our plan is building momentum and energizing our team. As our profitability continues to improve, we are focusing organic growth investments behind our most powerful brands. particularly DEWALT, CRAFTSMAN and Stanley. We believe these investments can enable organic growth to outpace the market by 2 to 3x. Stanley Black & Decker continues to become a more streamlined business built on the strength of our people and culture with an intensified emphasis on our core market leadership positions in Tools & Outdoor and Engineered Fastening.

Operator:

[Operator Instructions]

Julian Mitchell:

Maybe just my question would be around the second quarter, just honing in on that a little bit. I guess, just to make sure, based on the seasonality comment and I think the low 30s tax rate, are we sort of thinking it's flattish sequential revenue in Q2 and then a kind of 9% operating margin?

Patrick Hallinan:

Yes. Julian, I'll try to unpack all of those, see if I can remember them. I think you starting with sales. I think sales will be flat to slightly down fractionally down. I don't think there'll be -- the first quarter was down about one point, it probably won't be that steep.

Timothy Wojs:

I was just hoping maybe you could expand a little bit on the DEWALT growth. Just maybe some color on the underlying drivers of growth there, just whether it's kind of organic user kind of growth and expansion or just inventory availability or Outdoor, just some color there and maybe the sustainability of the growth trajectory. And then maybe just as you think about SG&A reinvestment this year, just how much are you specifically looking at kind of reinvesting that into DEWALT specifically versus some of the other brands?

Patrick Hallinan:

Yes. I mean I think in terms of SG&A for the year, Tim, I think it's 21% in kind of the middle fractions, 21.5-ish plus or minus 20 basis points is kind of where SG&A is for the year. And as our opening comments mentioned, that's about $100 million of incremental investment. I'd say $60 million to $70 million of that in the Tools & Outdoor business. And as Chris mentioned, A lot of that is on innovation. And therefore, a healthy portion of that goes to DEWALT. And a lot of it is on field activation and so again, because DEWALT is the biggest brand out in the field, a lot of that ends up going to DEWALT.

Jeffrey Sprague:

Big picture question for Don and then maybe just some loose ends for Pat. But first, just -- sorry if I missed it at the beginning, but the after-tax proceeds on infrastructure, and then Pat also, can you just address what that other was in cash outflow of $250 million-ish in the quarter.

Donald Allan:

Sure, Jeff. Pat, maybe you take those questions and I'll answer Jeff's second question.

Donald Allan:

Thanks, Pat. And so on the portfolio question, as we all know, we've done a fair amount of work of pruning the portfolio of businesses here at Stanley Black & Decker, in particular, the Security segment, which had 2 businesses. And then in Industrial, we've done some things related to not only infrastructure, but oil and gas a little while back as well.

Operator:

Our next question comes from the line of Michael Rehaut with JPMorgan.

Christopher Nelson:

Yes. So if I take a step back and talk a little bit about where we see the markets from a macro perspective for the year. I think that what we're talking about is within it's a very tight range, up a point, down a point, and we're kind of thinking that we're trending towards.

Operator:

Our next question comes from the line of Nigel Coe with Wolfe Research.

Operator:

Our next question comes from the line of Adam Baumgarten with Zelman & Associates.

Christopher Nelson:

So POS was, I'd say, in Q1, it was negative, but in line with our plan or largely in line with our plan. And we remain fairly confident in supporting the outlook that we have for the balance of the year.

Joseph O'Dea:

Just wanted to ask on Outdoor and as you see a more traditional start to the season, just any context on how you're thinking about 2024 demand in outdoor relative to 2019, trying to understand whether this is a return to a more normal demand environment?

Donald Allan:

Yes. So there's a lot of good questions in there related to the Outdoor business. And as a commentary on the margin, the -- I would say that in my presentation, we talked about 80% of the company being above kind of line average right now, at or above. And the other 20%, which is really made up of Outdoor and CAM or Aerospace Fasteners.

Patrick Hallinan:

Yes. I'd say on the volume, this year is certainly still going to be down substantially versus 2019 even if the shape of the trend line starts and starts to look more like a normal trend line. The absolute volume in dollars will be down substantially from 2019. And I would still say that most likely next year would be below 2019 as well, but starting to recover.

Operator:

Our next question comes from the line of Nicole DeBlase with Deutsche Bank.

Operator:

Our next question comes from the line of Rob Wertheimer with Melius Research.

Donald Allan:

So I think that we feel well positioned with our outdoor portfolio. And I think, as I've stated previously is what we're really wanting to do is make sure that we're driving the prioritization of our innovation dollars into the categories that we think that we have the biggest opportunity for share gain as well as that are margin accretive.

Operator:

Our next question comes from the line of David MacGregor with Longbow Research.

Operator:

Our next question comes from the line of Eric Bosshard with Cleveland Research.

Christopher Nelson:

So I'll start with the second question, first. As far as our inventories in the retail channel, we're at -- essentially at historical levels, if not in some areas, a little bit below. So we're seeing a pretty good direct read on the correlation between what we see in POS and what we see going in from sales. And I think that's a good position to be in. And we're like we said, we're on relatively on plan for what we're seeing from POS.

Dennis Lange:

Thanks, Shannon. We'd like to thank everyone again for their time and participation on the call. Obviously, just please contact me if you have any further questions. Thank you.

Dennis Lange:

Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2023 fourth quarter and full year webcast. Here today, in addition to myself, is Don Allan, President and CEO; Chris Nelson, COO, EVP and President of Tools & Outdoor; 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 on the IR section of our website. A replay of this morning's webcast will also be available beginning at 11 a.m. today. This morning, Don, Chris and Pat will review our 2023 fourth quarter and full 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 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. I'll now turn the call over to our President and CEO, Don Allan.

Chris Nelson:

Thank you, Don, and good morning, everyone. Now, turning to the Tools & 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 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 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 1 point organically, as pro-driven momentum offset pressures in DIY demand. Outdoor was significantly challenged as customers right-sized their inventory levels. We expect that trend to continue into the start of the 2024 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 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 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 line down low-single digits. The commercial and industrial channel, which has a heavy professional user base, grew low-single digits organically. Fourth quarter US 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 exit. 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 growth in the country. I want to thank the Tools & 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 slide, I would like to now introduce our new groundbreaking equipment system, DEWALT POWERSHIFT. 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 the pro 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, that is equivalent to 6.5 horsepower and is designed to withstand the toughest jobsite conditions. The POWERSHIFT battery leverages pouch cell technology, which DEWALT first brought to the industry in October of 2021. Pouch technology enables the cordless jobsite of the future, bringing more power, runtime and efficiency. Take, for example, the POWERSHIFT vibrator, used for concrete placement. 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 runtime than a tank of gas. There are electrified vibrators in the market today that can only deliver 15 minutes of runtime. Adding to the extended runtime, 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 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.

Don Allan:

Thank you, Pat. 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, CRAFTSMAN, 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. 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 and the highest quality innovation engine in the industry. With that, we are now ready for Q&A, Dennis.

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Julian Mitchell with Barclays. Your line is now open.

Don Allan:

Good morning.

Pat Hallinan:

Hey, Julian, it's Pat. Thanks for the questions. 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 off the balance sheet. So, throughout '23, you saw a very, very significant degree of progression throughout the year. Throughout 2024, 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 '23 and expect to see the front half of '24, 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. And if you look at the back half of '23, we were about 28.7% for our back half of 2023 progression. And we expect to be in expansion mode the front half of '24, it will be modest in the 50-ish basis point range, and we'll be stepping 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 volume softness we've been experiencing in the last six to 12 months. But we have every confidence we're going to get there. In terms of cash, 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 2023 about $100 million, and more cash-oriented restructuring charges around $50 million. So, the big difference year-over-year in 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 '23. We're going to be in the $400 million to $500 million range. But that difference in inventory reduction is made up by a 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.

Tim Wojs:

Hey, guys. Good morning. Nice job on the margins. Maybe just -- 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 2024? 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 you're seeing in kind of key cost inputs, and then also what's kind of explicitly baked in for price/cost?

Operator:

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

Pat Hallinan:

Yeah. No, like I said, we do expect some modest expansion front half to front half. We had, as we went through 2023 and we saw volumes being really soft, I think commend the team for still delivering over $500 million of savings across the volume backdrop that was for the year, about 300 basis points or 400 basis points below what we expected. And we got beyond the high side of our guidance for '23 gross margin. So, we 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 the couple of forces of that are, one that you pointed to, you have a heavier outdoor mix in the first half of the year, and you have some of the under absorption that was associated with low volumes from the back half of '23. 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.

Rob Wertheimer:

Thank you. Good morning, everybody.

Rob Wertheimer:

My question is on dynamics at the retail channel. And if I understood it right, you had volumes a little soft, 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, there is less promotion. Maybe just give us a comment on market share, on promotions, on dynamics of retail. Thank you.

Chris Nelson:

Yeah. I'd say that as you think about the -- just referencing POS, I would say that the 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 out of the pro and the expected level of -- kind of difficulties that we are going to see in the consumer and DIY segment. So, that's on plan, and it's what we're contemplating, as we said, moving into this year for that being a fairly stable macro that we're playing the 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 fill -- our fill rates have been proved. 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 somewhat anecdotally in places like Europe and in some of our professional channels. But when 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 there positioned, and we think that that's going to be kind of a neutral dynamic heading into 2024.

Nigel Coe:

Thanks. Good morning, guys. Believe it or not, I was actually at World of Concrete. I saw the new products. Pretty impressive I'd say. So, congrats on that launch. Just on the pricing, came in obviously better than last quarter in Tools & Outdoors. So, just wondering -- if you talked about normalization of the promotional activity and I'm just wondering if maybe you pulled back in the fourth quarter and perhaps that kind of put some of the maybe the weakness in Tools & Outdoor. But just I'd really be curious on 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 footprint during 2024.

Chris Nelson:

So, from a pricing perspective -- Nigel, good to hear from you. I'm glad you were able to see the new products. Sorry I missed you there. But no, we did not see a significant pullback in the promotional volume. What we saw was an overall -- 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 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. And as we take a look at in the rearview mirror, we have recouped a significant but not all of the costs 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.

Operator:

Thank you. Our next question comes from the line of Adam Baumgarten with Zelman & Associates. Your line is now open.

Don Allan:

Go ahead, Pat.

Operator:

Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Your line is now open.

Don Allan:

Good morning.

Pat Hallinan:

Yeah, Mike. I'll give you a few points. I'd say '23 was a bit over $100 million, will be around $100 million for '24. And as I referenced on our earlier question, 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 I think if you're getting to the broader question of you're sitting there with a model and 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 jolt 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%-ish range, if that's kind of what you're trying to unpack. 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 20%-ish level. And then, I think, beyond the medium term, to the extent we can be exceptional at driving gross margin improvement, the SG&A will move with the rate at which we can drive gross margin improvement.

Eric Bosshard:

Good morning. You talked about normalizing promotions and you talked about, I think, volumes relative to '19, 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?

Operator:

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.

Operator:

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

Dennis Lange:

Thank you, Shannon. Good morning, everyone. And thanks for joining us for Stanley Black & Decker’s 2023 third quarter webcast. On the webcast in addition to myself is Don Allan, President and CEO; Chris Nelson, COO, EVP, and President of Tools and Outdoor; 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 on the IR section of our website. A replay of this morning’s webcast will also be available beginning at 11 a.m. today. This morning, Don, Chris, and Pat will review our 2023 third quarter results and various other matters followed by a Q&A session. Consistent with prior webcast, we are going to be sticking with just one question per caller. And as we normally do, we will be making some forward-looking statements during the call based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate, and as such, they involve risk and uncertainty. It’s therefore possible that the actual results may materially differ from any forward-looking statements that we may make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent 34 Act filing. I will now turn the call over to our President and CEO, Don Allan.

Chris Nelson:

Thank you, Don. And good morning everyone. I am now at the 4.5-month mark at Stanley Black & Decker and this period has really reinforced my excitement about the future for this business. I have spent my time with end-users, customers and our passionate and highly capable Tools and Outdoor organization. We have iconic brands such as DEWALT, CRAFTSMAN, Stanley and Cub Cadet, a strong pipeline of innovation, and customers and users who are eager for our newest products. We remain focused on capturing that opportunity. We are rapidly making progress with our transformation. The organization remains committed to supporting the necessary cost efficiencies as we prioritize the additional investments in innovation, brand support and commercial resources that will be most impactful to reaccelerate growth and share gain in the market. Now turning to the Tools and Outdoor third quarter performance. Total revenue was $3.4 billion, down 5% organically versus prior year as a result of lower consumer Outdoor and DIY market demand. Our Tools SPUs in aggregate were positive organically in the quarter, excluding the Russian business exit, while Outdoor, was down 23% consistent with our expectations. Price for the segment was down 2 points in the period, as we successfully regained margin accretive cordless promotions consistent with historical activity. We made substantial progress in improving adjusted operating margin to 9.3%, this was a sequential step up of 480 basis points and 250 basis points better than last year. This improvement was driven by reduced sell-through of high cost inventory, supply chain transformation savings and reduced shipping costs, which were partially offset by lower organic revenue. In terms of performance by region, North America was down mid-single digits organically similar to the overall segment North America Tools organic growth was positive, while Outdoor declined. U.S. retail point-of-sale for the quarter remained above pre-pandemic 2019 levels supported by strength in professional demand and price. Third quarter POS for DEWALT was positive versus last year, supported by promotions, our pro-inspired new product offerings and sustain professional demand. Our European organic revenue was down 3% with bright spots from double-digit organic growth in the U.K. and low single-digit growth in the Nordics. We are leveraging targeted programs to capture professional share with DEWALT cordless tools. In emerging markets, we grew mid-single digits organically, excluding the impact from the Russia business exit. Including this impact, organic sales declined 4%. Solid emerging markets performance was led by Latin America, which is now recorded four consecutive quarters of organic growth. We have seen notable strength in Brazil, particularly within the professional channels. Moving to our strategic business unit performance. The hand tools business grew 2% organically versus prior year. This includes mid-single-digit organic growth in North America and Latin America, supported by expanded offerings at our retailers and strong new product sales. Power Tools declined 2% organically, pressured by Consumer Tools. Pro driven momentum coupled with positive impacts from a healthier supply chain is supporting enhanced service levels and promotional opportunities. Transitioning to Outdoor, organic revenue declined due to market demand choppiness as the industry resets from the pandemic era. This resulted in fewer shipments in the quarter as there are elevated inventory levels globally impacting replenishment cycles. Despite the current market environment, we are excited about the long-term opportunity and bringing leading innovation to Outdoor across our powerful brands. I want to thank the team for their strong execution in the quarter as we continue to focus on winning with our customers and capturing this amazing growth margin and shareholder return opportunity. Turning to the next slide, I would like now to highlight a few examples of how we are evolving our trade focused offerings and Cordless Outdoor expansion. With Professional Trades torque cordless impact wrench in its class, ideal for use in heavy-duty applications. We also introduced the world’s first battery charger box, The DEWALT TOUGHSYSTEM 2.0 Dual-Port Charger. Users now can protect store and charge dual batteries in a durable weather resistant container to keep professional’s productive despite rough job site conditions. In Outdoor as we gear up for winter, DEWALT has entered the snow category with the 60-volt MAX Single Stage Snow Blower. Powered by two flexible batteries, it is engineered to tackle tough demands and breakdown heavy wet or pack snow. Our Pro inspired innovation roadmap will continued to introduce solutions across our categories that enhanced safety on the job site while elevating power and performance. Now changing gears into DEWALT’s new involvement with our social responsibility efforts, we are working to close the trade skills gap and shaping the future of construction technology and the electrical and plumbing trades. In the third quarter, we opened the 2023 DEWALT Grow the Trades Grant and Trades Scholarship program. These initiatives provide non-profits with the necessary resources to train, reskill and prepare tomorrow’s trades people by directly supporting end-user trade education. This is a great example of our broader commitment to invest $30 million to grow trade skills by 2027. Now I will turn the call back to Don.

Pat Hallinan:

Thank you, Don, and good morning, everyone. We continue to generate strong transformation results and go-forward momentum. Our cost reduction program delivered approximately $215 million of pretax run rate cost savings in the quarter. Bringing our aggregate savings to approximately $875 million since program inception. This positions us well to deliver our slightly exceed our $1 billion run rate savings target this year and to deliver $2 billion run rate savings by 2025. As it relates to the supply chain transformation, strategic sourcing initiatives remain the largest contributor to supply chain savings since program inception. The early actions focused on strategic components and logistics, as well as other areas. We have now covered approximately two thirds of the targeted procurement spend, establishing a carry on savings trajectory consistent with that contemplated in the 2024 program target. Our supply chain management and engineering teams will continue to drive sourcing improvement through 2025 and beyond. Activating our Operations Excellence program has also contributed significant savings this year. In the plants where this has been activated, we are seeing increased productivity, leveraging lean manufacturing principles. Our footprint related projects are progressing on schedule with initial savings to begin this year. As it relates to complexity reduction, our teams are assisting customers as they transition to replacement products with the goal of exiting 30,000 SKUs by the end of 2023. We are confident that our transformation can support the sustainable cost efficiency needed to return our adjusted gross margins to 35% or greater. These actions are creating the flexibility to fund additional organic growth investments in our core business. Turning to our inventory reduction in gross margin improvement. We reduced inventory by approximately $300 million bringing our year-to-date progress to approximately $880 million. The third quarter inventory reduction supported the generation of approximately $360 million of free cash flow in the period, resulting in one of the strongest third quarter cash generations in the company’s history. We have reduced inventory by $1.7 billion since the middle of 2022. We achieved this through improved supply chain conditions, strategic inventory management and the planned production curtailments initiated during the back half of 2022. We expect modest inventory improvement in the fourth quarter, which would bring our full year 2023 inventory reduction to at or near our 2023 objective of $1 billion as we prepare for next year’s Outdoor season and supply chain network changes. Inventory reduction will be a major contributor to our full year free cash flow target of $600 million to $900 million. Looking to 2024 and beyond, we expect the additional multiyear inventory reduction opportunity to be at or above $1 billion. We expect to pursue further inventory reduction at the pace of $400 million to $500 million per year. We will balance our goal of inventory efficiency with ensuring sufficient working capital. Our priority for capital deployment is to fund our longstanding commitment to return value to shareholders through cash dividends and to further strengthen our balance sheet. Shifting to profitability. We recorded adjusted gross margin of 27.6%, up 290 basis points versus prior year and improving 400 basis points versus the second quarter. This is the third consecutive quarter that we delivered sequential gross margin improvement. Year-over-year expansion was driven by lower inventory destocking costs, supply chain transformation benefits and reduce shipping costs. All of which more than offset the impact of lower organic revenue. Moving forward, we expect continued adjusted gross margin rate expansion driven by the benefits of the supply chain transformation. Our guidance calls for adjusted gross margin to incrementally improve again in the fourth quarter. Now that the high cost inventory has turn through the P&L, we expect to continue to deliver expanding adjusted gross margin into the first half and full year 2024 supported by the success of our supply chain transformation. Achieving adjusted gross margins approaching 28% in the third quarter was a significant milestone on our journey to restore 35% plus adjusted gross margin. The momentum of our supply chain transformation is translating to sustainable upward progression in our margins and cash flow, and will provide resources to fund investment to accelerate long-term organic revenue growth toward our goal of 2 times to 3 times the market. Now turning to our 2023 guidance. Our expected GAAP earnings per share range has been revised to negative $1.45 to negative $1 from negative $1.25 to negative $0.50, charges primarily from the global supply chain transformation and Outdoor business integration. The current pretax estimate of acquisition related and other charges is now $425 million to $450 million, with approximately half of these expenses being non-cash. Based on the strength of the third quarter, we are raising our full year adjusted earnings per share guidance range to $1.10 to $1.40 from our previous guidance range of $0.70 to $1.30. We delivered a strong third quarter cash performance and are maintaining our full year free cash flow target of $600 million to $900 million. We expect fourth quarter cash flow to be supported by positive cash earnings, inventory reduction and the typical seasonal receivables reduction in Tools and Outdoor. The organic growth outlook for the year is unchanged with the total company expected to be down mid-single digits. This implies a revenue midpoint of $15.9 billion for the year and includes estimated risks for auto strikes and continued infrastructure customer destocking. Turning to important remaining elements of guidance. Our expectation is for production to continue to normalize in the fourth quarter. We remain disciplined and flexible in our approach to invest, to drive organic growth and share gains. Our outlook assumes approximately $125 million of annualized innovation and market activation investment with a goal to ultimately deploy $300 million to $500 million over the next three years. We expect fourth quarter adjusted operating profit to approximate $290 million with adjusted gross margin to sequentially improve to the 28% zone both the business. With that, I will now pass the call back over to Don.

Dennis Lange:

Great. Thanks Don. Shannon, we can now start Q&A, please. Thank you.

Julian Mitchell:

Hi. Good morning. And great to hear that update from Chris on the momentum in the Tools business. Maybe my question just around slide nine and some of the commentary there on margins. So, I guess, one is just, it looks like the gross margins up sequentially in Q4, but sort of operating margin down somewhat. So maybe just any sort of moving parts within that worth calling out. And then you talk about the gross margin moving higher sequentially into the first half of next year. So maybe you put that in context for us in terms of what does that tell us about the confidence in that sort of $4 to $5 of EPS number that you have mentioned in the past is perhaps some kind of framework for earnings next year? Thank you.

Pat Hallinan:

Yeah. Hey, Julian. Our focus is going to remain margins and cash generation until we are back to the operating model that business has traditionally had. I’d say, gross margins you saw, both effects, the effects of the program driving the cost savings we expected to the tune of, one, 100 basis points to 150 basis points of margin improvement in the quarter. Deflation also help in the quarter mostly from shipping coming off the balance sheet of another 100 basis points to 150 basis points. And then broader high cost inventory coming off the balance sheet of around 300 basis points. And that was our expectation. It’s great to see the teams working hard together to deliver the program on cadence, but as we have been telegraphing to investors, we could see the rate at which high cost inventory was coming off the balance sheet and that came well within our expectations and drove the important gross margin expansion. From here we have a pathway to 35%, obviously, the pathway going forward, it’s not going to be perfectly linear, but it’s certainly going to be more in the range of 50 basis points to 100 basis points a quarter on gross margin. As our operating margin question, that had more to do with just, it was about $200 plus million less revenue in this quarter and that was really the driver of the operating margin difference as we continue to invest in the business. And we are going to go forward both in the fourth quarter and as we head into a dynamic 2024 focused on continued gross margin expansion and cash generation. We are going to be investing for growth and that’s part of what we are doing in the fourth quarter and that’s what we are going to plan to do in 2024 as well. But we will be mindful of the macro environment and what that means for cash delivery and de-levering along that route. And the $4 to $5, I would say, given the performance of the business in the back half of the year in a dynamic market. I would still say, we see the $4 to $5 as a reasonable range. Certainly, it’s dependent on the macro and deflation versus inflationary environment. I would say that, the $4 to $5 anticipates a stable or improving macro. If you are at the stable side of the macro, you are probably on the lower side of the range and if you are at an improving macro, you kind of go towards the higher side of that range.

Dennis Lange:

Tim?

Jeff Sprague:

Thank you. Good morning, everyone, and hello, Chris. Good to hear your voice again. The -- I guess, maybe a little bit of a multi partner also, but just kind of thinking about, as you pivot from just kind of outright cost reduction to reinvesting for growth and the like. Does all most of this reinvestment happened inside of COGS and the gross margin discussion. How much of it ends up kind of in selling sales force, things that you are doing on kind of developing the trades that you mentioned. And maybe just as part of that selling related question, maybe just a little bit more color on what you are seeing on promotion and just kind of the general pricing environment in the market? Thank you.

Chris Nelson:

Yeah, Jeff. Thanks a lot. Nice hearing from you again. And what I’d say is that per Don’s comments, as we think about how we are going to move forward, and I would say, have focused investments in the business in the areas that we believe will drive the most leverage, making sure that we see which brands we want to invest in and what levers we want to pull there. And obviously, we have seen the strength of the Pro and there was we did, as far as near-term look, DEWALT was a positive story in the quarter, we need to keep on gathering steam with that. What I’d say is that, as far as in the investment buckets and where we are thinking we could have the most leverage. Certainly having the right products for the professional end-user is a large emphasis for us. We referenced a few of the launches that we have in the near-term, we are going to continue to double down on those types of investments for the Pro end-user, because of the strength of the brand, as well as what we see in the marketplace. Similarly, we want to make sure that we have the right commercial resources in the right markets on the ground with our customers, working with them on ways that we can grow together, because we really think that there is some great opportunities in the area -- in that area. So, that’s where really out of the gate, the emphasis is going to lie. As far as your other question on where we see, what we saw in the promotional activities? We are -- we did reference that we are going to be back in returning to traditional levels of promotion and we did that in Q3 and it started our quarter out strong and we are happy to be back in that promotional mindset, because it is an important part of the business and we think it is healthy and accretive for the business going forward. Now, we also are certainly going to supplement that with the new launches and we are going to lean into the new launches going into the back half of the year to continue that growth. But all in all, we are seeing the, in Q3, our sell-through was in line with our expectations. As far as pricing, we see disciplined in the marketplace as far as no deep discounting and we are going to make sure and continue in our healthy and traditional promotional mix. But then, like I said, also be driving growth organically through leaning into the opportunities that we see with the Pro.

Michael Rehaut:

Thanks. Good morning, everyone. Appreciate it. I just wanted to kind of understand some of the puts and takes on the updated guidance if I may. Kind of what really in effect drove the upside in the third quarter and it seems like, on an EPS basis year in effect reiterating the implied fourth quarter guide. I think you referenced investing in growth. I don’t know if that’s something that maybe perhaps you are increasing in the fourth quarter relative to prior expectations. But would love to understand that dynamic of what drove the 3Q upside and why you are reiterating 4Q. And also, to that point, the reiteration of the free cash flow guidance relative to the raising of the EPS guidance. What’s the bridge there as well? Thank you.

Operator:

Thank you. Our next question is from the line of Tim Wojs with Baird. Your line is now open. Tim Wois, your line is open, please check your mute button. Our next question comes from the line of Chris Snyder with UBS. Your line is now open.

Don Allan:

Yeah. We will give detailed 2024 guidance at the end of the year when we do our fourth quarter. But I can point in a few directions, especially around the gross margin, because it’s such an important point of our progress and where our focused energy is. I think on a full year basis for 2024, we would expect full year gross margins around 30%, potentially a little bit higher than 30%, obviously, that means exiting above 30%, because we come in somewhere in the 28%-ish range. And so, I think you have it right, it is an exit rate, that’s going to be somewhere in the low 30%s, we will update to what degree that is in January. I think when you talk about the macro -- the macro, while there certainly a dynamic environment, it’s probably given all that’s going on in the world held in a bit stronger than we would expect and a lot of what’s going on in our business is kind of the resetting of inventories and channel this year, the resetting of the Outdoor business post-COVID and a little bit of the shift that consumers have from buying goods to buying services. And so I think the topline next year, we are expecting a similar stablish type macro environment with some dynamic elements around it, but it’s really going to depend on our volume next year, is really going to depend on has the consumer stabilized and the rebalance between goods and services and has the outdoor business stabilized post-COVID.

