Welcome to the Fourth Quarter and Full Year 2023 Stanley Black & Decker Earnings Conference Call. My name is Shannon, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Vice President of Investor Relations, Dennis Lange. Mr. Lange, you may begin.

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.

Thank you, Dennis, and good morning, everyone. Stanley Black & Decker's performance in 2023 reflects our relentless focus on the execution of our strategic business transformation, which resulted in us building a strong foundation for improved profitability in 2024. Stanley Black & Decker today is a more streamlined business, built on the strength of our people and culture, with an intensified focus on our core market leadership positions in Tools & Outdoor and Industrial. Despite a challenging market backdrop, that pressured volumes during the year, adjusted gross margin improved in each quarter and we generated over $850 million of free cash flow. These results demonstrate significant progress against two of our most important areas of focus during 2023. Here are just a few additional examples of our accomplishments from the past year. We improved the health of our cost structure as a result of the momentum from our supply chain transformation. We achieved our 2023 target and delivered over $1 billion of savings program to-date. We remain on track for the expected $2 billion of savings targeted by the end of 2025. Our fourth quarter adjusted gross margin approached 30%. This result outperformed the plan, as our teams accelerated efforts to deliver profit and cash in response to the soft volume environment. Our strong free cash flow generation was primarily the result of $1.1 billion of inventory reduction, as we successfully executed our supply chain initiatives. We continue to actively manage our portfolio of businesses. In December, we announced the agreement to sell our Infrastructure business, and currently expect that transaction to close at the end of the first quarter. This aligns with our simplification efforts and focus on shareholder value creation, while advancing our capital allocation priorities. We strengthened our leadership team with the addition of three new highly-capable…

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…

Thanks, Chris, and good morning. Turning to the next slide, I would like to highlight the progress we have achieved streamlining the business and transforming our operations. We are on track to deliver our $2 billion pre-tax run rate cost savings target by the end of 2025. We achieved approximately $160 million pre-tax run rate cost savings in the fourth quarter, bringing our aggregate savings to over $1 billion since program inception. This performance is slightly ahead of plan as our teams accelerated savings efforts to offset macroeconomic volume headwinds that were greater than expected throughout the year, including during the fourth quarter. Strategic sourcing initiatives remain the largest contributor to our supply chain transformation to-date. In addition to the program, freight rate and demurrage savings also contributed to margin improvement starting early in 2023 and holding throughout the year. Consistent with expectations set at transformation inception, we expect strategic sourcing to be the leading contributor to savings and we expect this to be the case in 2024. Our operations excellence program continues to leverage lean manufacturing principles to improve productivity across both business segments. This workstream will expand in scope during 2024 and drive further cost efficiency in our manufacturing base. The footprint related projects are progressing on schedule and production transfers into centers of excellence are in the various stages of qualification, testing and execution. Similarly, logistics network optimization programs are also on track with regional distribution center redesigns underway. Concerning complexity reduction, our teams have identified approximately 85,000 SKUs for discontinuation and are assisting customers as they transition to replacement products. We have successfully eliminated over 45,000 SKUs as of the end of 2023 with more expected in 2024. These actions are expected to generate approximately $0.5 billion of savings in 2024, supporting the funding of additional…

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.

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

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

Hi, good morning.

Good morning.

Good morning. Maybe just a question for me around that rate of improvement as we're going through the year, just trying to understand, I guess, particularly the gross margin delta and also on the free cash flow progression. What's the confidence that that gross margin can sort of move up sequentially as you go through the year to get to that low 30%s exit rate? And on free cash, kind of how weighted should that $700 million midpoint be to the second half? Thank you.

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.

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

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?

Yeah. So, on investments, we're continuing to invest predominantly in innovation and then in the field and marketing resources to activate it. So, of the $100 million we're targeting for '24, I'd say three quarters or more are around that. Obviously, a lot of that in our biggest business, our Tools & Outdoor business, but some in Industrial as well. It's mostly about innovation and market activation and field resources to support it, maybe 20% to 25% is another capability building to make us a more productive organization. And then, as we go through the year, I mean, obviously, we're going into a year with a pretty muted macro and the uncertainty we've been experiencing the last 12 or 18 months, we're certainly going to be paying close attention to the macro and managing our cost structure as we go throughout the year to be in step with that macro. But we are really focused on the long-term growth of this business, and we're going to be working hard as a leadership team and as an organization to preserve those investments, even if the macro creates a bit more headwinds than we're expecting, because we're not going to just completely collapse '24 investment at the risk of longer-term brand health and brand share gaining power. In terms of inflation and deflation for the year, our plan expects roughly flat across kind of materials and freight. You've obviously had some of the battery metals go down in significant percentage terms, but in dollar terms, those don't drive our basket as much as some others. There's been some recent upticks in steel resins, and we'll probably face some marginal pressure from Red Sea freight. But overall, you put metals and freight together, roughly flat. Still kind of a high labor rate environment, but that's embedded in our gross margin and SG&A assumptions. And then finally, price/cost, again, roughly neutral. It will have some carry-in price in Industrial, that's to the good, offset by just the normalization of promotional cadence in Tools & Outdoor. Again, recall the back half of '23, we're getting back to a normal promotional cadence as our supply chain healed and that will be playing through the front half of '24 as well. But I'd say those two forces together enterprise-wide get us to roughly flat price dynamics for the year and again a roughly flat inflation backdrop in total.

