Yahoo Finance Stanley Black & Decker, Inc. (NYSE:SWK) Q1 2024 Earnings Call Transcript
Stanley Black & Decker, Inc. (NYSE:SWK) Q1 2024 Earnings Call Transcript May 2, 2024
Stanley Black & Decker, Inc. beats earnings expectations. Reported EPS is $0.56, expectations were $0.55. Stanley Black & Decker, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the First Quarter 2024 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 the Vice President of Investor Relations, Dennis Lange. Mr. Lange, you may begin.
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; 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 AM today. This morning, Don, Chris and Pat will review our 2024 first 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 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.
Don Allan: Thank you, Dennis, and good morning, everyone. Our first quarter performance was the result of consistent solid execution, and we are making progress against key operational objectives. We continue to see significant value creation opportunities tied to our strategic business transformation and the entire company is focused on the disciplined execution of this strategy. We are encouraged by the momentum that is building across the organization. Two of our primary areas of emphasis are free cash flow generation and gross margin expansion. We are focused on what is within our control and are pleased with the momentum behind our gross margin. This is particularly notable considering a significantly worse negative macro environment and corresponding revenue performance in 2023 and '24 versus our initial expectations at the outset of our transformation in mid-2022.
Our global cost reduction program remains on track for expected run rate savings of $1.5 billion by the end of 2024 and $2 billion by the end of 2025. As we hit the halfway point of our journey, our decisive actions are delivering quantifiable results. Specifically, we have captured 1.2 billion of run rate savings program to date. We remain confident this will support 30% gross margins in 2024, consistent with our guidance. We are encouraged that approximately 80% of the company's revenue is expected to carry 2024 adjusted gross margins in excess of 30% and exit this year at or ahead of initial expectations. We believe these product lines will continue to improve upon their current adjusted gross margin profile over the next 18 to 24 months.
As it relates to the rest of the portfolio or that 20%, which is predominantly our cyclically depressed outdoor business and the rapidly recovering aerospace fastener business. We are actioning significant cost efficiencies to make necessary improvements to the profitability of outdoor in response to the current market demand and refining the aerospace fastener product line cost base to drive significant growth leverage as widebody plane production continues to recover. Our long-term success will be driven by improved profitability, coupled with consistent market share gains. We believe our share position in tools is now stable to increasing. For example, our 2023 point-of-sale data in tools performed better than the category average across the North American home centers, which was led by our iconic DEWALT Professional brand.
We are also serving our customers better by delivering improved fill rates, earning the right for more activity across our brands. Retailers are recognizing this performance. For 2023, ACE Hardware named Craftsman as Vendor of the Year and Grainger recognized Stanley Black & Decker with their partners and Performance Award. Congratulations to our organization. This is a testament to the team's efforts and as we work to get closer to our partners, it's an early indication that we are on the right track. As we report our first quarter performance, we are energized by how our transformation efforts are taking root. I am confident that by executing our strategy, we are positioning the company to deliver high levels of organic revenue growth, profitability and cash flow to drive strong long-term shareholder return.
Turning to the first quarter results. Our top line showed signs of stabilization with organic revenues down 1 point. Excluding the now divested infrastructure business, organic revenue was flat as Engineered Fastening and DEWALT growth was offset by muted consumer and DIY demand. Adjusted gross margin was 29%, up 590 basis points versus the first quarter of last year and 30 basis points above the second half of 2023. Adjusted diluted earnings per share was $0.56. Adjusted gross margin expansion and EPS growth were both supported by lower inventory destocking costs, supply chain transformation benefits and reduced shipping costs. We are reiterating our 2024 full year adjusted diluted EPS guidance range of $3.50, up to $4.50 as well as our expected free cash flow of $600 million to $800 million.