Nigel Coe:

Oh! Hi. Thanks. Good morning. Thanks for the question. It seems like everyone is getting in three or four questions into one question. I will try and keep a bit simpler. But maybe no, who knows. I am just thinking, in the sort of a flat macro, given the imagery destocked especially in the Attachments, and obviously, Outdoor. Even unstable macro, do you think you can grow topline in that kind of setup? And then maybe my follow on question within the question is, what does the write-down at the Irwin and Troy-Bilt tell us about those brands. I mean, is this part of the SKU reduction initiative. Any kind of like insights into what’s driving those write-downs?

Operator:

Thank you. Our next question comes from the line of Rob Wertheimer with Melius Research. Your line is now open.

Don Allan:

Thanks, Rob. Yeah. I think, the -- we are probably over using the word dynamic, but I think it’s an appropriate word to describe the current market situation, because there’s a lot of different shifts happening. There is certainly a great deal of construction activity, but it’s shifted quite a bit from what it was 18 months, 24 months ago where it was very heavily residential focused and commercial focus to some extent and then we went through the pandemic and the commercial activity slowed down. So, we continue to see different types of shifts. We do not see radical shifts in our business model though or how we go to market at this stage. One of the really great things about Stanley Black & Decker is that we have over the years been very focused on what are the right channels to the end-user. The professional that ultimately is the ones the individuals that use our tools and because of that history and those channels that we have very strong presence in not only North-America, but the European markets, as well as emerging markets around the globe. We have their presence to be able to ensure that we are meeting the needs of the end-user and if the end-user is shifting to e-commerce, we have the ability to serve them an e-commerce as well or if they continue to want to go to the traditional distributor that they have spent time with, we sell through that channel. So I think we are positioned well for whatever may happen in the future. Clearly, there will be a shift -- continued shift over time, we are more and more people focus on e-commerce activity. We positioned ourselves well over the last decade to be able to continue to address that. I think you will see more of that shifting as you get into some of these commercial and industrial channels with larger distributors as they built some e-commerce platforms during the pandemic to deal with a period of time where people didn’t want to get close to each other and we have been able to address that as well. So we are going to continue to do that. They will probably be an area that we will invest in overtime to make sure that we meet those needs of the channel.

Joe O'Dea:

Hi. Good morning. Thanks for taking my question. I wanted to ask on the sort of returns targets around investment spend. And so when you think about investing $125 million, how do you think about the returns there and tracking them. And so, both from the market outgrowth, as well as the evidence of that. So when you spend $125 million, how do you go about tracking that it’s actually achieving the targeted outcomes?

Chris Nelson:

No. I just think that the comment that Don made about the three flagship brands that we have. And it’s not only about net incremental investment, but it’s also taking a look and seeing how we can reallocate existing dollars towards those three priority brands and the key initiatives that we see with the Pro end-user, as well as making sure that we have the right commercial resources in place to be driving those returns as well. So we are thinking at -- looking at the entirety of the spend and not just the net incremental and then driving that into measurable initiatives to be able to make sure that we are getting the types of returns above fleet average that Pat referenced.

Nicole DeBlase:

Yeah. Thanks. Good morning, guys.

Nicole DeBlase:

Just wanted to ask one on pricing. So I think originally you guys were kind of expecting flat to slightly down in the quarter for Tools, obviously, a little bit weaker than that. Just maybe a little bit more color on this from a competitive perspective and your thought process on pricing into 4Q and perhaps thoughts around 2024? Thank you.

Pat Hallinan:

Yeah. Nicole, I mean, purely from a guidance and actuals perspective, I’d say, very much within the bounds. I’d say the only dynamic that played out a bit differently in the quarter is the promotional mix around margin accretive Power Tools was a bit higher, which was net accretive to the P&L, you saw the gross margin performance in the quarter. It just as you reconcile and provide out the actual color and pricing was a little bit more than we would have expect. But I think that’s kind of on the margin of just how promotional activity unfolds in the quarter. But I and Chris may want to add to this. I don’t think we see any kind of change to the competitive dynamics inclusive of the pricing related to the competitive dynamics.

Operator:

Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is now open.

Don Allan:

Good morning.

Don Allan:

Yeah. I will let Pat give it a little more color on that, but we are pleased that we have gotten to a more stable manufacturing level here in the fourth quarter. And at this point the view of next year is, if we assume the environment that Pat described around the $45 of EPS, that-- for in that range, because of where the macro is we would expect it to continue to be stable. We will continue to focus on optimizing inventory next year. So Pat, maybe give it a little more color on that.

Operator:

Thank you. I would now like to hand the call back over to Dennis Lange for closing remarks.

Operator:

This concludes today’s conference call. Thank you for participating. You may now disconnect.

Dennis Lange:

Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2023 second quarter webcast. On the webcast in addition to myself is Don Allan, President and CEO; Pat Hallinan, EVP and CFO; and joining us for Q&A this morning is Chris Nelson, COO, EVP, and President of Tools and Outdoor. 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 replay of this morning's webcast will also be available beginning at 11 AM today. This morning, Don and Pat will review our second quarter results and various other matters followed by a Q&A session. Consistent with prior webcast, we are going to be sticking with just one question per caller. And as we normally do, we will be making some forward-looking statements during the call based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate, and as such, they involve risk and uncertainty. It's therefore possible that the actual results may materially differ from any forward-looking statements that we may make today. We direct you to our cautionary statements in the 8-K that we filed with our press release and in our most recent 34 Act filing. I will now turn the call over to our President and CEO, Don Allan.

Patrick Hallinan:

Thank you, and good morning, everyone. As Don mentioned, we made meaningful progress on our transformation in the quarter and first half of the year. Our cost reduction program is on track to deliver $1 billion of pre-tax run-rate savings in 2023 and is modestly ahead of plan year-to-date. Our simplification and prioritization efforts coupled with our supply chain transformation delivered $230 million of run-rate savings in the second quarter totaling $460 million year-to-date and $660 million since program inception. Approximately half of our 2023 savings were manufacturing costs related and as such we'll begin to see these benefits turn through inventory, off the balance sheet, and on to the P&L starting in the second half and continuing to build in 2024. Our organization is bringing our vision for the supply chain of the future to life with persistent sustainable progress. Strategic sourcing is a major contributor of 2023 savings and is ahead of plan. We have the capabilities in place to ensure changes are executed successfully and we are currently activating additional RFPs to secure further savings. The momentum behind the SBD operating model along with lean manufacturing practices is yielding sustainable productivity efficiencies such as alleviating manufacturing bottlenecks as well as reducing process waste and production downtime. This will become an important source of savings in the coming months and quarters. Our manufacturing and logistics network optimization remains on track, as we work to improve the efficiency and utilization of the asset base. Finally, as it relates to our complexity reduction, the SKU rationalization initiative is progressing in an orderly fashion. At this stage, we have approved the reduction of approximately 70,000 SKUs. We are working with our customers to assist with their transition to replacing products over the coming quarters. We have now decommissioned over 20,000 SKUs. We believe that as we exit the remaining 50,000 offerings, we will have suitable substitutes that will mitigate effectively all of the potential revenue risks which we size at less than 50 million annually. We believe managing this in a methodical way creates value via complexity reduction, without undue disruption to our customers or loss of share. We are pleased with the progress of our global cost reduction program and are confident in our ability to capture $1 billion of run-rate savings by the end of 2023 and $2 billion of run-rate savings by the end of 2025. Turning to our inventory reduction progress and gross margin trajectory. In the second quarter, we reduced inventory by $375 million bringing our year-to-date progress to $575 million. Over the last 12 months, we've achieved approximately $1.4 billion in inventory reduction through the improved supply chain conditions and planned production curtailments instituted during the back half of 2022. To contextualize our first-half performance, the $575 million reduction compares favourably to the average pre-pandemic first-half inventory build of approximately $400 million. We are expecting our full-year 2023 inventory reduction to be between $700 million and $900 million, which represents the DSI, that is about a 155 days. We remain committed to ongoing inventory productivity improvement to generate cash flow that will be used to strengthen our balance sheet while supporting our long-standing commitment to return value to shareholders through cash dividends. Turning to gross margin. The pace of improvement has been modestly ahead of expectations as transformation execution and freight deflation are favourable to plan. Second quarter adjusted gross margin was 23.6%, up 50 basis points sequentially versus the first quarter of 2023, the impact from liquidating high-cost inventory and the production curtailments represented approximately 400 basis points to 500 basis points of margin headwinds in the second quarter. Moving forward, we expect continued sequential improvement in adjusted gross margin driven by a lower impact from turning high-cost inventory and an increased benefit as our cost transformation improves the P&L. Assuming the demand levels and other assumptions that underpin our guidance, we expect adjusted gross margin to be 27% to 29% in the second half, a strong improvement versus recent quarters. While this is a significant step up from the front-half performance, we have line-of-sight into the cost-savings already generated and on the balance sheet that corresponds to lower-cost of sales and margin improvement in the coming quarters. To conclude, we're starting to reap the benefits from the inventory reductions and supply chain transformation and we'll remain focused on delivering our targeted adjusted gross margin of 35% plus by 2025. Now turning to 2023 guidance. Our expected GAAP earnings per share range has been narrowed to negative $1.25 to negative $0.50 from negative $1.65 to positive $0.60, inclusive of one-time charges, primarily from the global supply chain transformation and outdoor integration. The current pre-tax charges estimate was narrowed to $300 million to $325 million with approximately 25% of these expenses being non-cash. The 2023 quarterly profile of GAAP taxes and GAAP earnings per share is significantly impacted by the pre-tax loss in the first half and the interim tax impact of certain benefits factored into our annual effective tax rate assumption. However, as we expect to generate pre-tax income in the second half. This interim tax benefit will reverse and we expect our full-year tax rate to be relatively consistent with prior guidance. In parallel, we are also narrowing our full-year adjusted earnings per share guidance range to $0.70 to $1.30 from our previous guidance range of zero to $2. We are keeping the $1 midpoint consistent with the prior guidance framework versus our previous expectation, we have assumed modestly lower organic growth offset by better gross margin. At the midpoint, this results in an improved full-year adjusted operating profit and margin. This stronger operating performance is offset by an approximate $0.25 impact from higher interest and other expenses below the line, of which, 40% to 50% is interest-rate driven. We are narrowing our full-year free cash flow range to $600 million to $900 million from $500 million to $1 billion. We expect second half cash flow to be supported by positive net income, a further reduction in inventory, and the normal Tools and Outdoor seasonal benefit from working capital. We are planning for total company organic growth to be down mid-single-digits for the year. In terms of the business segment outlook, Tools and Outdoor total organic revenue is expected to be down mid-to-high single-digits for the year, incorporating the softer outlook in Outdoor as well as expectations for continued DIY softness and channel inventory conservatism. We are expecting to regain Cordless Power Tool promotions in the second half, reflecting our improved supply position. And as such, pricing is assumed to be relatively flat to slightly negative consistent with these activities. We continue to see the Pro tool user holding strong. And at this point, we believe the range of outcomes for volume covers some variability for the US consumer and DIY demand balance with the potential for stronger professional demand in the back half. In Industrial, we expect flat to low-single-digit organic growth on a full-year basis supported by a cyclical rebound in aerospace and auto. This is modestly lower than our prior outlook as we incorporate an assumption for continued customer destocking in attachment tools and industrial fastening. Production normalization and the pace of growth investments will both be flexed based on demand. We are planning for production to normalize in the fourth quarter recognizing the lower volume. We remain disciplined and flexible in our approach to reinvesting to drive organic growth. Our focus is to deliver on our financial expectations while utilizing gross margin improvements to fund growth investments. Our outlook assumes approximately $125 million of annualized investment with a goal to ultimately deploy $300 million to $500 million over the next three years. Clearly, our willingness to invest increases as we progress along our gross margin expansion trajectory. We expect second half adjusted operating margins to be in the mid-to-high single-digit as our cost efficiencies offset volume pressures. Turning to the important remaining elements of guidance. The expectation for the third quarter would be a sequential improvement in operating profit, primarily from the benefits of our cost reduction initiatives and a lesser impact from destocking. Adjusted EPS for the third quarter is planned to be approximately 80% of the full-year adjusted EPS amounts. And due to losses within the first half, the back-half adjusted EPS will be more than a 100% of the full-year total adjusted EPS. So in summary, we are exiting the first half with strong momentum across our cost-savings and cash generation initiatives with some of the more significant impacts from our inventory reduction now in the rear-view mirror, we are focusing on driving the items within our control to deliver further margin improvement and to fund investments. We continue to manage the business with the long-term in mind and we believe we have the right strategy in place to successfully navigate our path forward as we remain focused on driving above-market organic growth with margin expansion and enhance shareholder returns. With that, I will now pass the call back over to Don.

Dennis Lange:

Great. Thanks, Don. Shannon, we can now start Q&A, please. Thank you.

Timothy Wojs:

Hey guys. Good morning.

Timothy Wojs:

At risk of being yelled at, I'm going to try to ask a two-parter. So I guess the first question, just as you're looking at gross margins kind of first half to second half, if, Pat, maybe you could give us some color on the bridge in terms of how you go from kind of low 23s in the first half to that 27% to 29% in the back half, how much of that is production versus some of the cost savings that you're seeing there? And then I guess second, since we've got, Chris, on the call, maybe just hoping to get a little bit of his kind of early thoughts and observations as you've gotten into the business.

Chris Nelson:

This is Chris. Tim, thanks for the question. And I just wanted to start by saying how honored I am to join Don and the entire Stanley Black & Decker leadership team to help bring the company's long-term strategic vision of accelerated organic growth to life. As you well know, Don and the team have made meaning -- meaningful progress on this ambitious plan and I'm just grateful for the opportunity to help drive the company's transformation forward. As I've come on board, as you might expect, it's been a lot of taking time to learn and listen. And I got to say, it's been quite a whirlwind thus far in the first six-ish weeks. Then, seven factories spent at least today with every major business unit going through market trends, the products, the product roadmaps for the future, bend all the key design centers in North America, and had several key customer meetings. And through this process, what I'd say is that, the three real key observations and opportunities stand out. First is the long-term commercial opportunities exist due to the impressive strength of Stanley Black & Decker's brands and products. Simply put, our customers really, really like our products and our brands and want to grow with us. And that's something that cannot be underestimated for the future. Secondly is that the innovation engine within Stanley Black & Decker is amazing and I do believe it is a differentiating capability. Our ability to start with -- work with the end-user to understand their environment as well as the issues that they are trying to solve and then rapidly be able to turn that into design and implementation of products and solutions to help our customers solve their problems and become more efficient is really going to be an important future catalyst for growth. And then third is, as I've been out and spent time in the factories and in the operations, seeing the amount of traction that exists on the operations and supply chain transformation. There are obviously real benefits accruing through the P&L and Pat referenced those earlier, but as importantly, I can see the foundation that is putting -- being put in place that will make this a sustainable and long-term opportunity for the company. And it's also clear that the -- that there's ample future runway and that we're in the early innings of the transformation and that the future savings will be able to be reinvested back in the business to continue to fuel growth as well as margin expansion. So really the combination of these three key observations and opportunities really -- it has been very excited as far as the opportunity for long-term value creation within Stanley Black & Decker.

Julian Mitchell:

Hi. Good morning and welcome to Chris. Maybe just my question was understood just now that bridge from first half to second half of this year, but just wanted to check on any color you could give on the bridge from this year as a whole into next. And I suppose, if we look at your second half guidance for this year, it's about including some sort of outdoor seasonality assumption. It's maybe 3.50 of annualized EPS based off your second half guide at the midpoint. You had talked about a $5-ish EPS for next year previously, so I just wondered sort of any updated thoughts on that EPS step-up into 2024. And sort of related to that, it looks like your inventories will still be well above historical norms at the end of December, but you talk about production normalization during Q4, so I just wanted to sort of square that away when thinking about next year. Thank you.

Patrick Hallinan:

Yes, Julian, I'll pick up where Don left off. I think, from an operating performance and productivity range, we're targeting towards that EPS level, but as Don said, as we get to next year's guidance, we'll look at the macro and we'll look at our investment level for long-term growth. And I think that will decide our EPS for next year. In terms of gross margin this year and into next year, following on that opening question, we can really already see on our balance sheet and already in our savings rhythm the gross margin levels that we're projecting for the back half of this year. So those rates of gross margin delivery are, for the most part, on our balance sheet already for this year. And then your question around how do we step that into next year. Think of every one of the next few years going through the end of 2025 as $500 incremental million of COGS savings off of our revenue base. You're talking 200 to 300 basis points a calendar year of gross margin improvement. And so we continue to track on our long-term cost transformation. And so if we finish this year at 28-ish percent gross margin in the back half of the year, you could kind of expect that 200-plus basis point level of gross margin improvement to be carried into next year. And that's the kind of momentum you should be expecting the next couple of years. In terms of inventory, we're going to make significant inventory progress this year, but you're correct to point out that, by the time we get to the end of this year, our absolute inventory dollars at the end of this year will be in the $5 billion-ish range, which is around 155 days-ish range, which is higher than our long-term history of inventory levels, which have obviously changed since we acquired an outdoors business from the legacy Stanley Black & Decker levels, but still below 155. We'll continue to make progress and we will talk about that more specifically when we give guidance for next year, but we will continue to make progress and be working towards a level that is below 150 across a multi or rather below 140 across a multiyear time horizon. Next year, our progress will be balanced against some of our network changes. We are bringing online some new DCs next year and a new DC footprint altogether, so while we'll make some progress next year, it will be balanced against some of the long-term decisions we're making to improve service and costs in our DC footprint.

Nigel Coe:

Thanks. Good morning.

Nigel Coe:

I'll try and make this question a bit punchier. Thanks, guys. And Chris, welcome. Good to hear you. So the EPS, $0.80 for, well, $0.80 roughly for 3Q midpoint. And so I think that implies 4Q down slightly, so just wondering how we should think about that gross margin cadence between 3Q and 4Q. I'd have thought that maybe some of the cost benefits would benefit 4Q more than 3Q. So just maybe just run through that. And then the comment about pricing flat to slightly negative, is that for the whole corporation, or is that just specifically for Tools & outdoor segment?

Donald Allan:

And just a reminder recognizing that, as we launch new products at new price points throughout the year, the impact of the higher price versus the previous product that it's replacing does not flow through that price line, but it does flow through your margins. So you don't necessarily see the full impact of pricing decisions and processes that we have across the company because of that.

Michael Rehaut:

All right. Thanks. Good morning, everyone, and welcome, Chris. Wanted to dial in a little bit more into the change in your organic growth outlook for Tools & Outdoor. I think you kind of said it was driven by several different factors, softer outlook in outdoor, DIY weakness, channel inventory conservatism. I was hoping if you could kind of bucket those drivers in terms of what's driving the difference, if you can kind of tie it to the difference, I guess, which is maybe 3% or 4% of a change. And also if the POS turning positive, that was kind of part of your prior guidance because you said it could be a potentially positive signal for the back half. If that continues, would that drive any upside to the guidance?

Operator:

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

Donald Allan:

Well, I think what I articulated and Pat added some detail to it and more robust detail to it is a pretty good summary of where we think we are at this point. And you could build a bullish case that the numbers should be higher for next year, but you do have to factor in the fact that we really want to make sure that we continue to invest in certain key things in our company. We have to get more resources out on the field, closer to our end users. We need to have more engineering resources in key pockets to drive additional innovation opportunities. We've talked about electrification. We want to continue to do that in certain categories that are changing very rapidly. We have to continue to invest in that space. There's more investing we need to do on the digital marketing front, around social media and the activities that we do with our products, to really make our end users as fully aware as to the great innovation machine that we have and what we're putting in the marketplace. Those are things that we have to continue to invest in and so we want to strike the right balance in 2024 of earnings in the sense and cash flow of what's the opportunity for growth as we look at the markets and evaluate that later this year going into 2024. We have a good sense of what's going to happen with gross margins, as Pat articulated. And then the other wildcard is really how much do we want to invest to really plant more seeds for share gain opportunities in the future. That's an important part of our business model that's going to ensure that we're successful for the next several decades, and we want to make sure we do it in the right way and the right level of balance. And that's why we think, as you think about next year, that range of $4 to $5 probably makes sense. If we change our perspective because of market conditions or how much we want to invest, we'll provide that as soon as possible, but I think it's the right way to think about next year at this stage.

Nicole DeBlase:

Yeah, thanks. Good morning, guys.

Nicole DeBlase:

Maybe just a couple of follow-ups from prior questions that were asked. So on pricing, can you just characterize the competitive environment that you're seeing? Anything concerning out there? And then with respect to the channel inventory dynamics in the tools business, I think you guys talked about some channel adjustments this quarter. Is the expectation that, that kind of continues into the back half? Where are your inventories versus where you would like them to be in the channel? That would be great. Thank you.

Patrick Hallinan:

Yes. Nicole, channel inventories. We look at our current level of channel inventories relative to history. We're very much at or right around normal levels of channel inventory. And so I think, if there wasn't macro uncertainty or if short-term rates weren't as high as they are, we would be biased to stay where we are or to the upside, but I think, because of the rate picture in particular, with our channel partners paying much more in short-term rates to support their inventory and the fact there is macro uncertainty, their bias is to keep things low and, if not, to try to find new lows. We don't think there's big moves out there ahead of us. It's something very modest. And I would say our back half guidance anticipates somewhere in the neighborhood of $50 million to $100 million of inventory reduction in our guidance, as we've talked here today, and we think that's a pretty good number for the back half of the year. I mean obviously it could range outside of that if the macro environment changes, but that's what we've considered for the back half of the year.

Adam Baumgarten:

Hey, good morning.

Adam Baumgarten:

Can you just talk about how demand trended throughout the quarter into July? It seems like it built throughout the quarter. And the July commentary is pretty encouraging. Just maybe some additional color there would be helpful.

Operator:

Thank you. I would now like to hand the conference back over to Dennis Lange for closing remarks.

Operator:

This concludes today's conference call. Thank you for joining. You may now disconnect.

Dennis Lange:

Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2023 First Quarter Webcast. On the webcast in addition to myself, Don Allan, President and CEO; and Pat Hallinan, Executive Vice President and CFO. Our earnings release, which was issued earlier this morning and the supplemental presentation, which we will refer to, are available on the IR section of our website. A replay of this morning's webcast will also be available beginning at 11 a.m. today. This morning, Don and Pat will review our 2023 first quarter year results and various other matters followed by a Q&A session. Consistent with prior webcast, we are going to be sticking with just one question per caller. And as we normally do, we will be making some forward-looking statements during the call based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate and, as such, involve risk and uncertainty. It's therefore possible that the actual results may materially differ from any forward-looking statements that we may make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent 34-F filing. I'll now turn the call over to our President and CEO, Don Allan.

Patrick Hallinan:

Thank you, Don, and good morning everyone. I'm honored to join Stanley Black & Decker, the worldwide leader in Tools & Outdoor, at such a pivotal moment in the company's history. I have tremendous respect for the leadership team and Stanley Black & Decker's iconic portfolio of professional and consumer brands. During my initial weeks, I have been impressed with the breadth and depth of the company-wide transformation underway. Observing the early traction of the multi-year program and the savings captured during the initial phases, it is clear that the company's transformation is progressing rapidly and powerfully. I am energized to help accelerate the company's journey forward and to enhance our long legacy of market leading innovation and profit performance. Now let me walk through the details of the company's progress towards reducing inventory and improving gross margins. We exited last year with $5.9 billion of inventory. We reduced his by over $200 million in the first quarter. Since mid-2022, we have successfully reduced inventory by approximately $1 billion. This achievement was driven by improved supply chain conditions and planned production curtailments instituted during the back half of 2022 and which continue today. The targeted inventory reduction helped minimize the magnitude of the seasonal working capital build typical of our first quarter. As a frame of reference, our first quarter working capital build has averaged $700 million over the last five years, while this quarter it was $200 million, improving our cash performance primarily via inventory reduction. We are on track to achieve our expected $500 million of first half inventory reduction as we work down raw material and component inventory while selling out finished goods. Our full year 2023 inventory reduction target remains $750 million to $1 billion to drive significant cash flow generation and to pay down debt, strengthen our balance sheet, and back our long-standing commitment to return value to shareholders through cash dividends. Overall, the pace of our inventory reduction will be demand dependent and in a few moments I will cover the range of demand scenarios we are considering within our 2023 guidance. Turning to gross margins, which are also improving in a manner consistent with our plan. First quarter adjusted gross margins were approximately 23%, up 360 basis points sequentially versus the fourth quarter 2022, as we saw a smaller headwind from destocking actions and as our transformation initiatives provide a greater income statement benefit, something we expect to continue. Production containments in the first quarter were at levels relatively similar to those of the back half of last year and the destock impacted gross margin by approximately 400 to 500 basis points. We expect a similar impact to the second quarter resulting in second quarter adjusted gross margin consistent with that of the first quarter. Our base case guidance anticipates the adverse margin impact from our targeted production curtailments and destocking will ease through the year. Supporting adjusted gross margin expansion into the mid-to-high 20s for the second half of the year. The timing of normalized production and improved gross margin could shift earlier or later depending on the demand environment and corresponding speed of inventory reduction. We will actively monitor demand and adjust our supply chain to optimize the pace of margin improvement and inventory reduction throughout 2023. An important leading indicator for gross margin is the 110 million of supply chain transformation savings delivered in the first quarter. As these savings turn through inventory later this year, gross margin will expand further. It is encouraging to see the initial progress towards our multi-year target to return adjusted gross margins to the 35 plus percent range. We are prioritizing cash generation, gross margin improvement, and balance sheet strength. By executing against these priorities, we are positioning the company for long-term growth and value creation. Now turning to 2023 guidance. We are reiterating our four-year adjusted earnings per share guidance range of $0 to $2 per share. On a GAAP basis, we expect the earnings range per share to be negative $1.65 to $0.60, inclusive of one-time charges primarily from the global supply chain transformation and outdoor integration. The current pre-tax charges estimate was narrowed to 275 to 325 million with approximately 25% of these expenses being non-cash. We continue to target free cash flow generation of $500 million to $1 billion, primarily driven by inventory reduction. Consistent with the framework shared in February, we planned and continue to forecast around three 2023 demand scenarios as the macroeconomic outlook remains dynamic. Our base case scenario assumes a modestly unfavorable market demand environment compared to what we experienced during the second half of last year. In this scenario, we are assuming total organic growth to be down low to mid-single-digit, incorporating the softer start to the outdoor season. Tools & Outdoor, total organic revenue is expected to be down low to mid-single-digit, while we expect low single-digit growth for industrial. The base case also assumes that we maintain the production curtailment with the intention to return to normalized production levels during the third quarter. As a result, the under-absorption of fixed manufacturing costs would continue to constrain second quarter operating margins to low single-digit. As production returns to normalized levels in the back half of the year, we expect operating margin to improve to the mid-to-high single-digit range, resulting in full-year operating margins in the mid-single-digit. Finally, the base case includes approximately 125 million of annualized reinvestment targeting Tools & Outdoor growth acceleration and complexity reduction. We plan to be measured with the magnitude and timing of such investments depending on the demand environment. The second half acceleration scenario contemplates a stronger demand environment, supporting organic growth in the second half of 2023. In this scenario, we would expect a quicker normalization of inventory levels and gross margin improvement. Total organic growth would be relatively flat for the year. This scenario would position the company to deliver high single-digit operating margins in the second half, as well as a larger level of reinvestment to accelerate our transformation. The downside case reflects a deceleration of demand due to elevated recessionary pressures. If this scenario becomes the macro reality, we would expect full-year organic revenues to decline by mid-single-digit, with volume declines in both the Tools & Outdoor and industrial segments. In this scenario, production curtailments would likely remain in place through the end of 2023, extending the timeline of our gross margin recovery. With lower demand, we would adjust the level of reinvestment in CapEx until we have more clarity on the extent and duration of the macro impacts. We believe it is prudent to maintain these ranges of 2023 demand outcomes, production levels, and approaches to reinvestment as we prioritize our transformation and inventory reduction and cash generation. Turning to important remaining elements of guidance, for the full year, we expect the below-the-line expenses in total to be relatively similar to the guidance issued in early February. We are building an expectation for higher interest expense, which is offset by a modestly lower 2023 tax expense assumption. For the second quarter, we are expecting a sequential improvement in operating profit, primarily from seasonally higher levels of revenue. Adjusted gross margin is planned to be in the low 20s, relatively similar to that of the first quarter. Adjusted EPS is planned to be at a loss of approximately $0.40 per share at the midpoint, incorporating an expectation for a higher tax expense versus the first quarter. Free cash flow is expected to be positive in the second quarter, primarily from inventory reduction. Our plan calls for earnings to inflect positively in the second half of the year, generating an annualized EBITDA run rate of approximately $1.3 to $1.7 billion. This range is similar to our view in February, and we believe this is the appropriate base to build off as we deliver our transformation savings over the next couple of years. We are planning for the dynamic operating environment to continue, and feel we have the strategy in place to successfully navigate our path forward as we remain focused on driving above-market, long-term organic growth and margin expansion. With that, I will now turn the call back over to Don.