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

Thank you. I just wanted to follow-up about the flat-lining of gross margin that's expected into the first half relative to the Q4 exit rate. It seems like there is a lot of savings on the balance sheet that is yet to flow through the P&L. And I think the expectation is that those come through on a couple quarter lag. So just, maybe why is that not coming through in the first half? And I understand the outdoor mix will pick up. But I would also think that tools gross margin gets better from Q4 into the first half as you move past the holiday promo. So, any color on the gross margin delta between those product lines, to help understand that mix would be helpful. Thank you.

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.

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

Thank you. Good morning, everybody.

Good morning.

My question is on dynamics 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.

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

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.

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

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.

Yeah. So, Nigel, I'll have Chris answer your first question, and then I'll take the second question after he's done.

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.

Yeah. The comment on the footprint, I mean, yeah, the geopolitical dynamics continue to be intriguing and interesting for sure, what may play out in the future. But as it comes to our footprint transformation, we started with an overarching strategy of finding ways to get closer to our customer with our supply base and our manufacturing [Technical Difficulty] certain types of products that are high volume, in particular. Other products, you have to focus more on the low-cost location. And so, you end up with a mixed geography of where you're manufacturing and how you're serving your customers. That hasn't really changed. What we continue to do as part of the transformation though is develop centers of excellence for power tools, certain types of hand tools, certain types of outdoor products that leverage the expertise we have in these geographies in Asia, in Mexico and in the United States and Eastern Europe. We will continue to build upon that, which gives -- eventually, will give us the ability to flex supply from different geographies if the geopolitical landscape changes radically. That will take time to do. That's not something that will necessarily occur in the next six to 12 months. But as we continue on this journey and finish this transformation in the next two to three years, that's an outcome that we're looking to achieve. And so, we believe that's the appropriate way to address what's happening in the dynamic geopolitical space, and we'll continue to evaluate that going forward as things shift in countries like the United States if they shift and make pivots as necessary.

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

Hey, guys. Good morning. Just on SKU rationalization, do you think that had any impact on the volumes in the fourth quarter or even the second half of '23?

Go ahead, Pat.

Yeah. Adam, no, I mean, that program has been very thoughtful in weeding out complexity that's not creating value for end users or for our shareholders. And there's no major disruption by that, by any stretch of the means.

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

Thanks. Good morning, everyone.

Good morning.

I had a question on the growth investments and just how to think about the cadence about longer term. I think you talked about it a little bit earlier in the call, but can you talk about in totality, I think alongside the 35%-plus gross margin and enabling $300 million to $500 million of growth investment, I was hoping just to get a sense of what those investments were in '23, what you expect it to be in '24 and '25, and how much of that is going to be kind of an ongoing level of investment, and if that would all be on the income statement in the tools and storage, or if there would be some in corporate? Thanks.

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.

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

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?

Good morning, Eric. So, I would say that the level of promotional activities we're at now and we would expect in '24 is probably pretty consistent with what we experienced in 2019. And so, we're kind of back to where we were, which I think was a healthy balance of normal core operating selling activities and promotional activities. As we think about the year, our customers are not really talking to us about, what I would call, unusual levels of promotional activities. They're looking for the normal set of activities, and I think that's going to likely be the case throughout the year. And we tend to -- in demand markets like this that are somewhat stable in the sense where you don't have a lot of growth and you don't have a lot of retraction, it tends to be a more normal promotional environment in that setting. If demand retracts in a more significant way, then promotional activity does pull back a fair amount, because the impact of promotions is not as significant. If we see a back half of the year that gets better, which there's -- we talked about in our presentation that our guidance doesn't necessarily include that, but if the back-half demand environment is an improved environment, and you could potentially see a little bit of tick-up in promotional activity related to that. But at this stage, based on our guidance, I think it's probably balanced to say that our view is that promotional activity will be consistent with what we saw pre-pandemic.

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

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

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