Pat will provide more color on this later in our presentation. On April 1, we completed the sale of STANLEY Infrastructure to Epiroc. We have already deployed net proceeds from the transaction to reduce short-term debt, demonstrating our commitment to further strengthening our balance sheet. Looking forward in 2024, we expect mixed demand trends to persist across our businesses and we are driving supply chain cost improvements to expand margins, deliver earnings growth and generate strong cash flow. At the same time, we are funding investments designed to fuel targeted long-term growth and market share gains across our businesses. I want to thank our team members around the world for their contributions to the progress that we have made on our transformation journey and for their energy and focus as we continue to charge forward.
I will now pass it to Chris Nelson to review the business segment performance.
Chris 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. Pricing was relatively flat, consistent with our expectations. Adjusted segment margin was 8.5% in the first quarter, a 550 basis point improvement compared to the first quarter of 2023. This was achieved through lower inventory destocking costs, supply chain transformation savings and shipping cost reductions, which were partially offset with targeted investments designed to accelerate share gain and organic growth. Now turning to the product lines.
Power tools was up 1 point organically led by pro-driven growth in DEWALT and international sales. We are also seeing benefits from a return to historic promotional levels on high margin DEWALT cordless. Organic revenue for hand tools declined 7% pressured by lower DIY demand. Outdoor product line organic revenue grew 2% in the quarter, driven by strong demand for handheld cordless outdoor power equipment and incremental retail product listings. We are encouraged by U.S. retail point-of-sale data, which showed an early start to the season versus prior year. We are cautiously optimistic that demand can be better than the last two years. Our visibility will improve as we move through the second quarter and hit key U.S. holidays. The independent dealer channel continues to work through significant on-hand inventory, which pressured shipments in the quarter.
We are monitoring POS trends in this channel and currently expect that they can clear their inventory during the 2024 season to set up a stronger 2025. As Don alluded earlier, the outdoor market remains soft versus 2019 volume levels. We are not standing still and are moving with speed to improve profitability by continuing to optimize our cost structure. Consistent with our overall strategy, our intent is to focus resources towards capturing targeted share gain opportunities in the most profitable and attractive growth segments, such as electric handheld outdoor power equipment. Turning to Tools & Outdoor performance by region. North America was down 2% organically, driven by factors consistent with the overall segment. In Europe, organic revenue was down 3% as declines in France and Germany were partially offset by growth in the Nordics and the UK.
We are making targeted investments in the region to expand professional product offerings and activate these innovations in the market to capture share. In aggregate, all other regions were up 7% organically in the quarter, driven by mid-teens growth in Latin America, Brazil, Mexico, Central America and the Caribbean led this performance for the quarter. In summary, for Tools & Outdoor, we are acutely focused on successfully winning with our customers and winning with the Pro, while making profitability improvements. We are navigating mixed market conditions with the goal to capitalize on the areas of strength. We are making deliberate investments in our brands, market activation and innovation to capture the growth and margin opportunities that will contribute to the long-term shareholder returns.
I will now discuss our Industrial segment performance. First quarter industrial revenue declined 5% versus last year. Price realization of 1% across the segment and engineered passing volume growth was more than offset by infrastructure volume declines and a point of currency pressure. Within the Industrial segment, Engineered Fastening organic revenue growth of 5% includes aerospace growth of 30% and auto growth of 4%. We believe we are outpacing customer production levels as a result of targeted share gains, particularly in EV automotive. This growth was partially offset by market softness in general industrial fastening. Industrials adjusted segment margin was 12.1%, an improvement of 110 basis points versus prior year, driven by price realization and cost actions taken to improve productivity.
This was a strong performance considering the infrastructure volume decline that the team faced. The quarter was a result of focused execution by our Industrial business associates. On behalf of the entire leadership team, I'd like to thank our colleagues around the world for delivering another solid quarter of results and a strong start to the year. Now turning to the next slide. I would like to now highlight a few of our recent DEWALT product introductions, which are the results of our investments in innovation. The new DEWALT 20-volt MAX XR cordless framing nailer is engineered for enhanced productivity and performs applications that are traditionally served by pneumatic tools. It is designed to allow the end user to sync framing nails consistently sub flush into LVL material and when used in rapid sequential mode, ramp-up time is eliminated between shots.
