The Fourth Quarter and Full Year 2023 Stanley Black & Decker Earnings Conference Call has begun, with Dennis Lange as the operator and Don Allan, Chris Nelson, and Pat Hallinan as presenters. A replay of the webcast will be available later. The presenters will review the 2023 fourth quarter and full year results and make forward-looking statements, with a reminder that actual results may differ. The call will include a Q&A session, with one question per caller. Don Allan will now begin the presentation.

In 2023, Stanley Black & Decker's strategic business transformation resulted in improved profitability and a more streamlined business. Despite market challenges, the company achieved its cost savings target and generated over $850 million in free cash flow. The company also successfully managed its portfolio and is on track to close the sale of its Infrastructure business.

Stanley Black & Decker has added three new leaders to their team and has transformed into a refocused and reenergized company. Their leadership team, along with their associates, are executing their transformation strategy and achieving their goals. In the fourth quarter, revenue was down due to lower volume, but profitability exceeded expectations. They have also reduced inventory and are looking towards further improving profitability and cash flow in 2024.

In 2024, the company plans to focus on delivering innovative products, implementing cost efficiency measures, and gaining market share in professional and industrial markets. However, they expect weak demand in consumer and outdoor markets. Overall, the global markets are expected to be slightly negative, with positive GDP growth and moderate commercial construction. In North America, residential builds are expected to improve slightly, while repair and remodel and outdoor power equipment markets remain weak. The company will focus on pro users and healthy market segments to drive share gains.

The company remains agile and ready to serve incremental demand in the second half of the year. They believe their strong brands and innovation will allow them to outperform the market. The year's plan is focused on supply chain cost improvements, gross margin accretion, earnings growth, and strong free cash flow. The company is celebrating the 100 year anniversary of DEWALT and is committed to relentlessly innovating for their customers. The CEO thanks their employees for their contribution to the company's transformation journey. The Industrial segment saw a 4% decline in revenue, driven by lower volume due to customer destocking. However, engineered fastening saw growth in aerospace and auto markets. The segment's adjusted margin was 11.1%, down 40 basis points from the previous year. Overall, the company is pleased with the Industrial segment's performance for the year.

In the fourth quarter, the company's organic revenue growth was flat, but the engineered fastening segment saw a 6% increase due to strong performance in automotive and aerospace. The Industrial business team executed well and the Infrastructure team made valuable contributions. The Tools & Outdoor segment saw an 8% decline in revenue, but profitability improved through cost-saving measures. Hand tools saw a 6% decline, while power tools had a 1% increase. Outdoor products were significantly impacted by inventory adjustments and this trend is expected to continue into the next selling season.

The tools market had a stable year in 2023, with a growing demand for the DEWALT brand and a focus on improving cost structure and investing in handheld electrification. North America saw a decline in organic revenue, while Europe and emerging markets had growth, particularly in Brazil. The company is grateful for the efforts of the Tools & Outdoor team and is focused on long-term profitable growth and market share.

The DEWALT POWERSHIFT system is a new electrified equipment line designed for concrete professionals. It uses a 554 watt-hour battery and high-speed charger to provide efficient and powerful performance. The battery leverages pouch cell technology and is 85% more efficient than gas-powered equipment. The POWERSHIFT vibrator offers 60 minutes of continuous work and is lighter than other options on the market. DEWALT POWERSHIFT is a testament to the company's commitment to innovation and upholding their founding principles of innovation, safety, and productivity.

DEWALT is focused on streamlining their business and transforming their operations to achieve their $2 billion pre-tax run rate cost savings target by the end of 2025. They have already achieved over $1 billion in savings since the program's inception, with strategic sourcing being the largest contributor. Operations excellence and logistics network optimization programs are also on track, with production transfers and distribution center redesigns underway.

In 2023, the company focused on reducing complexity by discontinuing 85,000 SKUs and eliminating 45,000 SKUs, generating $0.5 billion in savings. This supports the funding of growth investments and aims for a 35% or greater adjusted gross margin. The company also prioritized free cash flow generation and gross margin expansion, reducing inventory by $1.1 billion and generating $853 million in free cash flow. The company plans to continue reducing inventory and increasing CapEx in 2024 to support transformation initiatives.

The company expects to generate between $600 million and $800 million in free cash flow for the full year, with a typical first quarter operating cash outflow due to building inventory for the 2024 spring selling season. Their main priorities for capital deployment are investing in transformation, returning value to shareholders, and strengthening their balance sheet. The adjusted gross margin for the fourth quarter was 29.8%, up 10.3 points from the previous year, due to lower costs and improved pricing. They will continue to manage costs and expect to see a 30% adjusted gross margin for the full year of 2024.

In 2024, the company plans to prioritize cash flow generation and gross margin improvement. They expect a modestly negative outlook for their markets, with flat organic revenue supported by targeted share gains. The Tools & Outdoor segment is expected to be flat, while the Industrial segment may see slight growth due to the aerospace market recovery and leveraging their core business model.