Dennis Lange:

Great. Thanks, Don. Shannon, we can now start Q&A, please. Thank you.

Nigel Coe:

Thanks. Good morning, everyone.

Nigel Coe:

Good morning, and Pat, look forward to meeting you soon, and Don, congratulations on hiring Chris Nelson. He's someone we know really well, so good guy.

Nigel Coe:

So my question is really just -- maybe just more detail on the Tools & Storage sales in North America. You talked about footprint of sales being above 2019 levels, but just wondering how that looked year-over-year, maybe the fact the Pro and DIY. And then the pricing of 2%. To what extent was that a lot of promotional activity around maybe outdoor? And how do you see pricing trending through the year? Thanks.

Patrick Hallinan:

Pricing environment has been stable. The price increase dynamic for us that you referenced in the first quarter was largely a carry-in price increase. Broadly in the channels and across competitors, the pricing environment remains stable. It appears to us that most in the market are focused on margin enhancement and, therefore, preserving pricing. We don't expect additional price in our outlook through the balance of the year, so stable pricing. We will be, given the supply chain improvements we've been making, we will be engaging in traditional seasonal promotions throughout the year, so that dynamic will be returning, but that's less of a new pricing dynamic and more of a return to traditional seasonal promotions.

Julian Mitchell:

Thanks very much. Maybe just my question would be around, when you think about that uplift of margins from sort of low single digits amid the high single digits in the second half, maybe try to parse out how much of that is sort of sales uplift versus less destock versus less underproduction? And how we think about the phasing of third quarter versus fourth quarter earnings, anything major to call out there?

Operator:

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

Don Allan:

Yes. Thanks for asking that question, Tim, because I didn't really get into that when I was talking about POS. But, yes, I would say the inventory levels in the channels and our major customers in North America and Europe are still high when you kind of look at traditional historical levels of inventory, but they are starting to come down. And so we're starting to see improvement in that. And I think for us in particular, the good news has always been that we weren't starting with a high level of inventory compared to maybe other folks within the industry and other competitors. So when you look at Home Depot as an example, we're not far away from where you would traditionally see. We're within a week or so of what we would typically want it to be and what they would want it to be. Lowe's is a little bit higher than that, but Lowe's tends to run at a much higher level of inventory, as we all know, versus Home Depot. So we feel pretty good about it. I think you'll see a continued little bit of working down of our inventory and our customers in Q2 and maybe a little bit of that in the Q3 as we work through the year, depending on where demand goes. So I don't think we're done with the de-stocking, but I think it's something that's very manageable for us versus maybe what some of our competitors are dealing with right now.

Josh Pokrzywinski:

Hi, good morning, guys.

Josh Pokrzywinski:

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

Operator:

Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Your line is now open.

Patrick Hallinan:

Yes, Mike, thanks for the question. In terms of the first quarter favorability, we are executing well on the transformation. And so the transformation is running ahead of plan. And we're feeling good, not just about 2023, but about the road beyond 2023 and delivering on that transformation. So I would say just, when you get to the phasing of it throughout the year, that's more just it's difficult to predict perfectly how inventory rolls off your balance sheet and what level of inventory rolls off your balance sheet. So I would say having guidance that's highly consistent with the original guidance of low 20% gross profit margins in the first half and high 20% gross profit margins in the back half is the way you should think of the business. You should have confidence in the transformation delivering that. And the way it flows quarter to quarter is always going to depend a little bit on mix and what type of inventory is coming off the balance sheet. So I wouldn't subscribe anything other than that to the first half gross profit margin. Solid transformation performance and just an update on where the inventory is falling off the balance sheet. In terms of the outlook of the end market dynamics in Tools & Outdoor for the balance of the year, we would expect what we've seen in the first quarter to persist throughout the balance of the year, which is continued strength in the pro-environment and a softer consumer environment and that dynamic to be relatively consistent across the quarters. But as Don mentioned earlier, Q&A, the comp gets easier as we get from the second quarter to the third quarter. So it's less about a change in end market buyer behavior in the last three quarters of the year, and it's more the comp easing in the latter part of the year.

Chris Snyder:

Thank you. So the Q1 inventory reduction certainly seems to be tracking ahead of expectations. But you guys left the 1 HD stock guide unchanged at 500 million. Does this signal that maybe some of the destock was pulled forward into Q1? Or should we think about potential upside on the rate of the first half destock? Because it does sound like outdoor is improving in April relative to March. Thank you.

Operator:

Thank you. Our next question comes from the line of Eric Bosshard with Cleveland Research. Your line is now open.

Patrick Hallinan:

Now, thanks for the question, Eric. Our inclination is to be more thoughtful around sales and operations planning. It is not our intent, except for around the SKU rationalization areas, it's not our intent to drive an inventory change through aggressive pricing. That is not our intent. We're going to be disciplined on pricing and we're going to be focused on improving margins throughout 2023 and beyond 2023. So we'll be addressing that, Eric, really by internal planning around production relative to sales and we'll update, the guidance as appropriate as the macro unfolds and as channel behavior unfolds.

Dennis Lange:

Thanks, Shannon. We'd like to thank everyone again for their time and participation on the call. Obviously, please contact me if you have any further questions. Thank you.

Dennis Lange:

Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2022 Fourth Quarter and Full Year Webcast. On the webcast in addition to myself, Don Allan, President and CEO; and Corbin Walburger, Vice President and Interim CFO. Our earnings release, which was issued earlier this morning and the supplemental presentation, which we will refer to, are available on the IR section of our website. A replay of this morning's webcast will also be available beginning at 11 a.m. today. This morning, Don and Corbin will review our 2022 fourth quarter and full year results and various other matters followed by a Q&A session. Consistent with prior webcast, we are going to be sticking with just one question per caller. And as we normally do, we will be making some forward-looking statements during the call based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate and, as such, involve risk and uncertainty. It's therefore possible that the actual results may materially differ from any forward-looking statements that we may make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent 34-F filing. I'll now turn the call over to our President and CEO, Don Allan.

Corbin Walburger:

Thank you, Don, and good morning, everyone. Let me walk through the details of our business segment performance. Beginning with Tools & Outdoor, fourth quarter revenues were in line with last year at $3.4 billion, benefiting from a 7% improvement from price actions and an eight-point contribution from the MTD and Excel outdoor acquisitions. Both of these acquisitions are now a part of organic growth beginning in December. These factors were offset by a 12% decline in volume and a negative 3% impact from currency. From a full year perspective, Tools & Outdoor achieved record revenue of $14.4 billion, driven by a 7% improvement from price actions, and 21% growth contributed by our outdoor acquisitions, which was offset by softer consumer demand and currency. Looking at the regions, Latin America achieved 4% organic growth. Although Europe declined 3% organically, performance improved sequentially from the third quarter, and we believe the more significant impacts from UK channel destocking are now behind us. North America was down 7% as a result of lower consumer and DIY market demand, as well as the third quarter carrying heavier holiday promotional shipments compared to last year. US retail point of sale was supported by price increases and professional demand. Compared to a pre-COVID 2019 baseline, the fourth quarter POS growth was consistent with the growth levels experienced in the third quarter of 2022. Aggregate weeks of supply in these channels ended 1.5 weeks below 2019 levels. Adjusted operating margin for the segment was 1% in the quarter as the benefit from price realization was more than offset by commodity inflation, higher supply chain costs, planned production curtailments and lower volume. For the year, operating margin was 8.4%, down versus prior year. Turning to the strategic business units. For the full year, Power Tools declined 5% organically due to weakness in consumer and DIY and front half constraints related to electronic components. These volume impacts were partially offset by the benefits of our price increases and the continued performance of our strong DEWALT cordless innovation across our FLEXVOLT, ATOMIC and XTREME product families as well as our new and differentiated power stack battery packs. Hand tools declined 5% organically in the year. Consumer related headwinds were partially offset by price realization as well as new product innovation, notably the DEWALT Impact Connect, which consists of accessories that attach to an impact driver, allowing up faster cutting than standard hand tools. We also benefited from innovation in storage solutions such as mobile tool storage within the DEWALT Tough system and the CRAFTSMAN Premium S2000 metal storage platform. The Outdoor business declined 7% organically on a pro forma basis for 2022 due to the difficult outdoor season outlined earlier in the year. The fourth quarter marked the one-year anniversary of the MTD and Excel acquisitions, and we're pleased with the progress made to advance the outdoor platform integration. We now have a combined dealer channel sales team and launched one go-to-market approach to grow share. We've activated a brand portfolio strategy, leveraging DEWALT, Cub Cade,t and Hustler in the Pro and high-end resi market segment while targeting CRAFTSMAN, Troy-Bilt, WolfGarden, and Black & Decker for the residential end user. I want to acknowledge and thank the entire team for their dedication to this process and ongoing commitment to delivering the best products for our customers. Now, shifting to Industrial, which had another strong quarter, recording 10% organic growth and double-digit adjusted operating margin. Segment revenue declined 1% versus last year as nine points of price realization and one point of volume were offset by five points from currency and six points from the oil and gas divestiture. The team leveraged the price increases and volume growth to overcome commodity inflation and higher supply chain costs to deliver adjusted operating margin of 11.5%, up sequentially 40 basis points and up 220 basis points versus last year. Looking within the segment, Engineered Fastening organic revenues were up 9% in the quarter, led by aerospace growth of 37% and auto growth of 14%, which were partially offset by industrial markets. Aerospace fasteners delivered its sixth consecutive quarter of sequential revenue improvement as the recovery in commercial OEM production continues. The auto fasteners' strong quarter, demonstrated by the business' ability to gain share in a dynamic environment and outpaced global light vehicle production in the quarter and for the full year. Attachment tools organic revenues were up 18%, driven by strategic pricing actions. While orders particularly from our dealer channel partners have been moderating, our backlog remains above 2019 levels. We continue to make progress with our inventory reduction in the fourth quarter, taking out nearly $500 million and resulting in a total second half inventory reduction of $775 million. Our production curtailment actions have been successful, helping to reduce DSI by approximately 20 days in the quarter and it was good to see the significant inventory reduction in the second half translate into free cash flow generation in the fourth quarter. As we look to the front half of 2023, we are targeting another $500 million reduction with the majority of this progress to be made in the second quarter. Although we typically see a seasonal inventory build as we prepare for the outdoor and spring selling season, we have the ability to work down our input materials and components as well as drive commercial actions to sell through finished goods. Our full year 2023 inventory reduction target is $750 million to $1 billion, which will drive significant cash flow generation that will be used to pay down debt and further strengthen our balance sheet. The timing of this reduction is demand-dependent. In a few moments, I'll cover how these assumptions impact the 2023 guidance range. Turning to gross margins. We expect the impact of planned production curtailments and higher cost inventory liquidations will continue to weigh on margins through the first half of 2023, resulting in margins in the low 20s. Production curtailments in the fourth quarter were down approximately 30% versus the long-term average and impacted gross margins by approximately six to seven points in the quarter. In our base case, we expect to improve from these levels but not fully eased production curtailments until the third quarter of 2023, which should support a gross margin recovery into the mid to high 20s in the back half. The normalized production and better gross margins could potentially shift earlier or later in the year depending on the overall demand environment and the speed of destocking. We have the teams focused on inventory reduction, cash generation, and balance sheet health as we work to drive gross margins to our historical 35% plus target level in 2025. I'll now walk through how the company is planning for three demand scenarios for our 2023 guidance as the macroeconomic outlook remains dynamic. Our base case scenario assumes a modestly unfavorable market demand environment, compared to what we experienced during the second half of last year. In this scenario, we are assuming total organic growth to be down low single digits with the first quarter being the toughest comp. Tools & Outdoor total organic revenue, inclusive of positive price is expected to be down low single digits, while Industrial is planned for low single-digit growth. Specifically, for Tools & Outdoor, this would imply a full year volume decline of approximately 5%, ahead of our forecast for the market. For the second half, volume is expected to be down 3% to 3.5%. In this base case, we would maintain our production curtailments with the goal of returning to normalized levels in the third quarter. As a result, the under absorption of fixed manufacturing costs would continue to constrain first half 2023 operating margins to low single digits. As production returns to normalized levels in the back half of the year, we expect operating margin rate to improve to the mid to high single-digit range. While our teams are aggressively focused on capturing deflation, this scenario does not include moderating commodity prices benefiting the P&L until late 2023 after the destock, and can be a positive driver heading into 2024. As we monitor the demand environment, we will be measured in the timing and magnitude of our investments, reinvesting into our businesses at the point of impact as part of our transformation strategy, and our base case scenario includes approximately $125 million of annualized reinvestment targeted at commercial leadership, driving innovation and complexity reduction. Shifting to our second half acceleration scenario. This contemplates the possibility of a stronger demand environment supporting organic growth in the second half of 2023. Total organic growth would be relatively flat for the year. To support the improved second half demand, production levels would normalize towards the end of the second quarter. This scenario would position us to deliver high single-digit operating margins in the second half as well as an elevated level of reinvestment to accelerate our transformation. Lastly, we are preparing a downside case that reflects a deceleration of demand due to elevated recessionary pressures. In this case, we expect full year organic revenues to decline by mid-single digits with volume declines in both the tools and outdoor and industrial segments. If this were to occur, our production curtailments would likely continue through the end of 2023, extending the time line of our gross margin recovery. Under this scenario, we would opt to conservatively meter the level of reinvestment until we had more clarity on the extent and duration of the macro impacts and economic cycle. Overall, we feel it's prudent to consider this range of potential 2023 demand possibilities production and reinvestment levels as we continue to prioritize inventory reduction and cash generation. As such, we are guiding full year adjusted earnings per share in the range of zero to $2. On a GAAP basis, we expect the earnings per share range to be negative $1.65 to positive $0.85, inclusive of one-time charges from the global supply chain optimization and the remaining outdoor integration-related expenses. The current pre-tax estimate for one-time charges is approximately $225 million to $325 million with $50 million to $100 million in non-cash charges. Now some added quarterly context from our base case. For the first quarter, we're expecting similar levels of operating profit to what we delivered in the fourth quarter. However, we do not expect the discrete tax benefits to repeat, resulting in a first quarter adjusted loss of $0.75 per share at the midpoint. We believe profitability can improve sequentially into the second quarter, resulting in a stronger performance. In total, we expect our actions [Technical Difficulty] but will translate to positive first half free cash flow driven by $500 million of inventory reduction, most of which will come in the second quarter. As we get through the first half destock, we expect earnings to inflect positively in the second half of the year, generating an annualized EBITDA run rate of approximately $1.3 billion to $1.7 billion. We view this as a jumping off point to further improve with our transformation. Our guidance calls for $500 million to $1 billion of free cash flow in 2023, primarily from inventory reduction. We're focused on our key priorities; number one, generate strong cash flow through inventory reduction to assist with ongoing debt deleveraging; number two, sequential improvement in our gross margins as we drive further supply chain transformation initiatives; and number three, focus on gaining market share in all major categories. We're planning for the dynamic operating environment to continue and feel we have the strategy in place to successfully navigate our path forward as we remain focused on driving above market long-term organic growth. With that, I will now turn the call back over to Don.

Dennis Lange:

Great. Thanks, Don. Shannon, we can now start Q&A, please. Thank you.

Julian Mitchell:

Hi, good morning.

Julian Mitchell:

Good morning. Maybe just my question would be around -- I guess, two quick parts. One would be, it looks like you're guiding for positive price, I think, in Tools this year, maybe the conviction in that given what seems to be a lot of inventory kind of out there at customers and competitors. And then also, the second part would just be I heard what you said on the annualized EBITDA run rate. Are we still assuming a sort of $7 plus or so of EPS potential at Stanley in the medium-term based off that, or has that view changed?

Corbin Walburger :

Long-term EPS, medium-term.

Corbin Walburger:

No. The only thing, Julian, maybe for your model from a pricing standpoint, we're going to have some price carryover in the first half of a point or two, and then that obviously anniversaries out by the second half.

Tim Wojs:

Yeah. Hey, good morning everybody. Thanks for all the details. Don, maybe just following on to your question, or to some of the answers from the last question. Just what are you seeing from the Pro today? And I guess, what -- within the scenarios that you've outlined, I mean, what are you assuming that the Pro does as you work through 2023?

Operator:

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

Don Allan:

Sure. I think on the inventory part of your question, I feel like going after $1 billion, $750 million to $1 billion is the reasonable level that we should pursue given where our business model is today and our supply chain is today. Could we, over time, over the next 12 months, get to a number above $1 billion? Yes, that's possible. It probably wouldn't be dramatically above that number, though. Now as you go into 2024, I don't think there's a need for another major step down in inventory. I think what we're going to see, if things go the way we would like them to go in 2023, we'll get a substantial chunk of inventory out in the first half of the year, a lot of that probably in Q2. We'll do some more at the end of the year in the fourth quarter, which tends to be part of the normal routine of our company. And beyond that, I think it's just going to get back to managing and optimizing the supply chain to maximize the efficiency of it. And we'll continue to drive down inventory. But it won't be at the -- having an impact on our production. It will be more managing it efficiently, looking at how we do certain types of activities that drive reductions of $250 million to $500 million each year for maybe the subsequent two years, more in that magnitude. And I think that's the right way to look at it. I really would like to get production levels back to normal in the back half of 2023. That is our goal. We think it's achievable based on our base case right now. And we'll continue to look at that. Obviously, Corbin articulated at the downside case, if we saw demand being even worse then the production levels would have to stay lower probably through the remainder of the year. But in our base case, I think there's a good chance we can get production levels back to normal in the summertime of 2023. On the dividend, very good question. Thank you for asking that. The dividend continues to be a very important part of our capital allocation strategy. We believe that it's a necessary thing for us to maintain the level of the dividend that we have today. We'll continue to evaluate that through the remainder of the year, but there's no change in that strategy at this stage. Obviously, buying back stock is not an opportunity for us given the leverage we have on our balance sheet. And so therefore, returning value back to our shareholders, the main lever we have today is our dividend.

Mike Rehaut:

Sorry, about that. Appreciate the taking my question. Just wanted to make sure I fully appreciated the base case in terms of -- I think you said earlier that it incorporates a view around repair remodel activity being down also low single-digits. I just want to make sure I understand that's right. I mean, obviously, you have existing home sale turnover trending down 30% year-over-year currently. And I think that might be, at least in our view, a little optimistic. But just wanted to understand your assumptions behind that? And also, if I could just kind of shift gears on the modeling side, I appreciate any views on some of the other line items from a guidance standpoint, corporate expense, interest expense, other net, some of those line items would be helpful? Thanks.

Don Allan:

I think the other thing that I would add is we – if you look back at history of Stanley Black & Decker and if you put the Great Recession in 2009 in a totally different category, because we had a significant amount of overbuild residential inventory, in particular, in housing and say that's an unusual situation that's probably not indicative of where we are today because we don't have that type of overbuild situation and we don't have the same type of leverage issues within the consumer in the housing market as well. The other recessions that Stanley Black & Decker has historically experienced, the average decline has been about 3% to 5%. And so when you think about it from that perspective and recognize that we just went through a period of time where we're dealing with supply constraints and then a bit of a consumer dip in the back half of 2022, now we believe we're going to see a bit of a pro dip here in 2023, we're kind of aligned with our 3% to 5% in 2023 with that historical point of view. There hasn't been many recessions that have impacted housing beyond the 5% except for the one that I mentioned, which was the Great Recession, which is very different than usual. So it's just something that we need to keep in mind as you factor all the different scenarios that Corbin went through in the presentation and really center around our base case. Our base case is very consistent with what history would say.

Operator:

Thank you. Our next question comes from the line of Rob Wertheimer with Melius Research. Your line is now open.

Don Allan:

Good morning.

Don Allan:

I think as we look at the pricing dynamics in Tools & Outdoor, we are monitoring all the different things that are happening across the different product families and categories related to price. And we really look at what our competitors are doing. We're obviously paying attention to monitoring what we're doing as well and making sure it's consistent with our expectations. But we didn't see any major turbulence in the market around pricing from our competitors during the fourth quarter. We do see here random, kind of, what I would call promotional activities to move inventory through some of our customers' stores. So you saw some of that happen in the fourth quarter. But it didn't dramatically shift the pricing dynamic, the list pricing dynamic in particular in that time horizon. That's something we will continue to monitor here going into 2023 and make sure we stay focused on that throughout the year. And it's always something that we have to factor into our decision-making. But we think the promotional calendar that we've built with our customers so far for this year. And the other activities that we're able to do will allow us to achieve the level of inventory reduction we would like to get to, which is $750 million to $1 billion. And we obviously have to be agile and flexible and look at what happens in the market. But at this stage, we're not seeing any irrational pricing activity.

Chris Snyder:

Thank you. So I wanted to ask about the gross margin recovery during 2023. When we see gross margin going from the 20% currently to the mid to high 20s by the back half of the year, could you provide just a bit more color on the buildup here between the improvement of just getting past the destock versus some of the benefits of the Phase 1 supply chain transformation plan starting to come through? Thank you.

Operator:

Thank you. Our next question comes from the line of Dan Oppenheim with Credit Suisse. Your line is open.

Don Allan:

Yes. I would say the range actually is indicative of the range of EPS. So if the low end of range of EPS played out that Corbin articulated, then we'd probably be looking at $750 million of inventory reduction. Even though we would be continuing curtailments, the demand levels would be much lower. And so you have two or three points lower demand versus the base case. On the high end of the case, I think the $1 billion becomes very achievable because you're dealing with much higher levels of demand where organic for Tools & Outdoor would probably be flat year-over-year. And therefore, the $1 billion feels more achievable in that environment, and you're getting your production levels back to normal levels in the back half of the year or maybe sooner. And so that's where the range kind of plays out. As I mentioned earlier in response to Nigel's question, I do think if demand is stronger in the back half, we could see a possible improvement above the $1 billion. I don't think it would be a dramatic number, but a few hundred million dollars above that, it certainly makes sense. And so that's really where that range comes from. It really correlates well with the EPS range, which correlates well to the demand associated with those three different scenarios.

Nicole DeBlase:

Yeah. Thanks. Good morning guys.

Nicole DeBlase:

Just to maybe piggyback on one of the earlier questions. Can you just give a little bit more color on the ramp of the cost savings that you guys expect to achieve throughout 2023, would take into the base case? And then any help at all on as we think about 2024 and 2025? It might be a bit early to give us explicit numbers. But is more of the plan coming through in 2024, or is it more back-end loaded towards the end of the three-year period? Thank you.

Don Allan:

Yeah. And I think for 2024 and 2025, I mean, we're trying -- obviously, with the numbers that you just heard, we believe we'll have $1 billion of value creation by the end of 2023. And then there's another $1 billion related to the supply chain transformation in the subsequent two years of 2024 and 2025. Right now, based on the plan we have that our operations and business teams have collectively worked together on, that $1 billion has a specific level of detail and actions that are associated with it that we believe are close to being rock solid. And, therefore, we do think in those two years, we'll probably get about $500 million or so of that in each year. And we'll see as we get deeper into 2023, whether more comes in 2024 versus 2025, time will tell. But at this stage, it feels like the way that we're phasing this because it is a pretty significant level of transformation that we're doing across our supply chain, and we need to be thoughtful as to when we do different phases of it, so we don't cause any major disruption to our customers, which is why it's going to take three years to do. At the same time, it's also why the value probably would be pretty evenly prorated over a three-year time horizon.

Eric Bosshard:

Good morning. Thanks. Curious on, Don, you talked about 2024 of $5 to $7 in rough frame. And I know six months ago, that was the concept for 2023. What's so notably different in 2023 that pushed out that level of earnings to 2024?

Eric Bosshard :

Great. That's helpful color.

Operator:

Thank you. I would now like to turn hand the call back over to Dennis Lange for closing remarks.

Operator:

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

Dennis Lange:

Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2022 third quarter webcast. On the webcast, in addition to myself, Don Allan, President and CEO; and Corbin Walburger, Vice President and Interim CFO. On 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 replay of this morning's webcast will also be available beginning at 11 a.m. today. This morning, Don and Corbin will review our 2022 third quarter results and various other matters followed by a Q&A session. Consistent with prior webcast, 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 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. I'll now turn the call over to our President and CEO, Don Allan.

