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In this scenario, we are assuming total organic growth to be down low single digits with the first quarter being the toughest comp.
organkic gtrowth 2023 down lsd
Transcript
2022 Q4
3 Feb 23
If that played out, and then you went into 2024 with that type of momentum, there could be a case where you actually do work yourself closer back to the $7.
So I think we're probably, at this point, somewhere around $5, with it eventually having the possibility, if the volume and demand is stronger than our base case, where it could be higher than that.
$5 in 2024
Transcript
2022 Q4
3 Feb 23
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?
Don Allan
Yeah. I would say there's a couple of dynamics. I mean, obviously, volume continues to be challenging. We think volume is going to be challenging for 2023. I talked about what I think is going to happen with the Pro market in 2023, and we'll see a modest recession aligned with what the historical recessions are for Stanley Black & Decker of down 3% to 5%.
Clearly, that's a significant factor in all of this. We're also -- we've decided to be much more aggressive in the inventory reduction than we were thinking three, five months ago, where we were going to be more methodical in that reduction. We're being more aggressive. We're really trying to get a large part of this done by the middle of 2023 to get production levels, as I said, back to normal in the back half of 2023. And those are probably the two main drivers of the difference in the timing.
what happemed to 5-7 in 2023, now $5 in 2024
Transcript
2022 Q4
3 Feb 23
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.
no irrationsal pridcing sactivity
Transcript
2022 Q4
3 Feb 23
o as Don mentioned, in 2022 in the second half, we've got about $200 million of savings. And as we look into 2023, from an SG&A standpoint, we expect to get about $300 million. About 70% of that will come in the front half and about 30% will come in the back half as you lap 2022. And then on the COGS side, we expect about $450 million, and that will build throughout the year.
So Q1 will be a little bit higher and then it will build in 2Q, 3Q, and 4Q will be pretty even.
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.
cost plan
Transcript
2022 Q4
3 Feb 23
an 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?
savings ramp 2023/2024/2025
Transcript
2022 Q4
3 Feb 23
how it impact production, but it doesn't seem as though you would change your goals in terms of that $750 million to $1 billion reduction of inventory. Why not think about reducing inventory by more? Is there something in the supply chain that's leading you to thinking about keeping a higher level than where you've had historically? What's the overall thought there in terms of why not more inventory reduction?
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.
inventory reduction
Transcript
2022 Q4
3 Feb 23
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.
not likely to buy back stock, so divi the focus
Transcript
2022 Q4
3 Feb 23
orecasting in our model is a slowing down of some of that activity. And when you look at the organic projection that we have for our Tools & Outdoor business, we expect it to slow down as we get deeper into the year and for that to continue in the back half of the year in a modest way.
And so I think that's a reasonable assumption when you give -- when you start to look at things like housing starts and the projections for housing starts, repair, remodel, what our customers are saying and their expectations are around likely performance year-over-year and what you hear from many of the peers in the space as well. I mean, everybody seems to be thinking that the market will probably be down somewhere 3% to 5%. And that's kind of where we are with our Tools & Outdoor business.
forecasting tools sales
Transcript
2022 Q4
3 Feb 23
Now your question on the angle of there's a lot of inventory in the channel, and therefore, we're going to have to take specific promotional actions that might be unusual to drive inventory out of the channel, which, therefore, would impact our price. We don't really see that in our plan today.
So we see normal promotional activity in the spring and the Father's Day season and then, of course, in the later stages around Thanksgiving and other holidays at the end of the year.
inventory in the channel
Transcript
2022 Q4
3 Feb 23
we really don't see any significant deflation and a little bit of inflation here in the first half of the year.
no deflation yet
Transcript
2022 Q4
3 Feb 23
So I think as you start to dissect the guidance we're providing at the midpoint, you'll see that the back half is getting itself close to a couple of dollars EPS for this year. And if you annualize that and factor in seasonality from the outdoor season that happens in the first half of the year primarily, you're probably trending something for 2024 that's closer to $5.
trending towards $5 in 2024 based on back half
Transcript
2022 Q4
3 Feb 23
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.
guidance assumptions
Transcript
2022 Q4
3 Feb 23
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.
plan relies on H2 improvement
Transcript
2022 Q4
3 Feb 23
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.
op mgn lsd in H1m then msd to hsd in H2
Transcript
2022 Q4
3 Feb 23
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.
500m in reductin in H1
Transcript
2022 Q4
3 Feb 23
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.
750m to 1bn inv reductuon is "demand dependent"
Transcript
2022 Q4
3 Feb 23
aerospace growth of 37% and auto growth of 14%, which were partially offset by industrial markets.
aero+auto good
Transcript
2022 Q4
3 Feb 23
Industrial
industrial segment
Transcript
2022 Q4
3 Feb 23
Power Tools
power tools segment
Transcript
2022 Q4
3 Feb 23