DEWALT is also introducing the world's first 20-volt MAX cordless 2-1/4 Peak horsepower dedicated plunge router. It provides power like a corded midsized router with the convenience of a cordless tool a prime example of how we continue to help our Pro users transition to a cordless job site. Additionally, our TOUGHSYSTEM 2.0 DXL workstation is the industry's first portable storage solution with a 30-inch platform that helps PROs maximize their productivity. This all-in-one workstation delivers customizable mobile storage and a functional work top that is unlike anything else currently available for commercial construction job sites. These are just a few examples of how we continue driving our innovation engine in a manner that is centered on the professional with the intent of making our users more productive.
We believe these innovations, coupled with our investments in brand and market activation will stimulate share gains. As we celebrate the DEWALT 100-year anniversary, we also reflect on our responsibility and commitment to serving the trades people around the world with brands like DEWALT, Craftsman and STANLEY. Thank you, and I'll now pass the call over to Pat Hallinan.
Pat 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 pre-tax run rate cost savings in the period, bringing our aggregate savings to approximately 1.2 billion since program inception. As we focus our portfolio, streamline our business structure and transform our operations, our teams are actively identifying and prioritizing opportunities to further optimize our cost structure. Given the dynamic macro environment, we continue to refine and mobilize plans to deliver targeted savings. We are confident in our ability to execute those plans. We continue to target $1.5 billion of pre-tax run rate savings by the end of 2024 and $2 billion pre-tax run rate cost savings by the end of 2025.
Strategic sourcing remains the largest contributor to our transformation savings to date. We are leveraging savings on the $5 billion of addressable spend across areas such as materials and components, finished goods and indirect expenditures. Our operations excellence program, which leverages lean manufacturing principles is driving productivity improvements. The scope of this work stream improves efficiency and effectiveness within our production and distribution facilities. A pipeline of projects is robust with initiatives lined up to deliver efficiency gains in 2024 and beyond. Footprint-related projects and product platforming, which are more event-driven, will become increasingly important throughout the remainder of our transformation.
We are optimizing our distribution footprint as well as redesigning our manufacturing network to leverage centers of excellence and to optimize our operations. This multiyear endeavor is accelerating in 2024 as we plan to exit or transform a number of facilities across the globe during 2024 and 2025. And -- the manufacturing sites we previously announced for closure have ceased production and we expect to exit these sites in the near future. We continue to execute manufacturing footprint changes during the first quarter, which affected five sites with the goal to complete the site modifications this year. Regarding product platforming, this initiative will unlock value by reducing complexity across our value chain. This savings initiative identifies various parts and components that can be standardized across a product family, which eliminates complexity and improves procurement scale.
In aggregate, our supply chain transformation initiatives are expected to generate approximately $0.5 billion of savings in 2024, improving margins and generating resources for additional growth investments in our core business. We remain confident that our transformation can support the sustainable cost structure and efficiency needed to return our adjusted gross margin to 35% or greater while enabling targeted growth investments. Moving to the next slide. We continue prioritizing free cash flow generation and gross margin expansion to support long-term growth and value creation. First quarter free cash outflow was in line with typical historical trends due to seasonal account receivable increases. This quarter, our inventory control contained the working capital build to approximately 360 million, where we've traditionally averaged a roughly 700 million increase in the first quarter of the year.
Days of inventory is now approximately 150 days, an improvement of 10 days versus the prior year and moving toward our long-term target of approximately 120 to 130 days. We used the net proceeds from the infrastructure sale to reduce our commercial paper balance in the beginning of the second quarter. Because this occurred subsequent to the first quarter close, it is not reflected in the first quarter balance sheet. We remain focused on working capital optimization and profitability improvement to generate strong free cash flow in 2024. For the full year 2024, we plan to reduce inventory by $400 million to $500 million as we continue prioritizing working capital efficiency. CapEX is expected to range between $400 million to $500 million, which includes support for the footprint-related transformation initiatives.