Corbin Walburger:

Thank you, Don, and good morning, everyone. Let me walk through the details of our third quarter business segment performance. Beginning with Tools & Outdoor, revenue grew 10% to $3.5 billion as the MTD and Excel outdoor acquisitions contributed nearly $600 million of revenue or approximately 18% growth, and price realization contributed 7%. These factors were partially offset by a 12% decline in volume and a negative 3% impact from currency. On an organic basis, we were down low single digits in emerging markets in North America and down 12% in Europe. U. S. retail point-of-sale was supported by professional demand and remained consistent with levels exiting the second quarter of 2022. Aggregate weeks of inventory in these channels remain below 2019 levels. The European results were impacted by retail market pressure due to high levels of customer inventory and inflation as recessionary concerns and the war in Ukraine continue to weigh on consumer spending, particularly in the Northern region. Adjusted operating margin for the segment was 6.8%. Excluding charges and acquisitions, margin was 140 basis points better at 8.2%, however, still below the 15.5% level from the same period last year as the benefit from price realization was more than offset by commodity inflation, higher supply chain costs, production curtailment costs and lower volume. Consistent with normal seasonality, the MTD and Excel outdoor businesses deliver only about 40% of full year volume in the back half at operating margin substantially below the annual average as margins in the first half of the year are typically bolstered by peak outdoor seasonal volume leverage. Across the North American channels, organic sales in retail and e-commerce were down versus 2021 levels, with moderate strength in Commercial and Industrial. However, as compared to a pre-pandemic 2019 baseline, organic sales performance was up double digits across these channels. Turning to the strategic business units within our Tools & Outdoor segment. Power Tools declined organically by 2%. This modest decline reflects an improvement versus the front half performance as we're seeing better semiconductor supply, which helped to raise customer fill rates and contributed to positive organic growth in North America. Looking ahead, we expect further progress in the fourth quarter and are serving a normalized merchandising and promotional schedule for our professional products with our customers. Hand tools declined organically by 7%, driven by retail consumer demand softness in European customer destock. These factors were partially offset by strength among professional-oriented customers in the U.S. commercial and industrial channels as well as successful new product launches in our CRAFTSMAN plastic storage. The Outdoor business declined 12% on a pro forma organic basis. Total revenue was impacted by moderated consumer demand like many other discretionary retail categories and lower orders, as our retailers are also working down inventory. The outdoor team is progressing on our platform integration initiatives, and we have a host of new outdoor innovations across our brands and categories in the pipeline to be launched for the 2023 season. Now shifting to Industrial, which had a great quarter, leveraging the cyclical recovery, with 14% organic growth and margin expansion back to the double digits. Segment revenue increased 5% versus last year as nine points of price realization, coupled with five points of volume, were partially offset by six points from currency headwinds and three points from the Oil & Gas divestiture, which closed in August. The team leveraged this growth and our price increases to overcome commodity inflation and deliver adjusted operating margin of 11.1%, up sequentially 180 basis points and up 340 basis points versus last year. Looking within the segment, Engineered Fastening organic revenues were up 15%, led by aerospace growth of 28%, auto growth of 22% and 4% growth in general industrial fasteners. The auto fasteners business continues to navigate a dynamic supply environment for our customers and is also leveraging tailwinds related to the recovery in auto manufacturing. Our industrial fastener business is continuing to outperform the Industrial Production Index and is maintaining a healthy backlog, which is up 7% versus last year. Aerospace fasteners delivered its fifth consecutive quarter of sequential revenue improvement. This business continues to focus on capturing the emerging recoveries in both narrow-body and wide-body OEM production. Infrastructure organic revenues were up 12%, driven by 19% growth in attachment tools, which was partially offset by the Oil & Gas divestiture in the latter half of the quarter. Orders from our dealer channel partners are beginning to slow, yet our backlog remains robust, and year-to-date OEM orders are up versus last year. I'll now spend a few moments covering our gross margin and inventory performance and expectations. Third quarter gross margins continued to be pressured by several points as we navigated the impacts from inflation and temporary impacts from under-absorption of fixed costs related to our planned production curtailments. This is a strategic choice as we prioritize cash flow generation through inventory reductions. We're making progress with our inventory reductions, which totaled nearly $300 million in the third quarter. We expect to make further progress in the fourth quarter, which will translate into positive cash flow. While these curtailments put temporary pressure on our margins that are necessary as we get our days of inventory back closer to historical levels. With this goal in mind, we made the strategic choice to extend our planned production curtailments versus our original plan to ensure we make continued progress through the middle of next year. Back in July, we assumed our production levels will begin to normalize at year-end. However, we're now planning to maintain low production levels through the first quarter of 2023. This puts additional pressure on our gross margins and depresses payables for the near term, with the trade-off and capturing a cash generation opportunity as inventory continues to decline. These items also impact our total cash generation forecast for 2022 and we incorporate assumptions for lower working capital reductions, including the previously mentioned impact of payables and a lower earnings base. However, the cash flow generation for the Company is gaining momentum. We generated positive free cash flow in the month of September, and we believe this will continue for the fourth quarter. Our capital deployment priority is debt reduction as we look to get to our targeted 2x debt-to-EBITDA level. In the third quarter, we reduced debt by approximately $3.3 billion, utilizing the cash from our divestitures. We expect to achieve further reductions to our debt levels as we generate cash flow in the fourth quarter and in 2023. Turning to gross margins. We believe that this quarter and the first quarter of 2023 should represent the trough as production curtailments and higher cost inventory liquidations are most impactful over the next six months, pressuring margins to the low 20s. The destock impact is expected to alleviate beginning in the second quarter of 2023, with gross margins recovering into the high 20s before any of the benefits from our supply chain transformation. As you heard from Don, we expect that the supply chain transformation savings will start to accrue as we move through the year and build to approximately $500 million by the end of 2023, which will provide further support for the improved gross margins into the 30s on the journey towards 35% plus gross margins in 2025. We believe our focus on inventory reduction, cash generation and balance sheet health are prudent as we work in parallel on structural supply chain savings to improve our gross margins in 2023 and beyond. I'll now walk through what this means for our 2022 guidance. For full year 2022, we expect low double-digit total revenue growth for the Company. We're updating our adjusted earnings per share full year guidance to a range of $4.15 to $4.65. On a GAAP basis, we expect the earnings per share range to be $0.10 to $0.80, inclusive of one-time charges. The current estimate for pretax charges in 2022 is approximately $755 million to $795 million. On the right side of the slide, we've outlined the key assumption changes to our adjusted EPS versus our prior estimate. Lower fourth quarter revenue, primarily driven by European retail market pressure due to high levels of customer inventory and inflation, reduces EPS by $0.30. Foreign currency translation pressure further reduces EPS by $0.23. Our strategic choice to prioritize inventory reduction and free cash flow generation is accompanied by higher production curtailment costs and inventory destocking costs, which are estimated to be $0.82 of a reduction. Then the 2022 tax impact from lower earnings is expected to increase EPS by $0.25, bringing the revised midpoint to $4.40. We're continuing to expect $150 million to $200 million of gross savings to be achieved in 2022 from our transformation programs, of which $65 million was realized in the third quarter. We have also disclosed other below-the-line planning items for modeling purposes on the slide. Turning to the segments. Tools & Outdoor is expected to realize a mid- to high single-digit organic revenue decline. Margins continue to be down versus prior year as a result of inflation, acquisition mix and volume deleverage. We are continuing to focus on the outdoor acquisition synergy realization as a lever to improve margins within this business unit over the coming years. The Industrial segment organic revenue growth expectation remains unchanged at high single to low double digits. The industrial margin rate is expected to continue to improve sequentially. However, it will be pressured year-over-year largely due to inflation and mix. Turning to cash flow. The fourth quarter free cash flow is expected to approximate $300 million to $600 million, which will support our strong commitment and track record for returning value to our shareholders via cash dividends as well as further debt reduction. As we look into 2023, we've positioned the Company with $1 billion of annualized cost savings, which Don covered earlier. We're also aggressively working to capture the opportunities of recent spot market pullbacks on many of our commodities, such as metals and resins, transportation as well as others. These input savings could benefit us next year after our planned destocking. We believe we are taking the appropriate actions which are in our control to position the Company to navigate a variety of demand environments and contribute to gross margin accretion. Once our visibility improves, we will also invest for share gain by advancing our innovation, electrification and end-user activation. With that, I will now turn the call back over to Don to conclude with a summary of our prepared remarks.

Dennis Lange:

Okay. Thanks. Shannon, we can now open the call to Q&A, please.

Julian Mitchell:

For my question, I'd just like to circle back to Slide 9, which was very helpful, and completely agree with the effort to get cash flow up even if it means near-term earnings are down. But I guess two related questions on that. One is the free cash flow was still negative $500 million in Q3. You've got the plus $400 million to $500 million in Q4. So really just trying to test the conviction in that tailwind on free cash given that it was, I think, worse than expected in the third quarter. And then secondly, when you look at that gross margin chart sort of bottoming in Q1 next year, just wondered what you're assuming for the macro on that point. Because I guess the risk would be that as you keep trying to lower inventories, the macro rolls and they stay kind of stubbornly high, so extra on the production is needed. So just trying to test sort of what are you assuming on the macro, on the pro channel for early next year when looking at that gross margin recovery slope?

Operator:

Thank you. Our next question comes from the line of Tim Wojs with Baird. Your line is open.

Don Allan:

Yes. Thanks, Tim, for that question. Yes, I'm really pleased with the team's progress in fill rates over the last 90 days. It's not 95% or above, so we still have more opportunity in front of us. But depending on the product category, we've made anywhere from 300 basis point improvement to 600 basis point improvement in the last 90 days. And so that's a great accomplishment by the team in a very short period of time. Now a large part of it is triggered by the supply constraint that we were dealing with in semiconductors, that now is pretty much behind us at this stage. And therefore, we feel like we can really focus on making sure that we're meeting the demand that our customers have. Another metric that we've looked at is what is the on-shelf percentage of all our products within our major customers. And those numbers are actually very good, 95-plus percent when you look at our products on the shelves -- those products are on the shelf. We have very little out-of-stock situations at this point in time. The third thing that I looked at is we actually did a really sizable promotion set of shipments to many customers in September and here in the month of October. A substantial amount of promotional activity is something that we haven't seen in well over a year, and so we're very pleased to be able to get back kind of at the end cap, get into some of the off-shelf areas within our major customers and begin to really drive some of that promotional activity and share gain in those particular circumstances. So, all three of those things are what we're looking at to really say, hey, we're making progress and we're getting back to a nice mix of core business and promotional activity, which is really, what makes the Tools and the Outdoor business successful over the midterm and the long term. As far as 2023, at this point, our customers are very excited about the upcoming year and the opportunities they see. They still believe that professional will continue to be strong. As I mentioned earlier, we are preparing a variety of different scenarios that could be a healthy environment or could be a significant decline that we have to manage through. And so therefore, we think given the amount of inventory we have, we have the ability to meet the needs of the customers, both core and promotional activities. And hence, why we continue to cut back production to ensure that we do actually lower our levels of inventory over the next 12 months.

Nigel Coe:

So Don, a question on inventory, you might be shocked by that. So obviously, no surprise, I'm just wondering if maybe you could quantify the actual -- you've called out the $0.82 of incremental production penalty to the guide, but where does that stand for the full year? I mean, how much are you absorbing maybe on an annualized basis so we can try and gauge the opportunity when inventory does eventually normalize? And then secondly, just kind of second part of that question is you talked about promotional activity, which obviously is top part of the business, but do you have to promote and discount to shift that inventory over the next couple of quarters?

Nigel Coe:

Discounting.

Operator:

Thank you. Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Your line is open.

Don Allan:

Yes. I think when I look -- when I think about this situation, it obviously is something that's very unusual. We can't go back in time and look at anything in Stanley Black & Decker and say we had a period of time where we had 10% to 12% price increases. That just hasn't been part of any history here within the Company, at least recent history. And so therefore, you have to look at it a little bit differently. That being said, we all have to remember there's been a period of time leading up to this where we had no price increase of any substance, and we were incurring substantial impact in our P&L from the inflation back in 2021. And so we can't forget that. We have to recognize that that's a dynamic that we went through. And then when the tail end of this happens and we're recovering the commodity deflation that we're now experiencing, which actually won't hit our P&L until the later stages of 2023, we have to be vigilant with the price increases and recognize that just because the commodity indices have changed, it does not mean we can lower our prices, because we have the high-cost inventory in our system that has to flow through and be sold to our customers and eventually the end users over some period of time, which is probably at least nine to 12 months at a minimum. And therefore, I think the tail, we will continue to be disciplined about this. We always are looking at what's happening with our competitors in the market. At this stage, we feel like our price points are very consistent with their price points across virtually every category. So, we don't see anything unusual happening there. And we do know there are some competitors that are still putting some price increases into the market even today. So there's going to be a tail here that we're going to have to navigate through. I believe the impact of deflation and what happens with price over the next two years will still be a substantial positive for Stanley Black & Decker's P&L.

Chris Snyder:

So I just wanted to ask more about the decision to have higher production curtailments versus what the Company expected three months ago. Because back half demand is trending as expected versus the July update, so does this reflect a softer outlook on demand into 2023? Or just more urgency around bringing working capital down and generating cash, maybe after that working capital winds down that the Company expected in the September quarter?

Dennis Lange:

No, I don't think that our view in North America is pretty consistent as we -- we're seeing levels of demand that were consistent with how we exited the second quarter. Obviously, we're seeing weaker demand in Europe. But the production curtailments are really, to your point, about generating cash and that's really what's been driving it. So, that as Don said, we've been through three or four of these. And as we look at the desire to get the inventory out, there are a few ways to do it. But the quickest way for us was to reduce our production, which we've done throughout the last three or four months.

Operator:

Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Your line is open.

Don Allan:

Well, so I'll -- there was a lot in that, Michael. So I'll start with the first question you had around fourth quarter margins and how much they may be being impacted by these pullback in production decisions. The impact in the fourth quarter is about 5 points or 500 basis points. So it's substantial, clearly. So we're also dealing with the last stages or the middle stages of the high-cost inventory from the big inflation wage that we've had that are in our inventory now, and that we're starting to sell that through. So that's another factor that's pushing down margins that will take time to work through. Because even when you get 90% or 100% price recovery when you go to these actions, you still have an impact in your margin rate that's substantial. And in this case, the differential in our margin rate is about 300 basis points just from the difference of inflation, dollar and price dollar, because it's not a one-for-one offset. The only way you're going to offset it completely in your margin rate is going to be if you get like 120%, 130% recovery on inflation through price. And so you got a bit of a double impact that's impacting the margins right now in Q4. And so I think that's something that we just have to be thoughtful about as we analyze the view of Q4. We're not going to give a ton of color on 2023. What we're trying to do is help people understand that there's a path to get our gross margins back to the high 20s and eventually to 35-plus percent. The path is really about eliminating some of these temporary things, because these things are temporary in the sense of pulling back on production will eventually get back to a more normal level of production because we're going through a period of time that's whatever this recession is going to be and how long it's going to last. But if you just kind of put that in the rearview mirror and focus post the recession, we are going to be back to normal levels of production. We're going to have transformed our supply chain. We will have pursued all the commodity deflation that's out there. And yes, could there be a partial price offset to that? Yes, there could be. But at the end of the day, all these different things are going to have -- these are levers that drive our margin back to those levels. As far as what we guided back in July, what we're doing now has nothing to do with guidance in July. We have a new view on 2023, and so we're adjusting our manufacturing on that. I talked about the different scenarios we looked at as a result of that. We're getting closer to 2023, so it gives us the opportunity to adjust our manufacturing at this point. And then, we also want to be more aggressive and focus on generating more cash flow and reduce our inventory in the short and midterm. And that's really what's driving the temporary impact to our gross margins. I understand nobody likes the gross margins where they are. I don't like them where they are either. But I feel like we're pulling all the right levers that are in our control that are going to get our gross margins back to where they need to be. But it's going to be a multiyear period of time for that to happen.

Adam Baumgarten:

I'm just wondering if you could run through some of the point-of-sale trends that you saw in U.S. retail throughout the quarter and maybe into October, if you saw any deceleration. It sounded like it was relatively stable, but any nuance would be helpful as we enter the fourth quarter.

Dennis Lange:

Yes. As we said earlier, we really did not see a big difference in the third quarter from what we exited in the second quarter. So in some ways, particularly around power tools, they've held up pretty well. Hand tools obviously was down a little bit. But in general, I think the POS sales in the U. S. have held up somewhat surprisingly well third quarter. Hard to tell what's going to happen in the fourth quarter and next year, as Don mentioned. But in the third quarter, we were relatively -- on a relative basis, pleased with what we saw.

David MacGregor:

Yes, I think we got a pretty good handle on inventory and gross margins at this point. Let me just ask about the outdoor acquisitions and you talked about slower consumer demand and the seasonal patterns, which I guess we understand is probably comes as a surprise to anyone. The seasonal pattern, was it consistent or was there something changing there? And just talk about margin contribution expectations and the progress on integration. And how do you avoid not being distracted by everything you're focusing on with inventory and gross margins and keep an appropriate level of focus on the integration and the achievement of value for the steel?

Corbin Walburger:

Yes. The integration, I think, has gone very well. And the colleagues that joined from MTD and Excel have been fantastic, and it's great to have them as target team, and the very innovative right now. Given the seasonal weakness that we saw in the spring and summer, obviously, margin rates were hit probably more than we expected because of the weaker season. However, as we go forward, we don't -- our view hasn't changed in where we think the business can get to over time. And we're generally very strong on hitting our synergy targets and getting the margins of our acquisitions to where we want, and we feel the same for both MTD and Excel on this one.

Dennis Lange:

Shannon thanks. We'd like to thank everyone again for calling in this morning and for your participation on the call. Thank you.

Dennis Lange:

Thank you, Shannon. Good morning, everyone and thanks for joining us for Stanley Black & Decker's 2022 second quarter webcast. On the webcast, in addition to myself, is Don Allan, President and CEO; and Corbin Walburger, Vice Presidentand Interim 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 replay of this morning's webcast will be available beginning at 11 a.m. today. This morning, Don and Corbin will review our 2022 second quarter results and various other matters followed by a Q&A session. Consistent with prior calls, we will be just 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 is therefore possible that actual results may materially differ from any Forward-Looking Statements that we may make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent '34 Act filing. I will now turn the call over to our President and CEO, Don Allan.

Corbin Walburger:

Thank you, Don and good morning, everyone. Let me walk through the details of our second quarter business results. Beginning with Tools & Outdoor revenue grew 17% as the MTD and Excel acquisitions contributed $900 million of revenue and price realization contributed 7% accelerating approximately 1.5 point sequentially as a result of our third round of global price increases implemented in May. These factors were partially offset by a 16% decline in volume and a negative 2% impact from currency, which both softened as we move through the quarter as interest rates increased and inflation in non-discretionary categories like gas and fuel hit consumers’ wallets. As a result, U.S. retail point of sale demand softened during May and June. That said, our professional customer channels and products remain solid and outperformed our consumer-oriented offerings. On an organic basis, regional performances were flat in the emerging markets down 10% in Europe, and down 11% in North America. Operating margin for the segment was 10.8%. Excluding acquisitions margin was a point better at 11.8%. However, still below the 19.9% level from the same period last year, as the benefit from our price actions was more than offset by inflation, higher supply chain costs and lower volume. Across channels sales were down versus 2021 levels. However, against a pre pandemic 2019 baseline retail was up mid-single digits and commercial and industrial was upload double digits. Turning to the Tools & Outdoor SBUs, power tools and hand tools declined organically by 6% and 8% respectively, driven by the softening of retail demand and against a very strong period in the prior year. Operationally, the teams have been successful and alleviating our semiconductor supply constraints and are beginning to see semiconductor driven fill rate improvements for the previously constrained products. The fill rates are on a path to return to targeted levels in the third quarter. As we look forward, our investments in innovation, electrification and commercial resources will support the launch of new product introductions expected in the back half, and into 2023. We are launching a series of new DEWALT cordless solutions continuing to electrify the professional job site. As we convert current product categories, still relying largely on corded and gas powered products to next generation battery powered tools, we will also pair these new products with the DEWALT power stack, our industry leading battery technology that launched only seven-months ago. Coming later this year is a world's first innovation, the new DEWALT impact connect, which consists of new accessories that attach to an impact driver and will allow end users to effortlessly cut copper and PVC pipe up to four times faster than standard hand tools. We will also launch new category solutions for the trade users with our CRAFTSMAN and STANLEY brands, expanding these 20-volt systems to more than a 100 products by early 2023. As we have throughout our history, we remain committed to serving the ongoing performance needs of the most demanding pro and trade users of the DEWALT, STANLEY and CRAFTSMAN solutions. The Outdoor business declined 8% on a pro forma organic basis. This decline was driven by a very slow start to the season due to poor weather, as well as softening consumer demand, similar to many other discretionary retail categories. Due to the softer demand, our retailers are working down inventory and have eased replenishment at this point. Despite this, season being slower than 2021, pro forma sales are still favorable as compared to 2019 levels, primarily driven by the secular gains we have experienced from electrification, which remains our focus going forward. The Outdoor team continues to advance our platform integration efforts, and we are excited about the innovation, growth and synergy opportunities ahead. Stay tuned for the exciting launch of a host of new Outdoor offerings, including innovations in handheld, walk behind and ride-on equipment for the 2023 season. Now shifting to industrial. Segment revenue increased 8% versus last year, as eight points of price realization coupled with four points of volume were partially offset by about a four point negative impact from currency. Operating margin was 9.3%, which compares to 10.5% in the second quarter of last year, as the benefit of price realization was more than offset by commodity inflation. Looking within the segment, engineered fastening organic revenues were up 7%, as 7% general industrial fastener growth was accompanied by 4% growth in the auto fastener business, along with an acceleration for aerospace fasteners, which was up 36%. The auto fastener business continues to successfully operate in a dynamic environment and outpace light vehicle production by five points. Our industrial fastener business has a healthy backlog, which is up 18% versus last year. Aerospace fasteners delivered its fourth consecutive quarter of sequential revenue improvement. This business is focused on capturing the recovery in OEM production, which is underway. Infrastructure organic revenues were up 26%, driven by 17% growth in attachment tools. Infrastructure backlog remains strong, up 44% versus last year, and the team continues to partner with suppliers to successfully fill booked orders. Moving on to our aggressive plan to reduce inventory to generate strong cash flow in the second half. Our second quarter ending inventory balance was $6.6 billion, up approximately $400 million versus the first quarter and up versus historical levels of stock. The main factors contributing to the increase versus prior years were; An elevated level of in process inventory as a result of the congested global supply chain, along with higher inflation, finished goods above current demand requirements and approximately $1 billion of additional inventory from the Outdoor acquisitions. We are implementing actions to significantly reduce working capital by $1 billion to $1.5 billion in the second half of 2022, primarily from inventory reductions. There are five parallel work streams already underway to enact as sequential inventory decline with a sense of urgency. First, production curtailments to slow finish goods manufacturing have already started. Second, commercial teams are working on expediting sell through of on-hand finished goods. Third, safety stock levels are being reviewed and optimized. Fourth, goods and transit are being actively addressed as we work to reduce lead times and slow production. And lastly, levels of raw material and whip are being evaluated to meet current production requirements. This inventory reduction plan has P&L cost implications for the next few quarters, but is necessary to realign our inventory to the current demand environment and meet our cash generation requirements. Let's transition to the next slide, where I will speak further about gross margin. Total company adjusted gross margin for the second quarter was approximately 28% down two points from the prior two quarters and against the 36% we had in the prior year. The confluence of the elongated supply chain, inflation and easing consumer demand impacted growth margins, partially offset by the implementation of price increases. Over the last 12-months, we have been responding to inflation with multiple rounds of price increases, which is reflected in our price performance over the last few quarters. At this stage, given the slowing demand environment and moderating spot commodity rates, we are targeting surgical opportunities for price as opposed to additional broad based global price increases. The cumulative impacts of rising inflation and global supply chain costs and inefficiencies are now capitalized in inventory. While we believe we can optimize moving forward, these capitalized costs will be with us until our inventory returns to normalized levels. In addition, there will be costs associated with plants running at curtail levels while we destock. We expect the cost dynamic of this inventory normalization process to take three to four quarters with gross margins sequentially improving as we move into and through the first half of 2023. These are short-term, but necessary impacts as we prioritize cash flow in this environment. To quantify this opportunity, we see 300 basis points of improvement potential. Once the destocking is complete. We are clearly not satisfied with 30% gross margins and have begun implementing the following actions to accelerate the pace and increase the magnitude of this improvement. First, we are immediately attacking the fixed and semi-fixed costs across our manufacturing base, capturing the quick wins from the first phase of our supply chain transformation. Second, spot commodity prices have moderated from the peak levels in April. While this will take until 2023 to work its way into the P&L, we plan to aggressively go after savings to capture this opportunity. In total, these two actions can accelerate the pace of margin improvement and enable us to achieve low 30s gross margins in the back half of next year. Our three-year target is to get our gross margins back to 35% plus and the $1.5 billion supply chain transformation that Don discussed is how we do it. So to summarize, prioritizing cash generation is the right decision for the company by curtailing our production plans and lowering our inventories to set ourselves up for a stronger 2023 and beyond. Now let me pull all this together into what it means for 2022 guidance. We are expecting total revenue growth to be in the low double-digits. We are updating our adjusted earnings per share to a range of $5 to $6. On a GAAP basis, we expect the earnings per share range to be $0.80 to $2.05, inclusive of onetime charges related to restructuring expenses, a voluntary retirement program, the Russian business closure and integration-related costs. The current estimate for pretax charges in 2022 is approximately $760 million to $810 million. The change in pretax charges from April guidance primarily relate to a roughly $170 million non-cash asset impairment charge related to the oil and gas divestiture and an estimate of $150 million to $200 million in restructuring to support our cost reduction plans. On the right side of the slide, we have outlined the components of our adjusted EPS assumptions versus our prior estimate. The slowing consumer demand in Tools & Outdoor, along with moderated price expectations, contributes to lower revenues and reduces EPS by $4.25. Currency translation, below-the-line items and second quarter performance impact EPS by another $0.55. We expect the plant production curtailments to range from $0.50 to $0.70 of a reduction as we minimize fixed and semi-fixed cost during this period, but do not completely avoid them. Then the 2022 benefit from the cost savings initiatives that we previously described adds $0.80 to $1. I want to spend a moment to recap the drivers of our cost savings plan. simplifying the corporate structure, reducing indirect spend, optimizing organizational spans and layers and streamlining the operational footprint are expected to total $100 million to $200 million in savings over the remainder of 2022 with cumulative savings of $1 billion by the end of 2023. We have also disclosed other below-the-line planning items for modeling purposes on the slide. Turning to the segments. Tools & Outdoor organic revenue is expected to decline mid- to high single digits with margins down on a year-over-year basis. Pricing is expected to contribute high single-digit growth for the back half and full-year. We believe there is a meaningful midterm opportunity to improve margins within the Outdoor acquisitions over the coming years, and this continues to be a significant priority for us. We expect high single-digit margins this year, and we see the potential for low double-digit margins over the coming years. We are targeting the Industrial segment to achieve high single-digit to low double-digit organic growth, driven by innovation, pricing and cyclical recoveries across much of the portfolio. The industrial margin rate is expected to be pressured year-over-year largely due to inflation and mix. We are closely following the recoveries in auto and aerospace and still believe there to be a solid growth outlook in those markets. Shifting more specifically to the third quarter, we expect adjusted EPS will approximate 13% of the full-year. This is comprised of relatively flat sequential tool sales, a slight sequential improvement for Industrial and a seasonally lighter Outdoor quarter as compared to the first half of the year. Now turning to cash flow. Second half free cash flow, excluding the tax payments from the security sale is expected to approximate $1 billion to $1.5 billion, supported by our inventory and cost optimization actions. The divestiture-related tax payment is expected to approximate $500 million to $600 million, and therefore, total free cash flow is expected to be $400 million to $1 billion in the second half. Stanley Black & Decker remains focused on disciplined capital allocation and our current priority for excess capital deployment will be debt repayment to support our strong investment-grade credit ratings and our commitment to the continued return of value to our shareholders as reflected by the recently announced 55th consecutive annual dividend increase. After we strengthen the balance sheet and the macro improves, our plan for excess capital is to prioritize our share repurchase program. And I'm sure many of you are thinking about what the normalized earnings power is for the company. It will take until the first half of next year to work through our inventory destocking plans and fully implement and realize the benefits from our cost reduction actions. We believe the initiatives we have outlined today are sufficient to return to our 2019 earnings power on an annualized basis once we hit the second half of next year. This does not assume any improvements to revenue. Here is how you get there. We believe destocking is a three to four quarter process that will improve our gross margins by approximately three points as we move into and through the front half of next year. Then the annualized benefit of our prioritization, complexity reduction efforts and impact from our indirect spend reductions are worth approximately $500 million by the end of 2023. Finally, the supply chain transformation can add another two to three points to gross margins as those savings are realized. These are all items within our control, and if we were to achieve them at a faster pace or realize improvements from revenue or input pricing, we will be prepared to accelerate investment in our core businesses and capitalize on the growth or realize improvements from revenue or input pricing, we will be prepared to accelerate investment in our core businesses and capitalize on the growth opportunities that Don outlined. With that, I will now turn the call back over to Don to conclude with a summary of our prepared remarks. Don.