Industrial growth in 2024 will be affected by infrastructure destocking in the first quarter and expected softness in industrial fastening markets. The company plans to invest $100 million to drive long-term growth and maintain a consistent SG&A percentage. The adjusted EBITDA margin is expected to improve to 10% for the full year, with Tools & Outdoor segment margin increasing and Industrial segment margin remaining flat to slightly up. The divestiture of the Infrastructure business will have a dilutive effect, but the company plans to use the proceeds to reduce debt. The company has established a $1 adjusted EPS range, with market demand variability being the biggest contributor. The company will work to optimize gross margin through their transformation program and manage SG&A thoughtfully, while preserving investments for future growth.

In 2024, Stanley Black & Decker expects to see GAAP earnings with pre-tax non-GAAP adjustments, a step-up in the adjusted tax rate, and a focus on gross margin and cash flow. They believe these actions will position the company for long-term growth and shareholder return. This transformation began in 2022 and aims to drive sustainable growth, profitability, and cash flow improvement.

The company is reporting progress in the quarter and is confident in their plan to increase investments and support organic growth. They are focused on delivering product innovation, cost efficiency measures, and gaining market share. The company is creating a stronger and more focused company with the best people, iconic brands, and high-quality innovation. The Q&A session is about to begin. The first question is about the rate of improvement for gross margin and free cash flow progression throughout the year. The company is confident in their ability to increase gross margin and deliver strong cash flow in the second half of the year. They attribute their progress in gross margin to the consumption of high-cost inventory off the balance sheet.

The company is confident in their plan to achieve a 300 basis point progression in 2024, with a back-half weighted approach due to low volumes in the first half of the year. They expect to see modest expansion in the first half and significant progress in the second half as they accelerate savings efforts. Cash drivers for the year include a larger proportion of footprint moves and restructuring charges, with a target of $400-500 million in inventory reduction.

The speaker from Baird asks the company about their investments and costs. The company plans to invest in innovation, marketing, and field resources, with some focus on building capabilities. They will also manage costs according to the macro environment, but are committed to preserving their long-term investments. Inflation and deflation for the year are expected to be roughly flat.

The speaker discusses the expected performance of battery metals, steel resins, and freight in the first half of the year. They also mention that labor rates will not significantly impact the company's gross margin and SG&A assumptions. The price/cost is expected to remain neutral, with some carry-in price in Industrial and a normalization of promotional cadence in Tools & Outdoor. The overall price dynamics and inflation backdrop are expected to be roughly flat. The speaker also addresses the expected gross margin performance in the first half, mentioning that while there are savings on the balance sheet, they will not fully impact the P&L until a couple of quarters later. They expect some modest expansion in gross margin in the first half, with a mix of outdoor products and the normalization of promotional cadence in Tools & Outdoor.

The company saw lower volumes in 2023 but still managed to deliver $500 million in savings and exceeded their gross margin guidance. The first half of 2024 is expected to have a positive trajectory, but will be muted due to a heavier outdoor mix and under absorption from low volumes in the second half of 2023. The competitive landscape has not changed and there is no unusual pricing or discounting happening. The company is focused on positioning themselves for share gain in a muted market.

Chris Nelson discusses the performance of POS in Q4 and mentions strength in the pro segment and expected difficulties in the consumer and DIY segment. He also mentions the stable competitive dynamics and the return to normal promotional rhythms. He then addresses inventory levels, stating that they are at historical levels and positioned well for the future. Nigel Coe congratulates the company on their new product launch at World of Concrete.

The speaker is responding to a question about the company's pricing and potential changes in sourcing and footprint. They mention a stabilization in promotional activity and a neutral price cost. They also discuss the challenges of the current macro environment and the potential impact of geopolitical dynamics on the company's future plans.

The company's strategy for transforming its footprint involves getting closer to customers and utilizing centers of excellence in different geographies. This will allow them to be more flexible in their supply and adapt to changes in the geopolitical landscape. They believe this is the best approach to address such changes and will continue to evaluate as necessary. SKU rationalization has not had any impact on volumes in the fourth quarter or second half of 2023. The program is focused on removing complexity and creating value for end users and shareholders.

The growth investments for the company are expected to be around $100 million in 2024 and 2025, with the majority going towards innovation and marketing. This may result in slightly elevated SG&A levels in the short-term, but the company expects to return to a 20% level in the medium-term.

The speaker discusses the company's plans for driving gross margin improvement and mentions that promotional activity is expected to be similar to 2019 levels. They also note that customers are not requesting unusual levels of promotions and that in a stable market, promotional activity tends to be more normal. If demand decreases significantly, promotional activity may also decrease.

The speaker is discussing the potential for increased promotional activity in the second half of the year if the demand environment improves. They mention that their current guidance does not include this possibility, but if it does happen, there may be a slight increase in promotional activity. However, they believe that promotional activity will remain consistent with pre-pandemic levels based on their current guidance. The call is then concluded.

This summary was generated with AI and may contain some inaccuracies.