These items, combined with organic cash generation, support our full year free cash flow range of $600 million to $800 million, which is unchanged from our guidance communicated earlier in the year. Our capital deployment priorities remain consistent, investing in organic growth and our transformation, funding our long-standing commitment to return value to shareholders through cash dividends and further strengthening our balance sheet. Turning to profitability. Adjusted gross margin of 29% in the first quarter improved 590 basis points versus prior year, driven by lower inventory destocking costs, supply chain transformation benefits and lower shipping costs. We expect to increase adjusted gross margin sequentially in each half of 2024, and we are planning for total company adjusted gross margin to approximate 30% for the full year.
We continue to expect to exit the year at an adjusted gross margin rate in the low 30s. We are off to a solid start in 2024 and the hard work we've done to make adjusted gross margin progress allows us to fund incremental investments to accelerate long-term organic revenue growth. Now turning to the 2024 guidance and the remaining key assumptions. In addition to the free cash flow guidance I just covered, we are reiterating GAAP earnings per share range of $1.60 to $2.85 and an adjusted earnings per share range of $3.50 to $4.50. We are maintaining the range of organic revenue assumptions to be plus or minus low single digits. We believe the most likely outcome for organic revenue is to be flat to down 1%. At this level, we expect to achieve the midpoint of our adjusted EPS range through cost controls.
Our view incorporates modest headwinds in aggregate for our markets, and we remain focused on gaining share in this environment. We are maintaining a disciplined approach to cost management and remain committed to funding investments for long-term organic growth. Turning to the segments. Tools & Outdoor organic revenue is expected to be plus or minus low single digits, most likely below flat consistent with the total company. The Industrial segment organic revenue is expected to be relatively flat to slightly positive. Infrastructure's first quarter decline will impact the segment's full year organic growth. And now that the deal is closed, we will report the divestiture revenue impact quarterly. Our planning assumption for growth investments is approximately an incremental $100 million in 2024.
These are designed to accelerate innovation, market activation and to support our powerful DEWALT, Craftsman and Stanley brands. This should result in 2024 SG&A as a percentage of sales in the mid-21% zone for the full year. We will remain agile with the pace of investments should the demand outlook swing in or out of our favor. Turning to profitability. We expect total company adjusted EBITDA margin to approximate 10% for the full year, supported by the benefits of the transformation program. Segment margin in Tools & Outdoor is planned to be up year-over-year, also driven by continued momentum from our ongoing strategic transformation. The Industrial segment margin is expected to be flat to slightly positive versus prior year as operating improvement in Engineered Fastening is offset by the dilution from the infrastructure business divestiture.
Our adjusted EPS range remains $1, with variability in market demand being the largest contributor, we will work to optimize adjusted gross margin and manage SG&A thoughtfully throughout the year to balance the macro uncertainty while working hard to preserve investments to position the business for longer-term growth. Turning to other elements of guidance. GAAP earnings include pre-tax non-GAAP adjustments ranging from $290 million to $340 million, largely relating to the supply chain transformation program with approximately 25% of these expenses being noncash footprint rationalization costs. Our adjusted tax rate is expected to be 10% for 2024, with the second and third quarters in the low 30s. Discrete tax planning items are expected to reduce the full year rate and primarily impact the fourth quarter.
Other 2024 guidance assumptions at the midpoint are noted on the slide to assist with modeling. We expect the second quarter adjusted earnings per share to be approximately 21% to 22% of the full year at the midpoint. Adjusted EBITDA for the second quarter as a percentage of the full year is expected to exceed 25%, with EPS contribution lower due to the quarterly tax profile. In summary, we continue to make progress on our transformation journey with an unwavering focus on gross margin expansion, cash generation, balance sheet strength and share gains in a soft market. We are confident that successful execution of our strategy can position the company for long-term growth and value creation. With that, I will now pass the call back to Don.
Don 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 2x 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 and Outdoor and Engineered Fastening. We are focused on consistent execution, while positioning the company to deliver higher levels of sustainable organic revenue growth, profitability and cash flow to drive strong long-term shareholder returns. With that, we are now ready for Q&A, Dennis.
Dennis Lange: Great. Thanks, Don. Shannon, we can now start the Q&A, please. Thank you.
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