Dennis Lange:

Thanks, Don. Shannon, we can now open the call to Q&A, please. Thank you.

Jeffrey Sprague:

Thank you. Good morning. I guess my 1 question would be picking up with more kind of Corbin close back to the kind of earnings power question over time. I just want to clarify really how you are defining earnings power relative to 2019. Obviously, we have got Outdoor in. We have got security out. We have got a different share base. Are you suggesting that kind of earnings power is shown by EPS or some other metric is in line with 2019. So maybe just give us a little more color on that and how you see that trajectory to play out through the quarters of 2023.

Corbin Walburger:

The only thing I would add is if you think about the second half of 2022 and then you annualize that, that gets you a little over $3 and then if you take the $1 billion of incremental cost in 2023, that gets you a little over $4. And so you get - it is another way to get back to what we did in 2019 at $3 plus $4, a little over $7 a share.

Timothy Wojs:

Yes. Hey guys good morning. I kind of have a two-parter, but I guess what gives you the confidence that this is really, I guess, a market phenomenon versus something that is more kind of Stanley specific? And as you are thinking about these cost reductions, can you just talk through how you are kind of protecting brand and R&D investments just to make sure there is no long-lasting impact on some of the brand values.

Operator:

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

Donald Allan:

Yes. I would say that when we go through those questions there, why don't we start with the buyback, we will get to the buyback as soon as we can. But as Corbin said, we are focused on inventory reduction, getting our cash flow performance to higher levels, fairly significant performance in the back half of this year as we both described. Another strong performance next year will be expected for cash flow and we will be focused on that. We will also be focused on getting our debt levels down to where we want them to be, where we have had them historically related to debt-to-EBITDA ratios. When we feel like we are in a good position to do that, we will do the buyback. That could be in 2023 or it could be a little bit later. Time will tell. We will see how things play out. Corbin, maybe you can take the question on the $6 to $7 and 2023 and provide a little more granularity and clarification of that.

Donald Allan:

Yes. And so the other part of Nigel's question was about commodity trends. So yes, we had a high in the March, April time frame. We have seen commodities pull back significantly, except for lithium. Lithium is still holding in pretty strong because there is still a high demand for batteries across many industries. But a lot of those spot prices have dropped back to levels that are closer to where they were at the beginning of the year. And so we are aggressively pursuing that opportunity. It is unlikely to have an impact on 2022 just because of where we are with inventory at this stage and trying to really liquidate a large portion of our inventory. But as we go into 2023, we have not factored that into our transformation savings. So that is an opportunity that we want to pursue. If these spot levels are maintained where they are, that clearly could be a significant opportunity that would improve the performance that we are talking about that could potentially play out for 2023. But as the year goes on and we get more progress in that area and we begin to see the impact of that in the later stages of 2022 as we start to plan for 2023, we will provide more color, but that is an opportunity that is out there that we will be pursuing as it has really reached a level of significance from a spot rate differential versus where it was in April.

Michael Rehaut:

Thanks. Good morning and thanks for taking my question. I guess I wanted to focus you had kind of alluded to your competitive positioning earlier, Don. And I know you put a lot of thought and analysis into that. As you look into the back half, I think there was a part where you said you are still considering surgical price increases. And I'm just kind of curious as you look at how the retail sales backdrop is softening and given the level of competition that is out there, what is the ability to hold on to price in the current environment? And as you look into 2023, you had mentioned that a lot of the cost savings don't necessarily come at the expense of the front forwarding, the front-facing part of the business, so to speak. But to the extent that we are in this reverted or more normalized demand backdrop, which is much less than this past 18-months. How do you assess the need to perhaps invest more in the business and plow some of those cost savings back into the company, either through some targeted price reductions or areas of investment in terms of marketing or R&D.

Operator:

Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is now open.

Donald Allan:

Yes. I will start and then pass it over to Corbin for a little more detail. There is nothing unusual in the margins between the two quarters in the back half of this year. So there is no dramatically low number in Q3 and dramatically high number in Q4. They are relatively consistent overall for the company. Corbin talked about what we expect to do with gross margins as a company as we go into next year and getting into the low 30s with a road map for the longer term of 35-plus percent. We believe that is a model that works very effectively for this portfolio of businesses and products. And that is something that if you look at history, you have a history that would demonstrate that. But really, the model that I described when I laid out kind of the strategy of where we need to go and the focus on investing in innovation, investing in commercial leadership, investing in our supply chain, et cetera, et cetera, all those different areas. That consistent investment model will allow for not only strong growth two to three times the market growth but also allows for higher levels of profitability. One of the benefits of having the Pro market and the Pro brand like the Walt in particular, but some of our other niche brands such as Pacome and Proto our programs as well. Obviously, on the Outdoor side, we have got some great brands with Hustler from the Excel acquisition, Cub Cadet DEWALT as well in that category. Those channels have and always have had high levels of profitability. And so that gives us confidence as well because we are looking to continue to shift, especially on the Outdoor side, more and more into the pro category where the higher levels of profitability are. But Corbin, maybe you give a little bit of color on. SP1.

Operator:

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.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Dennis Lange:

Thank you, Shannon. Good morning, everyone and thanks for joining us for Stanley Black & Decker's 2022 first quarter conference call. On the call, in addition to myself, is Jim Loree, CEO; and Don Allan, President and CFO. Our earnings release which was issued earlier this morning and a supplemental presentation which we will refer to during the call, are available on the IR section of our website. A replay of this morning's call will also be available beginning at 11 a.m. today. The replay number and the access code are in our press release. This morning, Jim and Don will review our 2022 first quarter results and various other matters followed by a Q&A session. Consistent with prior calls, we're 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. As such, statements are based on assumptions of future events that may not prove to be accurate and as such, they involve risk and uncertainty. It's therefore possible that actual results may materially differ from any forward-looking statements that we may make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent '34 Act filing. I'll now turn the call over to our CEO, Jim Loree.

Don Allan:

Thank you, Jim and good morning, everyone. As Jim mentioned in his comments, our focus remains on ensuring we serve the continued healthy demand and investing in our supply chain to further strengthen our position for sustained growth. As I've highlighted on prior calls, we took multiple actions in 2021 to navigate through the global supply chain challenges and further strengthen our manufacturing capacity, sourcing, operational efficiency and agility. These actions are allowing us to better serve our customers and deliver growth in revenue and cash flow in 2022 and beyond. Key areas of investment included adding capacity consistent with our make where we sell strategy, co-investing with strategic sourcing partners with a focus on batteries and electronic components and deploying our manufacturing 4.0 automation solutions to enhance productivity, labor efficiency and competitive costs. Our investments in this area as well as our electronic component availability continue to progress as expected and remain on track. Demand continues to outpace availability for our hottest products amid this constrained supply chain environment. First, as it relates to inventory, our actions will position us to meet the current demand levels while improving working capital to deliver strong cash flow generation. Greater working capital efficiency and cash flow generation remains a significant opportunity in 2022 and beyond. As a reminder, last year, we made significant investments in inventory to help meet the outsized demand in the tools business. Our 2022 cash flow guidance assumes that we can modestly reduce inventory versus 2021 levels and we expect much of that improvement to occur in the second half of the year once we get through this spring to early summer selling season. Our inventory at the end of Q1 was up approximately $850 million versus the year-end '21 balance. The increase in our first quarter inventory was primarily due to working capital seasonality to support the peak outdoor buying season, spring merchandising and the Father's Day selling season. This investment in working capital, coupled with the earlier timing of certain tax payments, contributed to a free cash outflow of $1.4 billion in the first quarter. This Q1 performance will reverse as we execute on the remaining 2022 working capital initiatives. Within the supply chain, tight component supply and elongated transportation times continue to be a challenge. However, we have seen some signs of stabilization. For example, our goods in transit for the quarter remained stable and similar to year-end levels. The Port of L.A. has seen improvements with reduced congestion and moving goods from the ports to our DCs is not a significant source of delays. As it relates to China, we continue to frequently monitor our end-to-end supply chain. And while there has been some minor COVID-driven disruption to date, it remains manageable at this stage. This is a dynamic situation that we will continue to watch closely in the coming weeks. As it relates to semiconductors, we continue to see improved supply in line with expectations. Our Tier 1 contract manufacturers received more semiconductors in the first quarter which will enable us to increase the throughput for our professional power tools in Q2. We are on track for an improvement to our electronic component supply of approximately 20% in 2Q and further improvement in 3Q which will support better fill rates, customer inventory positions and higher revenues as we progress through the remainder of the year. So in summary, we are actively managing a very dynamic supply chain and responding with agility to position ourselves to meet the continued strong demand we are experiencing, especially within the professional power tool portion of our business. Turning to our segment results. The headline for the first quarter is that demand for our products remains healthy and we are executing the necessary pricing actions to mitigate higher input costs. In Tools & Outdoor, we grew revenue 24% as the strategic outdoor power equipment acquisitions contributed 27% and price drove 5 points of growth. Price realization accelerated sequentially because of the new global price increases implemented in response to commodity and transportation inflation experienced in late 2021. These factors were partially offset by a 6% decline in volume and 2% from currency. Volume was impacted by electronic component availability and we have not seen evidence of broad demand destruction related to price elasticity. We estimate that supply constraints resulted in approximately $200 million in unfulfilled professional power tool opportunities in the first quarter which, if realized, would have resulted in volume growth and a record prior year performance comp. We will better position to capitalize on this volume opportunity as we improve supply in the coming 2 quarters. Regional organic growth was relatively in line with our expectations, with Europe up 2%, emerging markets contributing 5% and North America down 3%. The Tools & Outdoor operating margin rate for the segment was 14%, representing a 260 basis point improvement versus the fourth quarter of 2021. We continue to execute on price to protect our margins and we saw the sequential benefit in Q1. Comparing the Tools & Outdoor margin rate versus prior year, we experienced the decline as price realization was more than offset by inflation, higher transportation costs, growth investments and lower volume. The outdoor acquisitions were near line average margin rates for the quarter, representing a very strong start to the year. U.S. retail point-of-sale remains at healthy levels, supported by strong professional construction markets and our innovation. While the POS comps were down versus a stimulus-aided Q1 2021, the normalized 2019 comparative growth rates accelerated from the levels we experienced in the back half of 2021. This strengthens our conviction that we continue to experience a very solid demand environment. Now turning to the Tools & Outdoor SBUs. Power tools was down 1% organically in the quarter. We continue to realize benefits from our price increases, along with continued demand for our innovative offerings for the pro and tradesperson. We have launched a series of products under our industry-leading CRAFTSMAN, STANLEY FATMAX, Black & Decker and DEWALT brands. Our recent breakthrough, DEWALT POWERSTACK, continues to be very well received by end users and is expected to be a multi-hundred million dollar contributor to growth in 2022. Hand tools, accessories and storage declined 1% in the quarter against a very difficult comparable. Revenue was supported by pricing and new product innovation. Some of our new innovations include extending our world's first DEWALT 20-volt laser platform with the new 20-volt MAX laser, expanding our DEWALT ToughSystem storage to include soft storage solutions designed to optimize efficiency in organization and we added a new IRWIN STRAIT-LINE tape to our industry-leading tape measure lineup. Moving to outdoor products. This business grew 4% organically, while the addition of MTD and Excel added over $800 million of revenue. Growth was driven by price realization, expanded distribution and new product innovations under the Black & Decker CRAFTSMAN and DEWALT brands. Our acquisitions are also benefiting from product innovation, including recent launches such as the redesigned FasTrak zero-turn mower line for commercial use and the first semi-autonomous zero-turn mower with the Cub Cadet SurePath. Despite the strong start for these acquisitions, this growth was modestly impacted from a later breaking outdoor season due to colder weather in many parts of North America. We expect these revenues to be recovered in the second and third quarter. Our first full quarter as one outdoor team was very successful and we remain on track to integrate 3 assets into a new $4 billion revenue platform, as you heard from Jim. As the integration progresses, we continue to build conviction around the innovation, growth and synergy opportunities. We are even more excited about the electrification growth opportunity as we work to integrate these organizations and processes. The team is energized, focused and off to a great start. I want to thank the Tools & Outdoor organization for their efforts in the first quarter. We made progress against our key operational goals for 2022 with strong price realization, improved power tool supply and actioning a strong plan for working capital reduction as we move throughout the year. This dynamic environment requires agility and I know we have the right people with the perseverance and dedication to be successful. Now, shifting to Industrial. Segment revenue declined 2% versus last year as the 5 points of price realization were more than offset by a 5% volume decline and a 2% negative impact from currency. Operating margin was 6.9% as the benefit from price realization was more than offset by commodity inflation and market-driven volume declines, in particular, in our higher-margin automotive business where our customers remain constrained by their own supply chain challenges. Looking within the segment, engineered fastening organic revenues were down 3% as 5% general industrial fastener growth was more than offset by lower automotive OEM production as well as a modest decline in aerospace. Our auto fastener business continues to successfully operate in a dynamic environment with customer production fluctuations. Despite this, auto fasteners once again demonstrated outperformance versus light vehicle production. And the business is also benefiting from accelerating growth and content gains across the electric vehicle production space. Our industrial fastener business enjoys a healthy backlog and delivered growth at nearly 2x global IPI in the first quarter. The aerospace fastener business delivered its third consecutive quarter of sequential revenue improvement. This business is focused on capturing the recovery in the OEM production which is beginning to emerge. We expect in 2022 aero fasteners will begin to demonstrate organic growth as it starts the cyclical recovery back towards historical levels of revenue. Infrastructure organic revenues were up 4% as 13% growth in attachment tools were partially offset by lower pipeline project activity in oil and gas. Momentum remains strong in attachment tools driven by record backlogs, dealer inventories continuing to trend below targeted levels and elevated market confidence due to the U.S. infrastructure bill. Our Industrial team is continuing to make steady progress with its revenue and profitability improvements. And we are primed to leverage the cyclical recovery that is on the horizon and capitalize on the auto electrification trend as well. Turning to the next slide. The operating environment continues to be dynamic and the recent invasion in the Ukraine by Russia has driven a new wave of inflation versus the backdrop earlier this year. From an input cost perspective, our updated expectations for 2022 commodity inflation and cost to serve is now $1.4 billion versus our January expectation of $800 million. The key drivers of the incremental $600 million reflects significant increases in battery inputs such as lithium, nickel and cobalt, oil-related inputs such as transport and resins and continued upward movements in other base metals and steel. Looking at the commodity indices since we issued our initial 2022 guidance, lithium, nickel and cobalt are all up approximately 90%, 50% and 7%, respectively, whereas oil is also up nearly 15%. If we break down the $600 million increase, it is in primarily 4 major categories

Dennis Lange:

Great. Thanks, Jim. Shannon, we can now open the call to Q&A, please. Thank you.

Jeff Sprague:

Thank you. Good morning. I guess just on price and I guess it's going to be a multipart question. But the argument here is you're pursuing price to offset cost. But based on the bridge, it looks like pricing is aiming at maybe offsetting 1/2 to 1/3 of the cost pressure. So maybe you could put that in some additional context. Perhaps it's the annualization of the way things work through the system. Are you actually targeting full recovery at a run rate with the price actions that you're taking? And separately, I wonder if you could just provide a little bit of color on what you might be doing to try to mitigate the incremental cost pressure that you laid out for us here.

Dennis Lange:

What are you doing on the cost...

Jim Loree:

And just for clarity, I think Don made this clear but I'm just going to emphasize that we are aiming to offset with our fourth price increase now over a 2-year period the entire amount of the inflation. So it's just a matter of timing. We got hit with this latest tranche of $600 million of inflation in the last 2 months. It takes a little time to get that price -- those price increases implemented and that's the dynamic at play here. There's no long-term degradation of margins associated with the hyperinflation because we are absolutely and I'm very, very pleased actually with the ability to implement price and offset the inflation with price increases because, historically, we never had this type of hyperinflation and we never had 100% price coverage of the inflation. And this era that we're in, we've been able to prove that we can do that successfully and that's what we're going to do here and the fourth increase as we go out to market.

Julian Mitchell:

Hi, good morning. So I just wanted to home in on that sort of price-cost delta again. So I think pricing was maybe -- I don't know, maybe $200 million or so in Q1. Maybe help us understand what was the gross cost headwind in Q1. And then how do we think about those 2 numbers in the second half? And as you kind of snap the line today, what's the cost headwind looking like for '23 at this point?

Operator:

Thank you. Our next question comes from Michael Rehaut with JPMorgan. Your line is open.

Jim Loree:

That's an artful one question but we'll take it. Don will take the second part, I'll take the first. We didn't get into this outdoor business because we thought it was low margin, low growth. And we are extremely pleased with what we've acquired and the teams that have come with these acquisitions. The innovation or new product development pipeline is revolutionary and especially in the professional products area and especially as it relates to the large format, zero turns and riders. It is clear that electrification will be an increasing force in this market with the advent of ESG and with the increased energy prices. So one of the factors that has slowed the adoption of electric large format has been the differential between the price for electric and the price for gas. And it historically has been fairly wide but it's coming -- it's converging as electric gets down the cost curve through innovation and cost reduction and energy prices drive higher prices for internal combustion-powered equipment and regulatory action has begun. So in the States, you have heard about regulatory action in several states, led by California. And so there is going to be a very, very significant amount of pressure to convert much of the gasoline to powered unit sales to electric. And we see that accelerating. We see the fact that we have been working together for several years on revolutionary innovation in electric and autonomous. And by the way, the labor shortages that exist all around and the cost of increasing labor are another factor getting us excited about the growth because the autonomous units that we have can literally cut lawns for landscapers without people on the mower. So there's a bunch of factors that make us very excited about what's happening in the market. And then there are the 8 facilities that we own that are up and running that make everything from walk-behind mowers to zero turns to basic riders. So we are poised and ready to go with products, with capacity and with a great team -- management team. So 10% to 15% in a market that has historically grown in the high single digits, mid- to high single digits is something that we think is very achievable. And we're going to make investments to support that.

Operator:

Thank you. Our next question comes from Tim Wojs with Baird. Your line is open.

Don Allan:

Yes. As I have mentioned in some of my comments, Tim, we have done a little bit of a haircut on the volume side versus January. It's down about 3 points from our original assumption. And that's really factored in just more price increases going into the market, maybe being a little more cautious on the impact on volume. It's not necessarily a view that we think demand is slowing. It's just more of with all the price increases going in, you're going to have -- we had almost 5.5% of price in the first quarter. We're going to have somewhere between 7.5% to 8% of price in Q2 and then it's going to get close to 10% in Q3 and Q4. That's a lot of price in the market very quickly. And so we thought it was prudent to just do a modest haircut on the volume side to represent the potential impact of all those price increases. But it is not an assumption that there's some significant slowdown related to overall demand. Other than what's happening in Russia which is relatively modest, it's an annual revenue of about $150 million.

Nigel Coe:

Good morning. I think I will keep this to one question. So obviously, Don, you've been chasing the curve on inflation all the way up here. What -- you've kind of reset the inflation expectation. How do you take a step to try and ring-fence the plan now for FY '22? I mean, is there any buffer in there to maybe protect into further inflation? And then broadly speaking, it seems that the China supply chain, the context of the supply chain is really causing a lot of transportation and freight inflation. What steps are you taking to accelerate the transition back to domestic manufacturing?

Jim Loree:

And it goes beyond just risk management. That's a huge part of it but also working capital management and efficiency. Getting the production closer to the market, within the home market, enables faster cycle times. It enables more ability to respond to volatile changes in demand which is the nature of the world today. And I think as e-commerce becomes more prominent, it's more important to have that production and supply chain closer to the customer, again, for purposes of agility and responsiveness. So there are offensive reasons for doing this as well. So it has a double benefit, a defensive risk management side to it but also an offensive go-to-market advantage in supply chain responsiveness for a changing end market in terms of what's expected and changing channel needs as well.

Joe O'Dea:

Hi, good morning. I wanted to circle back to volume. You gave some helpful color on price and cadence over the course of the year and wondered if you could talk a little bit about the volume cadence specifically in Tools. And as you have maybe a little bit of -- I don't know if you call it buffer or cushion in there just related to uncertainties around what the pricing is going to do on demand. But generally, what the framework looks like and whether kind of back half of the year, we're talking volume that's more kind of flattish? Or are you anticipating volume declines in each quarter?

Operator:

Thank you. Our next question comes from David MacGregor with Longbow Research. Your line is open.

Don Allan:

Yes. The unabsorbed cost is not significant. Those plants have been ramping up for a period of time. And as the year goes on, they're going to continue to become more and more efficient. The main bottleneck is really semiconductors and the electronic components that they go into. As I mentioned in my commentary and Jim's commentary, that's going to continue to get better. There's a big step-up happening in Q2 of about 20% improvement. And we'll see another improvement in the back half of the year as well. And so as that starts to shake loose, we'll be able to meet the current demand levels and hopefully be able to look at other opportunities above and beyond the demand levels at that stage. The capacity in our plants is not really the challenge. The challenge is really in one particular area that I just touched on.

Eric Bosshard:

Thanks. You talked about favorable tool market share performance over the last year. And I know this is a point of discussion. Just curious what you think you're doing, what you were affected at in 1Q with tool market share and then what your assumption is for further tool market share progress in the back half of the year, especially with your thoughts on volume and guidance on volume for tools for the back half.

Operator:

This concludes the question-and-answer session. I would now like to turn the call back over to Dennis Lange for closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Dennis Lange:

Thank you, Shannon. Good morning everyone and thanks for joining us for Stanley Black & Decker's 2021 fourth quarter and full year conference call. On the call, in addition to myself, is Jim Loree, CEO; Don Allen, President and CFO. And our earnings release, which was issued earlier this morning and the supplemental presentation, which we'll refer to during the call are available on the IR section of our website. A replay of this morning's call will also be available beginning at 11 A.M. today. The replay number and the access code are in our press release. This morning, Jim and Don will review our 2021 fourth quarter and full year results and various other matters followed by a Q&A session. Consistent with prior calls, we are going to be sticking with just one question per caller. And as we normally do, we will be making some forward-looking statements during the call based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate, and as such, they involve risk and uncertainty. It's therefore possible that the actual results may materially differ from any forward-looking statements that you may make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent 34 Act filing. I'll now turn the call over to our CEO, Jim Loree.

Don Allan:

Thank you, Jim, and good morning, everyone. As Jim mentioned, we are focused on serving robust demand and investing in our supply chain to position us for sustained growth. We took multiple actions in 2021 to navigate the global supply chain and position the business to have the capacity, sourcing, operational efficiency and resilience to serve our customers and deliver significant growth in revenue and cash flow in 2022 and beyond. These key investments include adding capacity consistent with our Make Where We Sell strategy, co-investing with strategic sourcing partners with a focus on batteries and semiconductors and investing in automation solutions to support productivity, labor efficiency and competitive costs. Our capacity additions are on track, and we have opened 2 new power tool plants and 1 new hand tool facility in North America, which are now ramping up. These new manufacturing plants will enable shorter lead times and be accompanied by parallel regional development of our supply chain base overtime, enhancing local sourcing and speed to market. As it relates to strategic sourcing, we have added new battery suppliers and made co-investments with key partners that have put us in a great position as we enter 2022. We have the necessary battery supply and capacity to support significant growth in tools and to fuel our electrification strategy in outdoor. The supply environment remains tight for semiconductors and electronic components. This plus the elongated global supply chain, which significantly increased inventory in transit, impacted our ability to generate more volume in the fourth quarter. Semiconductor shortages have been a pain point for many global industrials, and we have been investing to improve supply to enable significant tools growth. For example, adding new Tier 2 and 3 suppliers for chips, co-investing with Tier 1 suppliers to improve their capacity and taking actions to lower lead times across our supply base. As mentioned in October, we expect semiconductor supply to improve in Q2 versus current levels. Based on current commitments from our semiconductor suppliers, we expect a 20% to 30% increase in chips in Q2 versus the current run rate. In summary, we have been working to alleviate constraints on many key components and are now down to the last critical few, which will unlock more supply as we move into the second quarter. We are also advancing our Industry 4.0 capabilities, driving automation throughout our manufacturing environment. This will make our U.S. manufacturing plants more competitive, as well as improved productivity in factories across the globe. We just completed a significant flexible automation assembly line in our major U.S. power tool plant. It is up and running. Last year, we also made significant investments in inventory to help meet the outsized demand in the tools business. Excluding the consolidation impact from acquisitions, we increased our core inventory position by $1.8 billion as compared to year-end 2020. Two-thirds of this increase is composed of inputs, work in progress or goods in transit, that will work their way through our supply chain to support growth and improve fill rates with our customers. As a result, fourth quarter free cash flow was $175 million, which brings our year-to-date result to $144 million, significantly below our prior expectation for 2021. The main driver of the deviation was related to the congestion of the global supply chain on working capital. Let me unpack this to provide some additional color. First, we ended up building more inventory and tools versus our expectation. This was primarily related to a combination of goods in transit, expanding in the quarter as we experience port and other logistical delays. The increased tools inventory is needed to serve existing and projected demand, and therefore, we believe we will sell through this incremental inventory during 2022. Secondly, we are holding on to inventory longer than we have historically due to longer shipping and lead times, which has changed the relationship between inventory and payables. This dynamic also led to a deviation versus our October expectations. Finally, the MTD and Excel inventory build ahead of the outdoor season was not in our forecast back in October due to the unknown timing of each of those closings. The global supply chain is dynamic, as we all know, and requires new intensity, focus and agility to react to the changes as well as to be able to predict the dependencies that may be -- may not be consistent with past experiences. We have a long history of using the SBD operating model to drive high asset efficiency, strong cash flow and superior cash flow return on investment. These processes and tools, with some new enhancements, will ensure we mitigate the temporary portion of the inventory increase and the correlated impact to account payables. We will do this while holding the appropriate levels of inventory and making CapEx investments to support the strategic growth initiatives you heard about earlier. We expect to drive working capital efficiency in three primary areas which will increase supply chain predictability, optimize inventory location and improve inventory turns from acquired businesses. One, opportunities will definitely arise as the semiconductor pressure alleviates in Q2 and the electronic component supply improved. Two, we built a dedicated team focused on lowering in-transit inventory. This team will also focus on product SKU optimization of our days of stock, ensuring we have the right inventory when it's needed by our customers. And three, we are also deploying the SBD operating model across our recent acquisitions to drive efficiency in all aspects of working capital. MTD and Excel entered the portfolio around three turns, and we have line of sight to improving that metric across a multiyear period. This management team has dealt with headwinds and temporary shifts in business conditions for two decades plus. And therefore, we are confident that we will improve our turns and believe the cash flow working capital benefit is at least a $500 million opportunity, which is incorporated into our $2 billion cash flow commitment for 2022. In summary, our portfolio and supply chain actions from 2021 have put us in great shape for 2022 and beyond. I will now take a deeper dive into our business segment results for the fourth quarter. Tools & Storage delivered 3% revenue growth as the acquisitions of MTD and Excel contributed 7% and price delivered 5 points. These factors were partially offset by a decline of 8% in volume and 1% from currency. Regional organic growth was 7% in the emerging markets with weaker performances in North America and Europe due to, one, a tough comparable related to the prior year holiday shipping timing; two, the current year volume constraints caused by supply chain logistical challenge I previously mentioned; and three, the anticipated Q4 semiconductor shortages we discussed in October. Pricing actions delivered strong mid-single-digit growth in response to commodity inflation and higher cost to serve aligned with expectations. This was the most significant quarterly price benefit the Tools & Storage business has seen in modern history. The operating margin rate for the segment was 11.4%, down versus last year as pricing benefits were more than offset by inflation, higher supply chain costs, growth investments in volume. As a reminder, the fourth quarter of 2021 as well as the first quarter of 2022 is currently expected to be the peak of the inflation and supply chain cost headwinds, and then these headwinds will begin to recede versus the prior year. This expected trend in headwinds combined with the pricing actions we completed in 2021, the additional price actions to be completed and implemented in 2022 that I will touch on a little bit later in the call, and the cost controls that we recently put in place will result in profitability rates trending back to normalized levels as we move through 2022 for Tools & Storage. End-user demand strength remains persistent across all markets as the consumer reconnection with the home and garden, innovation, and e-commerce continue to drive growth. Our e-commerce platforms grew over 30% in 2021, the innovation pipeline continues to be impressive with new product launches across the portfolio. In addition to an exciting line of new product introductions in 2022, within the DEWALT, FLEXVOLT, ATOMIC and XTREME power tool platform, and also across the construction, automotive and industrial end markets. Point-of-sale demand in US retail grew high single digits and channel inventory ended below historical levels. We saw strong professional driven demand in the commercial and industrial channels, which grew in the fourth quarter and achieved 28% organic growth in the year. Now turning to the Tools & Storage SBU. Power Tools delivered 20% organic growth in 2021, which was supported by the new and innovative product launches across CRAFTSMAN, DEWALT and STANLEY FATMAX, inclusive of DEWALT POWER STACK, which is off to a fantastic start. Hand tools, accessories and storage achieved full year organic growth of 17%, inclusive of 26% international organic growth, fueled by robust market demand and new product highlights, including the Craftsman trade stack and DEWALT ToughSystem portable storage solutions as well as new additions to the DEWALT Elite Series circular saw blade. Moving to Outdoor Products. This business grew 3% organically in the quarter, while the addition of MTD and Excel added over $200 million of revenue. The outdoor team had a great 2021, achieving 40% organic growth, inclusive of share gain led by electrification. This came from new listings and innovations under the Black + Decker, Craftsman and DEWALT brand. Our acquisitions also had strong innovation-led organic growth for 2021 with new launches such as the redesign Hustler FastTrack zero-turn mower line for commercial use and the first semi-autonomous zero-turn mower with Cub Cadet Share path. We are beginning the journey to integrate our acquisitions into a new $4 billion revenue strategic business unit and are making great strides towards becoming one team focused on innovation, growth and capturing the cost and revenue synergies from these transactions. The collective efforts of our tools and outdoor teams across the globe were unrelenting as they continue to navigate this dynamic operating environment. I want to acknowledge and thank the entire team for your perseverance and dedication. Now shifting to Industrial. Quarterly segment revenue declined 7% versus last year, as the three points of price realization were more than offset by 9% volume and 1% currency. Operating margin was 9.3%, down versus last year as the benefits from price and productivity were more than offset by commodity inflation and market driven volume declines in the higher margin automotive and aerospace fastener businesses due to our customers primarily in those markets lowering their production. Looking further within the segment. Engineered Fastening organic revenues were down 9% as strong general industrial growth of 12% was more than offset by aerospace market pressure and lower automotive OEM production, which obviously resulted from the global semiconductor shortage. Our auto fastener business navigated customer production fluctuations and a dynamic market as they move through the year. Despite these external challenges, auto fasteners demonstrated nine points of outperformance versus light vehicle production and the business successfully doubled its revenue tied to electric vehicle production. The business is exceptionally well-positioned for the cyclical rebound in production and for the secular trend of electrification. Our industrial fastener business realized 12% organic growth in the quarter and exit the year with a healthy backlog, which is up nearly 50% versus 2020. It was satisfying to see the business achieve organic growth over 18% in 2021, two times the global industrial production index. While aerospace continued to decline significantly versus prior year, we have started to see green shoots, with revenues sequentially improving for two quarters in a row. This business is focused on capturing the coming rebound in production that will begin in 2022 and continue beyond that. Infrastructure organic revenues were up 3% as 18% growth in attachment tools was largely offset by lower pipeline project activity in oil and gas. Momentum continues to build in the attachment tools market, the strong demand from our OEM and independent dealer customers, generating orders that were up 59% versus the prior year and a backlog that is nearly five times year ending 2020 levels. To summarize our thoughts on Industrial, we saw some pockets of strong growth, combined with early stages of stabilization in the challenged markets I mentioned as we close 2021. And we are looking forward to leveraging the cyclical recovery and to capitalizing on the auto electrification trend over the next two to three years. Turning to the operating environment. We are actively engaged on multiple fronts to support margin recovery and believe headwinds have now stabilized. The 2022 carryover impact inclusive of currency is sized at nearly $800 million. From an input cost and transport rate perspective, we had assumed that the levels seen in the fourth quarter continue for all of 2022. This could be a second half opportunity if recent trends in commodity pricing hold. However, with the continuing dynamic environment, we are not counting on that, and we remain diligent on executing several actions to support margin recovery. We are taking more price actions in the first quarter to offset these headwinds. We are notifying our North American Tools & Outdoor customers this week about new price increases of 5% to 10% or more depending on the category. These actions are in addition to the five points of price already delivered, which underscores that the price environment today is very different from history. Our expectation is 100% coverage of inflation during this cycle. Our 2022 plan now calls for 6% to 7% price, which will be exceeding the carryover cost impact. These actions in aggregate will support sequential margin improvement in the coming quarters and year-over-year margin improvement in the back half of the year. In terms of when price cost turns positive, we still expect that to occur in the middle of the year, as close to 90% of the $800 million of headwinds are estimated to occur in the front half of 2022. Finally, as always, we continue to advance our margin resiliency initiatives and see a pathway to generate $100 million to $150 million of 2022 opportunity. Now before diving into guidance, there's one point that I would like to mention. As a reminder from our release, this guidance does not include the commercial electronic security and health care businesses, which are now recorded as discontinued operations as a result of the announced divestiture in December. Moving to our 2022 guidance on Slide 11. We are planning for total revenue growth in the mid-20s, inclusive of organic growth of 7% to 8% and adjusted earnings per share range of $12, up to $12.50 or increasing approximately 15% to 19% versus 2021. On a GAAP basis, we expect the earnings per share range to be $10.10, up to $10.70, inclusive of various one-time charges related to facility moves, deal and integration costs, cost reduction and functional transformation initiatives. The current estimate for pre-tax charges is approximately $380 million. From a segment perspective, total Tools & Storage organic growth is expected to be in high single-digits, supported by price, core and breakthrough innovation, continued strong demand across our end markets and the improvement of our customer inventories. The Industrial segment is expected to achieve high single-digit to low double-digit organic growth, driven by new products, pricing, momentum in industrial fasteners and attachment tools and the beginning of a cyclical recovery in auto and aerospace. As it relates to the acquisitions, we believe they will contribute just over $3 billion in revenue in 2022, primarily from MTD and Excel with about 60% of that revenue occurring in the front half. The team is building momentum, and this will be an acquisitive growth driver in 2022, but more importantly, an organic growth driver for years to come. For the full year, it's still our expectation that Tools & Storage will have a strong year-over-year margin expansion on the core, driven by strong second half improvement, as I discussed earlier. Total segment margin will be down as our outdoor acquisitions enter the portfolio with high single-digit profitability. Improving margins from the outdoor acquisition is a focus in 2022 and, of course, beyond. We expect to improve these margins to low double-digits in the one to two-year timeframe and mid-teens in the medium term. For Industrial, the margin rate is expected to expand year-over-year, leveraging strong revenue growth, productivity, and price. Shifting now to the right side of the page, I will outline the drivers of our year-over-year EPS growth at the midpoint. Our plan is to grow our core earnings base with added benefits from the MTD and Excel acquisitions. As we discussed earlier, we are actively addressing the inflationary environment with a 6% to 7% pricing -- set of pricing actions that should allow us to more than fully recover the carryover impact from inflation and the elevated cost to serve, adding $1.20 up to $1.30 of EPS. The carryover impact of our growth investments in SG&A is a headwind of about $0.20 net of our recent cost containment actions. Our outdoor acquisitions are already building momentum and should generate $0.60 of year-over-year benefit, ahead of our prior estimates. We also realized the $0.65 benefit from the 2022 impact of our $4 billion share repurchase program. This is partially offset by tax and other below the line items of $0.55. Our full year tax rate assumption is 10% and we are also planning for increased interest expense due to a higher rate environment and the financing needs of our strategic capital deployment. So, in summary, we expect the business to deliver nearly $1.80 of EPS growth this year to achieve a midpoint of $12.25 of EPS. Now, to cover what this means in terms of the first quarter, which is expected to be about approximately 13.5% of the full year adjusted EPS. We are planning for tools to have a relatively flat organic growth and industrial to decline in the low single-digits, reflecting the tough comp in the automotive business. Acquisitions should contribute about $950 million in revenue as the outdoor season kicks off. Price cost will still be a negative as we experience a significant amount of our full year headwinds in the first quarter. Total company margins should step up from the fourth quarter and in each successive quarter thereafter. We also intend to execute our $2 billion to $2.5 billion of our previously announced $4 billion share repurchase program here in the first quarter. As you think about the quarterly profile for 2022, consider the following factors; one, 90% of our $800 million headwinds occur in the first half of the year; two, the additional pricing actions I mentioned pays into the P&L during the first half; and three, the share repurchase begins to occur in the middle of the first quarter. Therefore, we expect 60% of our annual EPS to be delivered in the second half. For the full year, we expect robust free cash flow generation of $2 billion. This plan considers continued investment in our supply chain, inventory optimization to serve our customers as well as the drawdown of at least $500 million of our working capital, as we previously discussed. We are confident in the steps we have taken and are continuing to take to navigate a dynamic supply environment and optimize our factories. The organization is focused on driving above-market organic growth, delivering on our price and cost control measures, successfully integrating MTD and Excel into the portfolio and leveraging the SBD operating model to improve our working capital efficiency in 2022. We expect executing on these actions, as well as our $4 billion allocation to repurchase shares will deliver 15% to 19% adjusted earnings per share growth and a historic free cash flow performance in 2022. With that, I will now turn the call back over to Jim to conclude with a summary of our prepared remarks.

Dennis Lange:

Great. Thanks, Jim. Shannon, we can now open the call to Q&A, please. Thank you.

Julian Mitchell:

Hi good morning. A lot of good detail in the slides. Maybe 1 point I wanted to home in on was on the Tools volume side of things. I think it sounds like you're assuming that tools volumes organically at least down maybe mid-high single digit in Q1 after backing out price, so, not too different from the trend year-on-year in Q4. Just wanted to check that that's the case. And then maybe as you think about the balance of the year after Q1, there's clearly a lot going on with people trying to figure out the impact of interest rate increases, maybe we start to see some volume headwind from continuously rising prices. So how conservative do you think your tools volume guide is for the year? I think you're assuming volumes are maybe flattish or down a bit in tools for 2022 overall and down more than that in Q1?

Jim Loree:

Yeah. The flattish volume is really more of a financial planning construct than it is in operational execution plan. So we are going for as much volume as makes sense and as much as double-digit volume in terms of what we're programming to try to achieve. However, given the uncertainty in the macro, given what remains to be seen in terms of price elasticity of demand for the products, we're trying to be financially conservative here so that, if any of the types of things that I described become factors that we still have a financial plan that makes a lot of sense.

Jeff Sprague:

Thank you. Good morning. Maybe to pick up on that point, right? You delivered what you delivered in 2021 with the semiconductor situation as it was. So Jim, I think you're then implying that with what we heard today on the call about semiconductors, there actually is an opportunity to kind of uncork more volume. I just wonder, if that's kind of the linchpin of the whole kind of volume debate in 2022 and if there are any other particular really pinch points or bottlenecks that you need to work through?

Operator:

Our next question comes from Markus Mittermaier with UBS. Your line is open.

Don Allan:

Well, I think, Markus, the way to think about it is there is really no cycle in history that you can really compare this to. I mean maybe you could go back to the 1970s and the inflationary periods back then. But the world clearly was much different and e-commerce didn't even exist back in the 1970s. So, it's a very different timeframe. And so when you look at this situation where you're dealing with $1.4 billion of headwinds at Stanley Black & Decker, we put a significant amount of price in the market in 2021. We have not seen an impact to demand related to that in any of the channels that you referenced. We're putting more, as I mentioned, price increases in the market here in the first quarter of 2022, anywhere ranging from 5% to 10%, depending on the product family or category, in some cases, even higher than that if we see significant gaps versus our competitors or we see a situation where a particular product is being impacted more heavily by the commodity inflation headwinds. So, we'll watch this very closely. I mean it's why we're taking this approach on the volume side where we're not being overly aggressive in forecasting where the volume might go. But we're prepared, as Jim and I both mentioned, to really pursue higher volume. But we have to watch the pricing impact very closely and see the elasticity impact, but it's different. It's a different cycle. This is not the typical cycle where you're looking at maybe putting 3% to 4% price increase in the market to offset your inflationary pressures. You're talking about something that's more above 10% in many cases. And if you look at our peers and other players in both the building products and industrial space, you're seeing the magnitude of those types of increases across the Board. And we believe that's the right approach at this stage. However, we also have to maintain the flexibility and watch this very closely day-to-day and week-to-week and respond accordingly.

Operator:

Our next question comes from Josh Pokrzywinski with Morgan Stanley. Your line is open.

Don Allan:

Yes, I think the surcharge component is probably a couple of points of price that we put in place in the fourth quarter. And it was really more heavily tied to the cost to serve aspect. And so, we had these -- as we all experienced this really intense wave of price increases in logistical space transportation in the summer of 2021 and going into the fall, and that surcharge is really in response to that. Those prices on container costs and other logistic costs have not really changed. They dipped down a little bit in the month of December, but then they pop back up to the previous levels in January. So I don't -- we don't really see any significant shifts in that particular area. And I think the supply chain could continue to be a little bit challenging from a cost perspective for a portion of this year. What I was referring to is more on certain commodities are shipping in the last month or 2, where you're seeing steel pull back a little bit and a couple of other commodities as well. Right now, that if those prices held, that could be a $50 million to $100 million opportunity for us later in the year. So that's kind of the sense of the magnitude. It's not a massive move at this stage. If it continued to improve, and obviously, that number could get better. So we're not seeing shifts that have us concerned about the pricing actions we've taken nor the pricing actions we plan to take here in the first quarter. But again, that will be something we closely monitor. And we also have to keep in mind that we – it takes a while to get price actions into many of our customers, and you saw that in 2021 play out. And so we're probably a 3 to 6 month lag versus what you might see in some industrial channels versus the building product channels that we're more heavily weighted to. And as a result, you're probably going to have an upside tail on the back end of this as things start to change. And so that's just something to keep in mind as you think about price, where if you compare it to an industrial peer who may have had priced much quicker in 2021 and price may move down sooner in 2022. The dynamic here will be different just because of what I laid out related to the lag and how it really plays out in the building product space.

Nigel Coe:

Thanks. Good morning. You mentioned price elasticity now a couple of times. I'm just wondering if you've seen any signs of that. The POS is strong, but just wondering if you've seen any early signs of that. And it feels like you're prepared to trade lower volumes for higher price. I just want to make sure that's the case. But my real question is, could we just get a bit more definition on how we see the Tools & Storage margins playing out through the year sequentially? It seems like we're starting up at comparable levels to what we saw in 4Q how do we see that building up through the year? Thanks.

Don Allan:

And you mentioned margins and profitability and tools, Nigel. And so as you saw, we had 11.4% in the fourth quarter operating margin for the Tools & Outdoor segment. I think the first quarter will be kind of in that ballpark, maybe a little bit better than that number. Then you see a fairly substantial jump in Q2 and in the back half. We're getting pretty close to that 18% number, in particular in the fourth quarter. So it's going to be a gradual improvement in operating margin rates with a bit of a pretty sluggish start in the first quarter because of the fact, as I mentioned. The fourth quarter of 2021 and the first quarter of 2022 is really the peak periods for the headwinds. And so you're seeing pretty substantial headwinds in both those quarters, and then they start to recede going forward after that. So that's just something to keep in mind as you factor in your modeling.

Mike Rehaut:

Thanks. Thanks for taking my question. Just to make sure – and apologies, if we're beating a dead horse here, but in terms of where you were on last quarter's earnings call, where you're expecting, I believe, mid-single-digit volume growth, and now for Tools & Storage, flattish. I just want to kind of break down the differences between then and now in terms of the expectations. How much is coming from maybe supply chain constraints, which I think you've said you expect to more fully address in the second quarter and going forward versus conservatism from the price increases and that impact on volume in terms of demand elasticity. Just trying to understand where the differences come from. And if there's any other elements that's driving that change in terms of the end market demand for instance. And then secondly, on the price – the price increases of 6% to 7% company-wide if that is – we could think about that kind of a similar impact in terms of against Tools & Outdoor and industrial if it's a similar type of allocation. Thanks.

Dennis Lange:

Yes. So, both segments -- no, tools and industrial.

Dennis Lange:

Yes, I think it's actually when you look at both of those, they are both going after pretty aggressive price actions and there's not a big deviation between the two of them.

Joe O’Dea:

Hi, good morning. It seems like there's a big step up in earnings expected from one 1Q to 2Q and I'm assuming that that's related to the supply chain side of things and you've talked about April getting better, but I wonder if you can just expand on the visibility you have into that because I think you're putting a finer point on it than others in terms of the timing of some of the supply chain getting better. But just how secure that is at this point for the visibility it gives you?

Operator:

This concludes the question-and-answer session. I would now like to turn the call back over to Dennis Lange for closing remarks.

Operator:

This concludes today's conference call. Thank you for your participation. Everyone, have a wonderful day. You may now disconnect.

Dennis Lange:

Thank you, Shannon. Good morning, everyone. And thanks for joining us for Stanley Black & Decker’s 2021 third quarter conference call. On the call in addition to myself is Jim Loree, CEO; Don Allan, President and CFO; and Lee McChesney, Vice President of Corporate Finance and CFO of Tools & Storage. Our earnings release, which was issued earlier this morning and a supplemental presentation, which we'll refer to during the call are available on the IR section of our website. A replay of this morning's call will also be available beginning at 11:00 a.m. today. The replay number and the access code are in our press release. This morning, Jim, Don and Lee will review our 2021 third quarter results and various other matters followed by a Q&A session. Consistent with prior calls, we're going to be sticking with just one question per caller. And as we normally do, we will be making some forward-looking statements during the call based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate. And as such, they involve risk and uncertainty. It's therefore possible that actual results may materially differ from any forward-looking statements that we may make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent '34 Act filing. I'll now turn the call over to our CEO, Jim Loree.

Don Allan:

Thank you, Jim and good morning everyone. As Jim just highlighted in his opening remarks, we continue to see a range of powerful secular business drivers that are creating a path for strong multi-year growth for our businesses. In support of that, I want to spend a moment to share a few of the many actions we have taken to position our company for significant growth in 2022 and beyond. Three areas I would like to highlight include our latest investments in expanded manufacturing capacity, strategic sourcing partnerships and the further acceleration of our factory automation initiatives. Beginning with our manufacturing footprint. We are aligning our new investments with our Make Where We Sell strategy as we expand capacity globally. For example in 2021, we are opening two new power tool plants, and one new hand tool facility in North America. These three new facilities will enable shorter lead times and once in place our North American capacity will have tripled since 2016. These new manufacturing plants will be accompanied by a parallel regional development of our local supply chain base over time, enhancing local market sourcing and speed to market. As it relates to strategic sourcing, we have acted and continue to focus on securing sufficient supply of battery cells and electronic components used in our power tools to support our long term growth plans, which include the growing tailwind from electrification. We have co-invested with key battery suppliers to secure dedicated capacity for the next several years. In addition, we are adding new qualified suppliers to diversify our sourcing and working to increase our inventories for battery cells. We made great progress in 2021 and are well positioned for significant supply increases related to battery cells. As it relates to electronic components, we are following a very similar plan. We have made progress in 2021 and are on our way to securing the chips and the throughput to support at least 25% growth in our electronic component supply for 2022. This area is currently an intense pain point. However, we see a roadmap for significant improvement by early spring of 2022. Finally, we are leveraging our Industry 4.0 capabilities to drive manufacturing automation throughout many of our factories. We are deploying multiple projects in our Charlotte manufacturing facility that have a payback of less than one year. These flexible automation projects enable to labor efficiency and increase throughput required to deliver outsized productivity and enable our Make Where We Sell strategy. In summary, we have positioned our business to have the capacity, supply and throughput to deliver significant growth in 2022 and beyond. I will now take a deeper dive into our business segment results for the third quarter. Tools and stores delivered record revenues as we maintained our focus on ensuring, we keep up with the existing market demands. This resulted in 14% revenue growth with volume up 11%, price up 2% and currency contributing an additional point. The operating margin rate for the segment was 15.7% down from 21.5% in the third quarter of last year. As volume, price, productivity and benefits from innovation were more than offset by accelerating transit costs incurred to meet the strong market demand. Additionally, rising commodity inflation and new growth investments related to digital marketing and feed on the street offset those positive items I mentioned. All regions delivered organic growth with North America up 9%, Europe up 20% and emerging markets up 28%. This performance was supported across all markets as the secular shifts related to the reconnection with the home and garden, as well as e-commerce were amplified by our industry leading innovation and the strong professional demand. The high single digit North American growth was underpinned by another strong retail performance up 6%, as point of sale demand remained at robust levels in U.S. retail and channel inventory remained below historical levels. The strong professional driven demand was also demonstrated in the commercial and industrial channels posting 15% growth versus the prior year. Our thesis on demand is playing out as underlying construction activity remained strong and the pro is driving growth. Overcoming a robust growth performance in the comparable period last year and a little bit of moderation in the DIY category. Further demonstrating the durability of these trends, our latest POS results showed mid single digit growth over the last four weeks covering late September through mid-October, with the last measured week up double digits, a very good signal of the healthy backdrop in U.S. retail. The European Tools business experienced growth across all major geographies, along with the commercial, retail brick-and-mortar and ecommerce channels. The region grew 17% organically with a standout ecommerce outperformance up 43% versus the prior year in addition to a notable DEWALT brand strength performance, which achieved 27% growth. Finally in emerging markets growth was pervasive across all regions and was led by trade solutions, cordless power tools and continued ecommerce momentum. All markets are consistently contributing to share gains, including 36% organic growth in Latin America and 22% organic growth in Asia. Finally, our enterprise-wide ecommerce strategic growth initiative continues to deliver strong results. With third quarter global ecommerce revenue up nearly 20% versus 2020. Now, let's turn to the tools and storage SKUs. Power tools delivered 11% organic growth, which was support by the new and innovative product launches across CRAFTSMAN, DEWALT and STANLEY FATMAX. Two great examples of these innovations are one STANLEY 20-volt product line launch with improved battery technology and two, several new offerings across both the extreme and atomic platforms. Moving on to the outdoor business. All regions contributed to an 11% organic growth performance. This was driven by new listings and cordless innovations under the Black & Decker Craftsman and DEWALT brands. Notably, global sales were up over 50% year-to-date as compared to 2020. We delivered industry leading growth rollout new offerings and mowers and handheld products in 2021. Looking ahead, we are encouraged by the results of our 2022 line reviews, where we gain significant listings with all our major retailers, supporting our beliefs that outdoor electrification has the potential to be a major growth catalyst for the company. Finally, hand tools accessories and storage grew 16% organically fueled by a robust market demand and new product introductions across our key construction auto and industrial markets. A few highlights include the 20-volt spot laser and the elite circular sawblade within the construction space. Within the automotive aftermarket CRAFTSMAN unveiled a new set of V Series mechanics tools that are designed to professional specifications. We also launched a LENOX GEN-TECH carbide bandsaw for our industrial customers. A lot of wonderful innovation in the third quarter. Also during the quarter, the tools and storage team was awarded 46 Pro Tool Innovation Awards, representing best-in-class products in the construction industry. Well done tools team. I want to thank all the tools and storage employees around the world for their perseverance to navigate this dynamic environment to deliver a fantastic revenue result for the quarter. Demand in tools remains robust lapping strong 2020 growth comps and Q3 saw strong mid 20’s percentile growth as compared to 2019. Now shifting to industrial. Segment revenue expanded by 1%, as 2 points of price and 1 point of currency was partially offset by 1 point of volume and 1 point from an oil and gas product line divestiture. Operating margin was 7.9% down versus 12.3% in the third quarter of last year, as the benefits from price and productivity were more than offset by commodity inflation, growth investments and volume declines in higher margin automotive and aerospace fasteners. Looking further within this segment, engineered fastening organic revenues were down 1% as strong general industrial growth of 23% was offset by market driven aerospace declines and lower automotive OEM production, resulting from the global semiconductor shortage. Our auto fastener growth outperformed light vehicle production by approximately 15 points for the quarter and year-to-date periods. This shows our value add business model is generating share gains, despite the OEM production schedule fluctuations. Infrastructure organic revenues were up 7%, as 16% growth in attachment tools was partially offset by lower pipeline project activity in oil and gas. Momentum continues to build in the attachment tools markets with strong backlogs and order rates at our OEM and independent dealer customers. As we look forward into 2022 and beyond, we are prepared to serve the cyclical growth recovery across many of our industrial end markets. Now shifting to security. Total revenue was up 5% with 7% volume and 1 point contributions from price, currency and acquisitions, which was partially offset by a 5 point decline related to the international divestitures completed in the third quarter of last year. North America was up 12% organically driven by strong backlog conversion and commercial electronic security and solid growth within automatic doors and healthcare. Europe was positive organically led by data driven product solutions in France, which is one of our most mature businesses in activating the new health and safety growth opportunities that we have outlined in the past. Our security business transformation is consistently driving top-line momentum. Order rates globally grew 14% in the third quarter resulting in the third consecutive record quarter-end backlog. Overall security segment profit rate, excluding charges was 9.2% down versus the priority year rate of 11%, as price and volume gains were more than offset by higher labor costs, pandemic related inefficiencies and growth investments such as SaaS solutions, touchless door technology, and other health and safety options. We now have broad customer access, but new safety protocols are extending installation timelines. We are implementing price actions for these new realities while we continue to invest to fuel top line momentum. I will now turn the call to Lee McChesney who will review cash flow and provide an update on our response to the rising costs in key areas of our supply chain. Lee?

Don Allan:

Thanks, Lee. I will now outline the full year organic growth and margin rate assumptions overall and by segments. Our updated full year 2021 guidance calls for organic revenue growth of 16% to 17%, and at the midpoint adjusted EPS expansion of 22% versus the prior year and 31% versus 2019. Tools and Storage and security organic growth expectations are consistent with our prior guidance in the low 20s and the high single digits respectively. The teams will continue to leverage price and cost actions in addition to operational productivity to counteract the extremely dynamic supply chain cost pressures. We are anticipating a relatively consistent level of revenue for Tools and Storage across Q3 and Q4, which both represent total growth in the mid to high 20s versus the comparable periods in 2019. Across all the segments margin rates will be down year-over-year, largely due to the accelerated inflation impacts, which are partially mitigated by the incremental pricing actions that were or will be implemented during the third and fourth quarter. On a GAAP basis, we expect the earnings per share range to be $10.20, up to $10.45 inclusive of various one time charges related to facility moves, deal and integration costs and functional transformation initiatives. On an adjusted basis, we are moderating the EPS outlook to $10.90, up to $11.10 from the previous range of $11.35 to $11.65. The key assumption changes to the company's prior EPS outlook includes the following four items. One, an incremental $230 million in commodity, transit and labor inflation, which is approximately a $1.25 reduction into EPS. Two, recent currency movements have resulted in a $0.15 negative EPS for 2021. Three, these pressures will be partially mitigated by our incremental pricing actions and other actions, which add an incremental $0.30 EPS. And then four, the benefit of a lower full year tax rate and other below the line assumption will contribute approximately $0.60 of improvement in EPS. We have also disclosed several key full year assumptions and our expectation for pre-tax M&A and other charges to assist you with your modeling. Lastly, the company expects free cash flow to be approximately $1.1 billion to $1.3 billion, which contemplates CapEx investment levels to be between 3% to 3.5% of revenue. This updated guidance reflects our desire to maintain temporarily higher levels of inventory to serve the strong demand and improve customer fill rates. That combined with our supply chain investments will set up – set us up strong for very strong performance in 2022. So in summary, our revised guidance calls for consistent revenue expectations generating organic growth of 16% to 17% and approximately 22% adjusted EPS expansion for the company in 2021. Considering the volatility in the operating environment that we all continue to navigate, this is an excellent top-line performance with significant year-over-year EPS expansion. Moving to the right side of the page. I'll now outline some initial thoughts on 2022. While the environment remains dynamic, we have strong conviction that we can grow our core earnings base in addition to the MTD and Excel accretion. We have been investing in our supply chain and in a powerful set of organic growth initiatives that can fuel mid-single digit organic volume growth in 2022. In addition, we have cost productivity to help us fund investments and enable healthy operating leverage. We are also actively addressing the inflationary environment with pricing actions that should result in 3.5 to four points of price next year, and will allow us to move to more than fully recover to carryover impacts from inflation experience in the second half of 2021. We believe this price and inflation dynamic can be a positive carryover benefit of approximately $0.20 of EPS in 2022. These factors added together should generate approximately $0.90 to $1.10 of EPS accretion. Additionally, MTD and Excel is expected to generate $0.50 of EPS and combined with the prior factors can result in significant double digit EPS growth from operations. Below the line, we are assuming a $0.50 headwind primarily from the tax benefit in 2021, which will not repeat next year. So to summarize with the current inflation and demand environment, we are programming the business to deliver $1 of EPS growth versus our 2021 guidance. Tools and security global markets continue to demonstrate strong demand and our customers have an optimistic view for 2022. Industrial begin to see a cyclical recover in 2022, most likely at a moderate place. We have a clear plan for 2022 growth assuming that conditions we are experiencing today continue. These initial thoughts on what is possible in 2022 will be refined with our guidance to be issued in January once we have a clearer picture of various external inputs. That being said, the market demand environment remains very strong and supportive. We have a phenomenal set of growth catalysts across the businesses, and we are actively addressing the supply and inflation environment, which has not worsened from what we have experienced in Q3. We remain well positioned to deliver above market organic growth with operating leverage, resulting a strong free cash generation that will drive top quartile shareholder returns over the long term. With that, I will now turn the call back over to Jim to conclude with a summary of our prepared remarks. Jim?

Dennis Lange:

Great. Thanks Jim. Shannon, we can now open the call to Q&A please. Thank you.

Rob Wertheimer:

Hi, good morning. Lot of work going on there obviously. My question is on a couple on pricing. Do you feel reasonably confident on the surcharge going through? I don't know if you've had feedback from channel partners, if you've seen competition, what's been going on. So does that seem likely to go through? And then maybe just a little bit more of a structural question, you mentioned some really interesting data and analytics around the supply chain. Have you changed the analytics and internal rhythms around pricing as well? Such that I don't know if you're trying to move faster in an inflationary environment and I'll stop there. Thank you.

Operator:

Thank you. Our next question comes from Jeff Sprague with Vertical Research. Your line is open.

Don Allan:

Good morning

Jeff Sprague:

Just to explore price a little bit more, just correct me if I'm wrong on these kind of rough assumptions, but it seems like you're kind of modeling $700 million of price next year and I don't know, $400 million or so of it in North America. I just wonder if you could kind of address specifically North America price kind of the surcharge dynamic versus what you might be trying to do on base pricing. Just thinking about the mechanism here when you have to kind of give the surcharges back so to speak. So I'll leave it there.

Don Allan:

Yes. I would just add to what Lee said at the end there. The cost to serve dynamic is interesting. It will improve eventually. The question is when will it approve? And so that's why, we took this approach around pricing fairly swiftly in the fourth quarter to respond to it. But we may be dealing with some of these supply chain challenges for another six to 12 months. Hopefully in the back half of 2022, we start to see them ease a little bit, but we're prepared for them to continue to remain for the full year of 2022.

Tim Wojs:

Yes. Hey everybody, good morning. Maybe just on the volume growth for 2022, the mid single digits that you're kind of highlighting, just curious kind of your confidence behind that and maybe how much of that is driven by just end market sellout growth. Any potential restocking and some of the kind of new product introductions and when you think about POWERSTACK and reviva, how would you kind of think about framing those growth opportunities over the next few years?

Don Allan:

I just add one thing to what Jim said. There is the cyclical recovery of industrial. That's still out there, now whether that all happens in one year, because we think that's about $300 million, it's still to be debated, but maybe it happens over two years we get a $100 million to $200 million next year and you get the rest in 2023. So that's kind of an addition to all the things that Jim just mentioned.

Julian Mitchell:

Hi, good morning.

Julian Mitchell:

Good morning, just wanted to circle back on the operating margin assumption. So it looks like you're aiming for around firm wide and 11% operating margin or so in the fourth quarter, just wanted to check that was roughly the right ballpark. And then for next year, it looks like the margin is sort of flattish maybe up a bit for the whole company for the year so maybe 14% or so. Maybe just help us understand how you expect the first half, second half margin cadence to move given your comments on the price and cost dynamics. Thank you.

Operator:

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

Jim Loree:

So I would say that, yes, the number you mentioned for price going in the fourth quarter is the right number. We believe that everyone for the most part is doing some type of price increasing. The question is what geographies and what magnitude, most of our competitors, if not all of them are being impacted by higher logistical costs to serve, additional costs, so to speak. So everybody's dealing with the same dynamic and it's a question of how much you want to have your margins impacted for a period of time versus offsetting it as quickly as you can with price increases. We've taken a very proactive approach where we have, as you saw from Lee, some significant headwinds that we're dealing with here in 2021 that carry over into 2022. They appear to have stabilized in the last 30 to 45 days, which is in our mind a very positive sign. Maybe we've hit the peak in this area. So now it's really about how do you drive the price increases on various products and different geographies to more than offset that. And so we feel fairly confident at this point that we can get, if not a 100% recovery on the price side versus the headwinds, pretty close to it. And so that's then our approach. Then we have productivity that over and above that, that'll help us fund investments and other things we need to do to continue to grow the business. That is the approach we're taking. And it's an unprecedented period of time around inflationary headwinds, but in some ways it helps us do what we need to do because it is so significant and everyone in the industries that we serve are dealing with it.

Markus Mittermaier:

Yes. Hi, good morning. Maybe just one on…

Markus Mittermaier:

Good morning. On supply chain and your comments on semiconductors improving by Q1 2022, just to be sure I understand that right. Is that a Stanley specific comment around sort of your relationships with suppliers or is that market assumptions you make? And do we need that to happen for that dollar of accretion in the markets that you outlined? Thank you.

Don Allan:

And I would add to that. To be very, very specific in my comments, we have enough commitments in battery cells and electronic components/chips to be able to expand our supply chain by 25% in power tools, if the demand is there for that to be served. And so that will happen by the spring of 2022 is what I was trying to say. And as we said, the guidance that we had for 2022 was mid single digits volume increase. So what he’s basically implying here is that there is, if the demand is there and it’s very robust, we have – we will have the ability to serve that demand.

Mike Rehaut:

Thanks. Good morning, everyone. I just wanted to circle back to some of the pluses and minuses of the guidance change in 2021. And apologies, if I didn’t catch all the details when you were kind of highlighting the four major differences. But you obviously, the big incremental headwind being the extra $230 million from the supply chain outlook and several offset to that, but still a net $0.50 impact on EPS. I was just trying to ascertain, you highlighted for next year the $100 million to $150 million of margin resiliency. I just wanted to understand how that had been factored in to guidance up until prior to today. And if you were expecting the $100 million to $150 million as a potential benefit this year if that’s still the case and how that has or continue to be reflected in guidance?

Operator:

Thank you. Our next question comes from Ken Zener with KeyBanc. Your line is open.

Jim Loree:

Hey, Ken.

Jim Loree:

Yes. Well, I wish the competitive landscape was getting easier, but it’s not, it’s intensifying and hence the investments in innovation and capacity and growth and everything. So the pouch technology is very exciting though. It is as I mentioned in my remarks, 50% more power, 25%, more compact, 15% lighter and it lasts twice as long. You get twice as many charge cycles. And one of the nice things about it too, is that the pouch technology batteries do not compete with automotive. So we don’t have to worry about the cylindrical cells that go into power tools being much, much a smaller part of the cylindrical cell market. I don’t think cylindrical cells will go away over time, because the pouch cells are slightly more expensive. So, there’s probably a 10% to 20% type premium on the cost of a battery that lasts twice as long. It’s going to be a very pro oriented product. It’s going to play beautifully with the atomic and extreme compact tools. And over time, I expect it to grow to be a significant part of the market. But I don’t see it crowding out of the competitors. I mean, there are active vital competitors who are continuing to invest and it’s a hotly contested race for market share. I think we’re doing well, but so are some of the competitors.

Joe O’Dea:

Hi, good morning, everyone.

Joe O’Dea:

Another one for you on pricing, but I just wanted to understand the mix of the surcharge and then the base pricing. And so when I think about kind of what’s implied in terms of the benefit that you’re anticipating next year, it looks like what would be – if we apply the total base pricing across the whole portfolio, it looks like what’s implied is more in the kind of 2% range. So when you talk about what you’re implementing right now versus what looks like could be maybe anticipated in terms of realized. Is that kind of the right interpretation that you’re just not sort of fully baking in 4% to 5% of realized base pricing? And it’s more the expectation that that could be 2%. And then why wouldn’t that be better?

Operator:

Thank you. And this concludes the question-and-answer session. I would now like to turn the call back over to Dennis Lange for closing remarks.

Operator:

This concludes today’s conference call. Thank you for participating. You may now disconnect.

Dennis Lange:

Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2021 second quarter conference call. On the call in addition to myself is Jim Loree, CEO; Don Allan, President and CFO and Lee McChesney Vice President of Corporate Finance and CFO of Tools & Storage. Our earnings release which was issued earlier this morning and a supplemental presentation, which we will refer to during the call, are available on the IR section of our website. A replay of this morning's call will also be available beginning at 11 AM today. The replay number and the access code are in our press release. This morning, Jim, Don and Lee will review our 2021 second quarter results and various other matters followed by a Q&A session. Consistent with prior calls, we're going to be sticking with just one question per caller. And as we normally do, we will be making some forward-looking statements during the call based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate, and as such, they involve risk and uncertainty. It's therefore possible that 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. I'll now turn the call over to our CEO, Jim Loree.

Donald Allan:

Thank you, Jim and good morning everyone. Before we leave Slide 5, as Jim mentioned, I want to make a few remarks about some significant financial attributes related to this exciting potential transaction. First, over the last 12 months ending June 30, MTD achieved revenue of approximately $2.5 billion. They have seen great traction on their Spotlight 10 initiative and have improved their EBITDA rate from approximately 4.5% in 2018 to high single digits over this LTM period. As I referenced at Investor Day, MTD has worked tirelessly to meet the supply chain challenges brought about by the pandemic, including limited throughput on larger products, as well as component and input shortages. However, this has muted their output in revenue over the last 12 months. We believe these are temporary and manageable disruptions that can improve with our application of the SBD Operating Model. Consistent with Investor Day and taking into account our recent diligence, we believe that our combined MTD and SBD outdoor platform can become a growth catalyst to deliver $200 million in organic growth per year over the medium-term. Our planning assumption for 2022 continues to call for the addition of MTD. Assuming $2.6 billion in revenue and continued progress on our own expansion, we believe this can contribute approximately 9% adjusted EBITDA margin or just over $230 million in consolidated adjusted EBITDA in 2022. Considering the benefits of our 20% stake currently in our P&L and applying interest and intangible amortization assumptions, this would result in approximately $0.50 of incremental adjusted EPS accretion in 2022. With our pathway for growth and margin expansion, this EPS accretion increases to over $1 by 2025, a strong P&L result that also carries a robust year forecast for our return on investment in the high teens. I will now take a deeper dive into our business segment results for the second quarter. Tools & Storage delivered 46% revenue growth with volume up 38%, currency up 5%, and price contributing an additional 3 points. The operating margin rate for this segment was 20.2%, up 320 basis points versus prior year. Volume, price and benefits from innovation and productivity were partially offset by commodity inflation, higher expedited transit costs to serve stronger demand, and new growth investments. The extraordinary Tools & Storage growth was realized across the globe again in Q2, with organic growth of 30% in North America, 63% in Europe and 85% in emerging markets. This performance was driven by the ongoing strong professional demand and robust levels of innovation across our brands, in addition to the continuation of the global penetration of e-commerce, outdoor product electrification, and the consumers reconnection with home and garden. We continue to see growth and share gain across our brick-and-mortar and e-commerce platforms in U.S. retail with the channel up 22% organically in the second quarter. POS remained robust and retail inventories ended the quarter still below normalized levels. Professional products are leading the growth across the front half and the share gains are consolidating. The first half 2021 POS is up approximately 40% compared to 2019. The North American commercial and industrial tool channels once again experienced positive sequential trends, accelerating to 68% organic growth. The growth was supported by strong professional driven demand and positive trends in manufacturing and industrial production, while our company specific marketing and digital efforts drove share gains with our industrial customers. The European tools business realized 63% organic growth, driven by an expansion in commercial, retail brick-and-mortar, and e-commerce channels, due to the strength of the industrial rebound, coupled with professional construction demand. All regions contributed to double-digit growth and share gains were led by the UK, France and Greece, which were up 130%, 73%, and 67% respectively. Finally, emerging markets was up over 85%, driven by higher construction related demand, all markets contributed to share gains. Latin America was up 136% organically, with all countries at least doubling and Asia delivered 36% organic growth, with at least double-digit growth across the region and India up nearly 3 times. Russia and Turkey delivered another solid performance with organic growth of 78% and 114% respectively. As highlighted at our May Growth Summit, our e-commerce initiative is a strategic growth driver for the business, and we are continuing to invest for further expansion. Second quarter global e-commerce revenue was up nearly 40% versus 2020 with a double-digit growth result from each region. Turning our attention to the Tools & Storage SPUs, our three SPUs had excellent contributions to the overall performance. Power Tools delivered 39% organic growth benefiting from supportive markets and our growth catalysts. This was enabled by the relentless supply chain execution combined with new and innovative product launches across Craftsman, Stanley FatMax and DeWalt. This includes an industry-leading breakthrough innovation, such as DeWalt Power Detect, Flexvolt Advantage, Atomic and Xtreme. DeWalt Flexvolt was our first breakthrough as many of you know and was once again a leader in 2021. Under this brand we are introducing a 15Ah battery and the 60 V SDS-Max 2 inch hammer, both of which will be world's first innovations. Our Flexvolt system is now up to 45 products and is forecasted to represent over $600 million in 2021 revenue. It remains a key growth driver and is a unique and advantage platform that we continue to leverage. We are passionate about innovation and the pipeline continues to be robust. Stay tuned as more breakthroughs are on the horizon for our power tool products. The Outdoor products business grew 40% organically with all regions contributing. This performance is driven by new listings in cordless innovations under the Black & Decker, Craftsman and DeWalt brands. This also includes expanding our offering in walk behind mowers and pressure washers, leveraging our flexible technology and the Black & Decker robotic mower launch in Europe. We continue to expand our cordless technology and other innovations through the outdoor electric category to drive growth, and are very encouraged about the future product pipeline. Finally, hand tools, accessories, and storage grew 42% organically, fueled by robust market demand, and new product introductions. We launched the new DeWalt tough series tape measures and hammers, as well as brought new power tool accessories to the market. We are expanding our offering of new metal and plastic storage solutions across both Craftsman and DeWalt brands in addition to further innovations across our key construction, auto and industrial markets. In summary, growth continues across the globe and within all three of the Tools & Storage SPUs. Equally as important, this growth comes with strong margin performance as a result of the team's continued resilience and disciplined price and supply chain execution. It was a fantastic performance for the Tools & Storage and Outdoor teams. Thank you both teams. Now turning to Industrial. This segment delivered 16% total revenue growth, which includes 13% volume, 3% currency, and 1 point of price. This was partially offset by 1 point from an oil and gas product line divestiture. Segment organic growth improved sequentially with positive 14% growth in the quarter. The operating margin rate of 10.9% was an increase of 210 basis points versus the prior year. Benefits from volume, price and productivity were partially offset by commodity inflation, growth investments, and choppy markets in oil and gas, as well as aerospace. Looking further within this segment engineered fastening organic revenues were up 26% as we continue to see improving automotive and industrial end markets. Our automotive fastener and system sales were up 63% organically. Our fastener organic growth significantly outpaced global light vehicle production, and was up nearly 90% in the second quarter. Out automotive systems business was up 5%, the second consecutive quarter of growth and a positive indication of improving OEM capital investment. At the segment level, we had an approximate 2 point negative revenue impact versus our second quarter plan from OEM semiconductor shortages, which disrupted vehicle production throughout the quarter. Industrial fasteners accelerated to 29% organic growth behind the continued recovery in global manufacturing and industrial activity. All regions contributed double-digit growth and realized share gains. The business soundly outpaced the global industrial production index. Aerospace fastener revenues continued to reduce versus 2020, as they deal with very slow markets due to limited new plane production. However, the recovery is on the horizon and expected likely to begin in 2022. Infrastructure organic revenues were down 11%. Attachment tools realized 16% growth, which was driven by increased OEM and independent dealer demand. Momentum continues to build in this market, with strong backlogs in order rates at our OEM and independent dealer customers. However, there was more than an offset by the dramatic reduction in pipeline activity which resulted in a 55% decline in oil and gas. This market is longer cycle as we know and is yet to see a recovery in new pipeline construction. Shifting to Security, total revenue was up 16% with 13% organic volume, a 6 point positive impact from currency, and a 1 point contribution from price. This was partially offset by a 5 point decline related to Internet, [ph] the international divestitures that we completed in the third quarter of last year. Overall North America was up 16% organically. We continue to get better access to customer sites, and we're able to convert our backlog within commercial electronic security. North America also benefited from strong growth within automatic doors and healthcare. European organic growth was up 12% as new data driven product solutions supported gains in France, and the Nordics, a strong performance considering that many of these markets still have pandemic related restrictions impacting installations. Our new Digital Solutions continued to build momentum, contributing approximately 2 to 3 points of growth, as the business continues to execute a required digital transformation. Overall order rates grew 36% in the second quarter, and the quarter end executable backlog with a record high, which positions the business to deliver high single digit organic growth for the remainder of 2021. Overall Security segment profit rate excluding charges was 8.5%, down 110 basis points versus the prior year rate, as price and volume gains were more than offset by the inefficiencies related to pandemic restrictions, and the cost impact from growth investments such as SaaS solutions, touchless door technology, and other health and safety options. We believe these inefficiencies will fade when the pandemic reaches its final stages, and as the growth investments contribute larger revenue dollars we will see the profitability rate of this business expand as well. Now I will turn the call to Lee McChesney to review cash flow and an update on material inflation, expedited transit costs, and our price actions. Lee?

Donald Allan:

Thanks Lee. Shifting to the right hand side of the slide, I will now outline the full year organic growth and margin rate assumptions, both overall and by segment. We are raising the total company organic growth range to 16% to 18% versus our prior assumption of 11% to 13%. The primary driver is an improved outlook for Tools & Storage. Our visibility and confidence for sustained market demand continues to strengthen in addition to bringing channel inventories back to historical levels. We are raising the organic growth expectations for the segment to the low 20's versus our prior estimate of 14% to 16%.This results in mid-to-high single digit organic growth in the second half, which is supported by increased customer inventory, as well as continued strong global demand. This assumption represents second half organic growth of about 26% versus 2019, which is consistent with what we just delivered in the front half of 2021. The Industrial outlook is in the low to mid single digit range, which is slightly lower than our mid single digit assumption in April. The primary factors for the change are the impacts from the second quarter, as well as moderating our assumption for oil and gas for the remainder of the year. Lastly, Security organic growth is assumed to be high single digits. The record backlog in commercial electronic security is encouraging and coupled with our data and technology based product offerings, and health and safety solutions, we are optimistic for a strong second half for the business. We are assuming the margin rate for the entire company will improve 40 to 50 basis points year-over-year. We expect the Tools & Storage and Industrial margins to increase year-over-year, even given; one, some of the significant inflationary pressures expected in the second half; and two, key new investments to drive 2022 growth. The Security margins will be relatively flat to the prior year as we manage through the inefficiencies related to the pandemic restrictions, as well as the cost impact from our key growth investments. Now I’ll summarize the remaining guidance assumptions on Slide 9. On a GAAP basis we expect the earnings per share range to be $10.80 up to $11.20, inclusive of various one time charges related to facility moves, deal and integration costs and functional transformation initiatives. On an adjusted basis, we are increasing the EPS outlook to $11.35 up to $11.65 from the previous range of $10.70 to $11. Our revised 2021 guidance calls for organic revenue growth of 16% to 18% as just mentioned and at the midpoint adjusted EPS expansion of 27% versus prior year and 37% versus 2019. The updated outlook reflects our strong first half performance as well as improved visibility to demand in Tools & Storage. We continue to make investments to support our growth catalysts, increase the capacity in our supply chain, and drive our margin resiliency initiatives. The drivers for improved adjusted EPS are outlined on the right hand side of this slide. Walking from the $10.85 EPS midpoint from our April guidance, second quarter performance adds $0.35, second half volume leverage net of expedited transit costs required to meet the improved second half demand adds $0.30. Lastly, as Lee referenced earlier, strong realization in our price actions, offset increased commodity inflation and net to a neutral impact to our guidance. On the left side of this chart, we have disclosed our current year assumptions for the significant below the line items and our expectation for pre-tax M&A, and other charges to assist with your modeling. Behind the strong start to the year, the company is reiterating free cash flow to approximate GAAP net income. Therefore, we believe the free cash flow will likely approximate $1.7 billion in 2021. And lastly, we expect third quarter's adjusted earnings per share to be approximately 21.5% of full year earnings. So in summary, our revised guidance calls for organic revenue growth of 16% to 18% and approximately 26% to 29% adjusted EPS expansion for the company in 2021. This is a very strong year-over-year expansion, yet balanced, recognized in the dynamic operating environment we all continue to navigate. Many of you are probably trying to gauge what this all means for 2022. While it is too early to make a call in the markets for that period of time, our objective and mindset is to grow our core earnings in 2022 in addition to the MTD accretion I outlined earlier. As you heard from Lee, we are in a great position from a price cost perspective and are expecting a neutral impact in 2022 from these items at current commodity prices. Additionally, as you heard at our growth summit in May, we have invested in a powerful set of organic growth initiatives and we are driving several key margin resiliency catalysts that give me confidence that organic revenue and earnings growth is achievable in 2022. The organization remains focused on day-to-day execution, implementing price increases and margin resiliency programs in response to commodity inflation and we are operating in accordance with our SBD Operating Model. We believe the company is well positioned to deliver above market organic growth, with operating leverage, strong free cash flow generation, and top quartile share for the returns over the long-term. With that, I will now turn the call back over to Jim to conclude with a summary of our prepared remarks.

Dennis Lange:

Great, thanks Jim. Shannon, we can now open the call to Q&A, please. Thank you.

Tim Wojs:

Yes. Hey, good morning, guys. Nice shot on the first half here.

Tim Wojs:

My questions really on DIY versus Pro, just if you could elaborate on what you're seeing maybe in both markets, particularly DIY as you're starting to, my guess is or my sense is hitting tougher comps right about now in that market? And maybe you can dovetail back, or just with some color on some of the drivers Don, that you mentioned about the confidence around organic improvement in 2022?

Dennis Lange:

Shannon?

Brandon Reagan:

Hey, good morning. This is Brandon Reagan on for Nigel Coe. I just was curious if you guys had any kind of position on the news that carriers potentially selling Chubb [ph] for $3 billion. Just wondering if this had any influence on your thoughts about the security options?

Donald Allan:

And as I said, my comments would have us really excited before we make that decision that Jim was describing is the trajectory is on for organic growth with this really amazing performance in Q2, we think we could be looking at a business that is in the high single digit organic growth for the full year of 2021. And as the business continues to demonstrate that growth with its new growth initiatives into next year, the profitability rate will come with it. And we'll get past some of these pandemic restrictions as well as those growth investments will start to demonstrate more operating leverage. So we have the best of both worlds, I guess.

Michael Rehaut:

Thanks. Good morning, everyone and congrats on your results.

Michael Rehaut:

Yes, I just wanted to talk a moment about MTD and a couple questions if I could kind of burn into one in this topic. Number one, your top line you had mentioned, looking at maybe $2.6 billion for 2022 as the company has encountered some maybe supply chain issues. I was wondering if you can kind of give us -- you talked about a $200 million organic growth type of opportunity on a combined basis. But how do you see it, do you see that there was any kind of share issues that might have cropped up I assume the broader market grew nicely, and how you intend to perhaps regain that share and grow the business organically? And then when you talk about, in negotiations for with MTD, for the option exercise. I was just curious, I think too many people just seem relatively straightforward that you had the opportunity to exercise or not, if there are any types of nuances that we might not be aware of, or is it more just a lot of, more basic blocking and tackling?

Operator:

Thank you. Our next question comes from Nicole DeBlase with Deutsche Bank. Your line is open.

James Loree:

Good morning.

Nicole DeBlase:

So I guess the 3Q 21.5% of full year EPS, clearly a bit lower than the normal contribution and there's obviously a lot of moving pieces this year. So maybe you could talk a little bit about when you went through like the freight costs and the impact of price costs, how does that differ, if any, between 3Q and 4Q, just to think about the cadence of margins for the rest of the year?

Operator:

Thank you. Our next question comes from Ross Gilardi with Bank of America. Your line is open.

James Loree:

Good morning.

James Loree:

Well, if only it was as simple as that. The MTD folks basically make gas powered equipment and specialize in higher end of zero-turn mowers and riding mowers and have some but a relatively limited walk behind business in terms of dollar percentage of total. So electric penetration into riders and zero-turns is roughly about 1% and has stayed pretty constant. So we can't paint MTD with that brush that you are painting them with, number one, because their mix is gas powered. And we know that other gas powered, heavy outdoor power equipment makers grew. And these include some companies that we're very familiar with, that grew in the 10% to 20% range during that quarter. So it is what it is. It's not a shift to electric. We will make that happen later if we're able to execute on this and that's kind of where we are at this point.

Eric Bosshard:

Good morning. Yes -- on the tools business, just two things would love to understand a little bit better. First of all, your sense from a market share standpoint, where you're making the most notable progress? And then secondly, your interaction with your retailers, you talked about inventory, but their commitment to building inventories from here and they're focus on that, if you could just expand on those two areas that would be great. Thank you.

Operator:

Thank you. And this concludes the question-and-answer session. I would now like to turn the call back over to Dennis Lange for closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. Everyone have a wonderful day.

Dennis Lange:

Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2021 first quarter conference call. On the call in addition to myself is Jim Loree, CEO; Don Allan, President and CFO and Lee Mcchesney Vice President of Corporate Finance and CFO of Tools & Storage. Our earnings release which was issued earlier this morning and a supplemental presentation which we will refer to during the call are available on the IR section of our website. A replay of this morning's call will also be available beginning at 11 AM today. The replay number and the access code are in our press release. This morning, Jim, Don and Lee will review our 2021 first quarter results and various other matters followed by a Q&A session. Consistent with other calls, we are going to be sticking with just one question per caller. And as we normally do, we will be making some forward-looking statements during the call based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate, and as such, 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. I'll now turn the call over to our CEO, Jim Loree.

Don Allan:

Thank you, Jim. And good morning everyone. I am pleased to report on the business segment results that contributed to our exceptional start to 2021. Tools & Storage delivered 48% revenue growth with volume up 42% and price and currency each contributing an additional three points, resulting in 45% organic growth for the first quarter. In addition, the operating margin rate for the segment was 21.4% up 990 basis points versus the prior year. This is the result of the team's relentless focus on margin excellence and strong operational performance. Volume, price, productivity and cost control were the main drivers of this expansion. These positive drivers were partially offset by higher costs and supply chains such as expediting product via air freight to serve the incredibly strong demand, as well as new growth investments to support share gains in the future. On a geographic basis, we had incredibly strong organic growth and market share gains across all regions, up 41% North America, 47% in Europe, and 67% in emerging markets. This performance was driven by our industry leading innovation, strong professional demand, and the on-going trends from secular shifts related to e-commerce, outdoor product electrification, and the consumers reconnection with the home and garden. The U.S. retail channel delivered 48% organic growth, as underlying consumer demand remained elevated with continued momentum from professional and DIY users. Additionally, our omni channel and etailer e commerce platforms nearly doubled in the first quarter, which further reinforces our conviction behind the additional investments we are making to capture this accelerating opportunity. Point-of-Sale growth for the quarter remained exceptionally strong and consistent with the high end of our forecasted Q1 range. Retailer inventories remain relatively in line with Q4 2020 levels, so the anticipated increase in store inventories of approximately four to five weeks is now expected to occur in the back half of the year. The North American commercial and industrial tool channels are continuing to experience positive sequential trends with growth in the mid-30s versus low single digit decline in Q4 2020. Pure play construction focus customers within these channels were up close to 40% more than two times the mid-teens growth we experienced last quarter. That resounding signal that the pro is back and demand is clearly accelerating this space. Also, with the recent positive trends in North American industrial manufacturing activity, our MRO customer base rebounded this quarter as well posting growth in the high 20s as compared to double digit decline in the fourth quarter. Now shifting to Europe, the European tools business relies impressive share gains across all regions generated by the rapid acceleration of e-commerce as well as a retail champ -- the retail channel strength. This performance was led by more than 80% organic growth in the U.K. while France, Central Europe, the Nordics, Italy and Iberia were all up over 30%. Finally, the momentum in emerging markets continued to accelerate with strong construction related demand in addition to impressive traction in e-commerce. Latin America was up 77% organically, with all countries up over 50% and led by an outstanding 86% growth in Brazil. Asia delivered 62% organic growth with China and India both at least doubling in size. South Korea, Malaysia, and Vietnam all grew in excess of 50%, while Japan, Thailand and Indonesia each posted strong double-digit growth for the quarter. Russia and Turkey remained strong, delivering 52% and 89% growth respectively. Those numbers are absolutely crazy, but they're wonderful. So let's turn our attention to Tools & Storage SPUs after reviewing the fantastic geographic revenue performance. Power Tools delivered 50% organic growth, which was the result of continued momentum from the positive home and construction trends, as well as sharp commercial, and supply chain execution combined with new product launches. New core innovations led the way, building upon our strength of Craftsman, the fastest growing brand in the industry, and DeWalt, the largest professional tool brand in the world as measured by total revenue. We built these positions with industry leading innovation, launching products such as Flexvolt, Atomic, Xtreme, Power Detect, Flexvolt Advantage all within the last five years. These products are delivering growth well ahead of the SPU average and are positioned for our pro users. To further highlight positive professional demand, Flexvolt grew over 80% in the quarter. This quarter and moving ahead, we are providing more top line disclosure for our outdoor products business, particularly as it increases importance of the growth catalysts and with our option to purchase the remaining 80% of MTD opening mid-year. I am pleased to report it was a record breaking start to the season with organic growth in excess of 120%. This performance is driven by the incremental listening wins we covered last quarter, and leveraging cordless innovations under the Black & Decker Craftsman and DeWalt brands. All of our major retailers participated in this explosive growth. It’s exciting to see our new products at the market and early season reads on cell two are very positive. This is a major growth margin and ESG opportunity. As we shape the conversion to electrification and bring our cordless capabilities to the outdoor equipment market. We could not be more excited about this industry and the growth potential it creates for our company over the next several years. Finally, hand tools, accessories and storage grew 28% organically as market rebounds, and new product introductions fueled the growth. We continue to innovate in our key construction auto and industrial markets. We are seeing new product momentum, including a variety of Craftsman and DeWalt plastic and metal storage solutions, as well as robots growth and the new DeWalt tape measures and accessories. So in summary, there are a few points I want to reinforce related to our Tools & Storage business. One, we continue to leverage an industry leading position. The team has built this position over time and it is supported by our innovation, brands, category breadth, operational excellence, and focus on keeping our customers and end users at the center of what we do. Two, this is a global phenomenon. The powerful trends that we are harnessing for growth are not unique to one geography. And three, this is fueled, enabled by the dedication, passion and agility of our people. The business delivered the largest first quarter in history as it relates to sales, profits and margin rate and the execution was superb. Thank you to the entire team for a job well done. I am excited about the possibility of record breaking performance is continuing in the future quarters. Well done, tools team. Moving to Industrial, this segment delivered 11% total revenue growth, which includes 6% volume 3% currency, and 3% from the CAM acquisition. This was partially offset by one point from an oil and gas product line divestiture. Segment organic growth continued to improve sequentially with positive 6% growth in the quarter. The operating margin reached 15.9%, an increase of 270 basis points versus prior year as the benefits from volume, productivity and cost reductions were only partially offset by new growth investments. Looking further within the segment, engineered fastening revenues were up 9% organically, as we continue to see improving automotive and industrial end markets. Automotive fasteners were up 16%, outpacing global light vehicle production by approximately 500 basis points. This was held back somewhat as we move through the quarter and navigated OEM disruptions due to their supply shortages. Our automotive system business was up 17% a very good sign that capital spending is improving with our automotive OEM. Growth within industrial fasteners turned positive this quarter, delivering low double digit growth driven by the continued momentum and global manufacturing and industrial activity. Combined with a modest impact from customer inventory increases. Infrastructure organic revenues were down 2% however, attachment tools had 16% growth as demand increase from OEMs and independent dealers. This was more than offset by significantly reduced pipeline construction activity, which resulted in a 30% decline in oil and gas. Shifting to Security. Total revenue was up 2% with a four point positive impact from currency, from price and acquisitions each contributed a point. This was partially offset by a four point decline related to the international divestitures completed in the third quarter of last year. Overall, North America was flat organically as growth and health and safety offerings within automatic doors and healthcare were offset by lower installations within commercial electronic security. The field organization continues to experience productivity challenges, as their customers slowly reopen and allow more on site access. European organic growth was up 4% as new Data Driven Product Solutions supported 17% growth in France, and 4% in the Nordics. France in particular has embraced the technology transfer in a transformation we ignited in this business in 2019. And it's experiencing the growth that we believe is possible across the entirety of commercial electronic security. Our new solutions in health and safety continued to build momentum, contributing approximately two points of growth in the quarter. The positive secular trends and underlying demand once again proved resilient in these markets despite incremental lockdowns due to the pandemic. The bidding code activity for these new solutions continues to build. And that combined with the executable backlog at record highs gives us confidence that security is set up to deliver strong organic growth for the remainder of 2021. Overall security segment profit rate, excluding charges were 8.5%, up 110 basis points versus the prior year. As price and cost control was partially offset by the impact from growth investments related to our SaaS solutions, touchless door technology and other health and safety apps. I would now like to turn it over to Lee Mcchesney who is our VP of Corporate Finance and CFO for Tools & Storage. Many of you know Lee from investor conferences over the last year, and he will now walk you through the cash flow for the quarter. And our game plan to tackle inflation. Lee?

Don Allan:

Thanks Lee. Turning to slide nine, I will now outline the organic growth assumptions for both the second quarter and full year. We expect second quarter organic revenue growth to approximate 30% for the company. In 2Q we expect the Tools & Storage business to grow 35% to 40% with continued strength across all regions and channels. We are planning for industrial to grow in the mid-to-high teens with continued momentum and industrial fasteners and markets and attachment tools. Automotive will continue to show growth on the easier comps. But we haven't cooperated moderated demand levels versus Q1 acknowledging the OEM supply constraints in the industry. Finally, aerospace and oil and gas were expected to remain depressed partially offsetting the stronger growth expectations and other areas of the segment. Turning to Security, we expect low double digit growth in the second quarter. We plan for revenue levels to improve sequentially, as we will benefit from increased access to customer sites to execute on the record backlog from the first quarter. Shifting to the full year we are raising the total company organic growth range to 11% to 13% with upward revisions in Tools & Storage and Industrial. Our confidence of growing market demand in Tools & Storage continues to strengthen. We are raising the Tools & Storage organic growth expectations to 14% to 16% versus our prior estimate of 4% to 8% for the full year. Both the first and second half assumptions improved. The first half assumption is based on stronger visibility to Q2 demand combined with the outstanding Q1 performance. The second half assumption includes the benefit from increases in channel inventory back to historical levels. Despite the improvement, we are assuming a decline between 2% to 4% in the back half acknowledging the tough comps. This represents growth of 12% to 16% versus 2019 and as a reasonable to your growth assumption given the strong market recovery occurring. However, we are preparing the supply chain for stronger demand scenarios and we will be ready should our planning assumption prove to be conservative, which is very which it very well could be given current global demand trends. The industrial outlook improved to 4% to 6% for 2021 as we have better visibility to industrial and attachment to market recoveries. We have built in the expected automotive customer supply chain constraints into our view. And then finally, aerospace and oil and gas will continue to be a significant headwind. Right now our view is that these markets will remain depressed for 2021 but become an upside opportunity next year. Lastly, we are maintaining our security organic growth assumption at 4% to 6% for the full year. The record backlog and commercial electronic security is encouraging and coupled with our data and technology based product offerings, and health and safety solutions. We are optimistic that the growth can accelerate throughout the remainder of the year. Now I'll summarize the remaining guidance assumptions on slide 10. We are raising and narrowing the 2021 adjusted EPS outlook to reflect the exceptional start to the year and improve demand outlook across most of our businesses. On a GAAP basis, we expect the earnings per share range to be $10.15 to $10.55 inclusive of various one time charges related to facility moves beyond integration costs and functional transformation initiatives. On an adjusted basis, we are increasing the EPS outlook from a $9.70 to $10.30 range, up to a $10.70 to $11 range. At the midpoint this is an increase of $0.85 versus the prior year guide and a 20% EPS growth versus the prior year. The drivers for improved adjusted EPS are outlined on the right hand side of the slide. Walking from the $10 midpoint from our January guidance, incremental pricing and volume net of incremental growth investments, along with margin resiliency, and other actions contribute approximately $1.50. This is partially offset by commodity inflation headwinds of approximately $0.80. In addition, we are planning to call our Series C Preferred Stock and the elimination of the preferred dividend adds a $0.15 benefit to 2021 bringing us to the current adjusted EPS midpoint of $10.85. Demand variability that I covered earlier remains at the primary driver beyond the adjusted EPS. We have also disclosed our current year full -- our current full year assumptions for the significant below the line items and our expectation for the pretax M&A and other charges to assist with your modeling. Additionally, the company is reiterating free cash flow to approximate GAAP net income. And lastly, we expect second quarters adjusted earnings per share to be approximately 25% of the full year performance. So in summary, we expect 11% to 13% organic growth, and approximately 18% to 22% adjusted EPS expansion for the company in 2021. A very healthy EPS expansion for the year, yet a balanced view recognizing the dynamic operating environment. As I said earlier, we are preparing for the potential for higher market demand beyond this guidance view and, as Lee mentioned have $100 million of margin resiliency not included in our guidance as a contingency to drive better performance or withstand new volatility. From a capital allocation point of view, we are very well positioned and have excellent flexibility due to our current cash position and leverage ratios. Therefore, we can retire the preferred stock mentioned earlier and react accordingly if our stock price trend presents an opportunity in the short term while staying on track with our expected timing of MTD later this year or early next. We are confident that we have positioned the company to deliver above market organic growth with operating leverage, strong free cash flow generation and top quartile shareholder returns over the long term, all while maintaining the safety of our employees and continuing to assist in our communities. With that, I will now turn the call back over to Jim to conclude with a summary of our prepared remarks.

Dennis Lange:

Great. Thanks, Jim. Shannon, we can now open the call to Q&A, please. Thank you.

Jim Loree:

Nigel, good morning.

Jim Loree:

Yes, sure. I'll start with that. And then Lee will probably add a little color to. Yes, I mean, we were at 235 for inflation, the impact this year, up about $160 million from what we said back in January. I would say this is a very volatile environment right now. And it really depends on where the demand goes in the back half of the year. I do believe as the year progresses and we get closer to July, it's difficult to have a material impact in the current year, if inflation continues to increase. That being said, there's been a few positive trends in some of these commodities in the last two or three weeks but it appears to be stabilizing. So two or three weeks does not make a trend. But it's something that at least is encouraging in the sense that maybe this is starting to modulate a little bit. But it will be one of the more volatile things that we'll have to manage. Now, the good news is that I do believe we will be managing to a very strong demand market for the remainder of the year, most likely into next year as well. And so that clearly is a benefit associated with inflation. We are aggressively underway have focused on pricing actions across the two major businesses where there's impact, which is obviously Tools & Storage and industrial. Tools & Storage will do what they typically do, which is a very surgical approach focused on areas that we think pricing does not impact demand in a significant way. And so we will manage through that dynamic with our customers as we always do. And I think we'll have a pretty good success rate. Industrial actually is an area that we feel better about. We feel like we have good processes in place, we've already got price actions that we've taken in the last 30 days. And we will likely take some more in the next 90 days in those particular businesses. But we feel like that is well under control and the industrial team has been very focused on that. So I think the area of interest that we're all going to be watching is making sure we get the right impact and pricing in the tools and storage business. Now that being said, we do, we normally do to manage to this dynamic, which is in the short term. We're looking at other areas of productivity. We look at margin resilience is our contingency to help offset that if needed. And we're optimistic as we go through the year that we will find a way to navigate this headwind and be able to offset it completely. Right now, as Lee said we think we're more like 1/3 to 50% at this stage, but as the next three months go by, I think we're going to make more progress in that regard. Anything you want to add Lee?

Operator:

Thank you. Our next question comes from Jeff Sprague with Vertical Research. Your line is open.

Jim Loree:

Hey Jeff, good morning.

Jim Loree:

We'll get there eventually. I would say, unfortunately, or fortunately, depending on how you look at it, but the volume you're spot on the volume has precluded any major shift, although you get minor shifts, because the waiting, the change in waiting just from having the additional production in, in these places. But the reality is, in when you're trying to serve, demand, that's up 45%, year-over-year, the opportunity to do production shifts is essentially, limited. And so once the demand returns to what I would call more historical levels, and at some point, it undoubtedly well, then the trend will be in great shape in terms of, we have the plans and programs, we have the people all set up to do it, we just need a window of opportunity to make that happen. And in the meantime, we'll continue to serve the demand that we have.

Operator:

Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is open.

Jim Loree:

Yes, the commodity headwinds is close to $200 million in the second half. So a large portion that $235 is hitting us in the second half. So which really is a good lead into your first part of your question, which, I do think the operating margin for the company in Q2 will be somewhere around 15%, maybe a little bit higher than 15%, then the back half, it'll be somewhere between 14% and 14.5%, depending on how -- where the demand goes and, and our success and really offsetting that headwind along the lines I described. And so for the full year, our operating margin rate will be up modestly year-over-year. When you look at the big drivers of that clearly a large part of that is in our tools business, because that's where a large part of the commodity headwind is focused at this stage. And so for the second quarter, tool should be around 19%, maybe a little bit better 19% than 19%. And in the back half, it'll be around 17% to 17.5% margins. And so we look at that and we say that's just slightly below our 18% to 20% range that we laid out there and we just want to remind everybody that range wasn't necessarily applicable for every single quarter, it was more about an annual performance and a long term performance as well. And so for the year, we would expect the tools operating margin rate to be, somewhere between 18.5% and 19%. And which would be a significant increase over last year's margin rate of 18.3%.

Tim Wojs:

Yes. Hey, Hey, everybody. Nice. Nice work, good start to the year.

Tim Wojs:

Maybe my my question really just on supply chain? I guess where are you seeing the most acute pressure on the supply side? And maybe if you could just talk a little bit about some of the bigger actions that you're taking to just make sure you're at least keeping up with sell, sell through demand?

Operator:

Thank you. Our next question comes from Rob Wertheimer with Melius Research. Your line is open.

Jim Loree:

Yes, I think our e-commerce strategy was born about 10 years ago, or so when we did the Black & Decker merger with Stanley. And at that time, e-commerce was zero, or close to zero, just a smidge. And year-after-year after year, we worked hard developing that channel after the acquisition or the merger. And last year, we were up in almost $1.8 billion of revenue. And not only did we do it with the major e-commerce player in the United States, but we did it systematically around the globe. And so pretty much everywhere you look we have deep relationships with the big B2B, B2C players, and a flourishing business and that channel shift, that occurred last year, when the percent of revenue went from 12% to 18%. And Tools was truly remarkable. And now, with almost 2x e-commerce growth in the first quarter, that 1.7 billion plus business has incredibly strong prospects globally for this year. And instead of resting on our laurels, and just enjoying that advantage, because we share about a three to one relative market share advantage in that channel, globally. Instead of resting on laurels, we have taken a really significant investments in this channel in beginning of the fourth quarter, third, third, third, fourth quarter of last year and then accelerating into 2021. To the extent that we now have big teams of people working on this project. B2B, B2C around the globe as well as we're starting to go in markets where we are under indexed. So take, for example, China, India, and Germany. And we are investing in D2C capability. And we'll be doing a lot in that regard because those channels are so difficult to penetrate, given the existing share positions of the players that are out there today. So I would say that the share gains are coming from the major power tools, players and other tools, and then maybe in hand tools, is where the minor where local players. And I think that's going to continue, we'll see, we'll see how the e-commerce investments grow in the industry over time, and I would expect them to, but right now, we have a big first mover advantage, and we are pressing the accelerator to the floor to make sure that we sustain that advantage for as long as possible.

Markus Mittermaier:

Yes. Hi. Good morning, everyone.

Markus Mittermaier:

Morning. Could actually ask the question on security, and especially on the common from France up 17%, Europe up 4% in that data driven product solutions business? What exactly is up? And if there are near term kind of COVID beneficiary that you see? Or is that something that could really make a dent in overall security segment growth here going forward? Thank you.

Operator:

Thank you. Our next question comes from Nicole DeBlase with Deutsche Bank. Your line is open

Jim Loree:

Good morning.

Jim Loree:

Perfect Nicole. So as we highlighted earlier, we give you the 21 number. It's yes, I'd say it's the equivalent maybe $150 million to $200 million of potential pressure in 2022. There is a bit of a topic out there of is this inflation going to continue, because there has been some supply disruptions. But right now we're going with the mindset that it will. And accordingly, that's why we're working on the pricing actions to get the benefit. You'll see this year but, next year, you'll actually have a potential scenario where you actually have more benefits than we have head wins.

Unidentified Analyst:

Hi, this is Alaei Homan [ph] on for Mike, congrats on the results. And thanks for taking my question. Can you talk about your sense for your POS in Tools & Storage relative to the underlying market and whether that delta is widening? So in other words, how much of the strong POS could be related to you gaining share versus an underlying continuing strong market?

Operator:

Thank you. Our next question comes from Ross Gilardi with Bank of America. Your line is open.

Lee Mcchesney:

Yes, I will. And that second part of the question we, we did that we just we put the benefit of the inventory restock in the back half of the year. And but we did not change the underlying demand assumption from January. So that's the, that's really the opportunity as we progress through the next 90 days, and we provide an update to all of you in July, where are where are we at that stage? And I think that's the big opportunity in front of us which leads a little bit into the first part of your question that I personally, ask Jim to comment on this as well, because I know he has a strong point of view as well. I really think this is a robust market, we're going to see for a while. And I think when you look at all the different dynamics that are happening in various geographies, and the recovery coming out of the pandemic, people are still going to have a very intense focus on their homes, because many of us will continue to work in a hybrid environment, even when we get back to an office on a on a part time basis. So you want to have an environment at home that really is sufficient to meet the needs of both work and personal habits and behaviors. And then you have things like infrastructure, which are just, massive bills across the globe. I mean, we tend to talk about the U.S. as an area where there could be a potential large infrastructure investment, but there's a lot of other major countries, really, thinking about doing the same thing over the next 12 months to 24 months. So you can see a significant influx into the economy from that as well, both in the U.S. and globally. So I sit here and wonder, is there really a dip coming in the next 6 months to 12 months? And when the more I think about it, the more I feel like that we're going to continue to see this strong demand and growth continue. Obviously, I don't think we're going to grow 40% to 50%, every quarter for the next three years. But I do think there's a path for growth for the next two to three years. Jim?

Operator:

Thank you. I now turn like to turn the call back over to Dennis Lange for any closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.