The multi-industry analyst at Barclays. It's my pleasure to have opening up the afternoon slot here, Corbin Walburger, VP of Business Development and Interim CFO at Stanley Black & Decker. A lot of you, of course, know Dennis in Investor Relations at Stanley. Thank you both for being here. I know there's a lot going on at Stanley these days, and it's a very busy time for you. Maybe Corbin, if you wanted to just make some sort of preparatory, you know, remarks, and then we can get into the questions. Yeah. Let me go. Sure. Good afternoon, everyone. As Julian said, I'm Corbin Walburger, the interim CFO at Stanley Black & Decker. Joined Stanley back in 2008 after having spent a little more than 10 years at Goldman Sachs doing investment banking. Stanley was one of my clients. As you probably know, we've taken a lot of significant portfolio actions over the last 18 months at Stanley. We've divested the security business, divested the oil and gas business, and we've become a much more streamlined and focused company with some incredible franchises. The remaining portfolio now is essentially a tools and outdoor in an industrial business. The tool business is about fifteen and a half billion dollars. Half of that's power tools, a quarter of that's hand tools, storage, and accessories, another quarter are outdoor products. Those are handheld products, walk-behind products, and large format mowers. Our industrials business is about $2.5 billion, made up of two components: an engineered fastening piece that serves the automotive, aerospace, and industrial markets, highly engineered products that fit into specific applications and help our customers be more productive. The infrastructure business is about $550 million business. It's kinda got two pieces: attachments and a heavy-duty tool piece. We've got a collection of incredibly powerful brands that we think are the best in the industries. Professional brands like DEWALT. We've got CRAFTSMAN and Stanley. Consumer brands like Black & Decker. We've got specialty brands like IRWIN and LENOX and FACOM and Mac Tools. We've got some great outdoor brands like Cub Cadet, Troy-Bilt, and Hustler. We're a global leader in tool and outdoor products. We've got the broadest product lines across multiple end markets and the most extensive distribution network in the industry. We're a leader in innovation. Historically, we've had a really successful operating model that has needed a refresh. I'll talk a little bit more about that in a couple of minutes. Over the last two years, we've seen incredible demand, volatility, and supply chain constraints that exposed places where we really needed to transform the company. The company is guided by our purpose, which is for those who make the world. Last June, when Don Allan was named CEO, he laid out a framework for the transformation that he wanted to undertake. With the company being more streamlined, we wanted to be more efficient, we wanted to move closer to our customers, and we wanted to make some investments in places that we hadn't been investing enough in for growth. We made great progress in 2022, and we put a very solid foundation in place. The priorities for 2023 are largely a continuation of that message. Big focus on strong cash flow generation, inventory reduction, gross margin improvement on a path up to 35% plus gross margins, transforming our supply chain and gaining market share. On the Q4 call, we gave you all an update on the transformation. I'll mention more about that this afternoon. kinda a couple of just key things I wanted to mention too before we get to the Q&A. On the inventory side, that's been a big topic of discussion. In the H2 of 2022, we took out $775 million of inventory. It was an enormous amount of work, but we've actually got a goal to take out between $750 million to $1 billion of inventory out in 2023. It'll be the reduction will be a little demand dependent, but we're targeting about $500 million of inventory in the H1. That inventory liquidation will allow us to generate strong free cash flow. Free cash flow goals for 2023 are $500 million to $1 billion, and we'll use that cash to fund the dividend to de-leverage our balance sheet and to invest in growth. We've undertaken a pretty significant cost savings and supply chain transformation program. We saved about $200 million in costs on the SG&A side in 2022. On an annualized basis, that'll be about $500 million for 2023. On the supply chain side, we've got line of sight this year to about $500 million in savings, another $500 million in 2024, and another $500 million in 2025. The total program will be about $2 billion in savings, and about $500 million of that will be reinvested in the front end of the business around product innovation and commercial resources. The four key programs on the supply chain transformation are strategic sourcing. We've already saved about $40 million from the very initial start of that project. We've got 20 RFPs out right now covering about $2 billion in spend, and those are due in mid-March. We've got a big effort in product platforming and SKU rationalization and product simplification. We've already approved 50,000 SKUs to be decommissioned. We're now having discussions with customers about how to replace a product that they're buying today with a similar product that delivers the same value. We've got a big effort that'll probably be more focused in 2024 and 2025 around facility optimization and redesigning our distribution network to help us to be closer to our customers. Finally, a real emphasis on manufacturing excellence. Emphasizing lean, we've got 4 plants that are in the program right now for Q1. We'll start phase II in Q2. We'll continue to update you all on this big program. Probably one of the largest initiatives that we've undertaken in the last 15 years, and an enormous amount of focus and work going into it. The supply chain transformation and the cost savings programs will free up capital. The primary reason is to allow us to be closer and more responsive for our customers. It'll also allow us to free up some capital to invest in electrification, which is a big focus for us, additional innovation, and like I said, feet on the street, people in stores, and more commercial and digital marketing. The company's been around for 180 years, a tremendous legacy. Today, we're a more focused company. We're a more agile company with a goal to delight our customers and end users with great products and to deliver shareholder value. Those are my prepared remarks. Great. Thanks very much, Corbin, for that introduction. Maybe just the first question, as you said, it's been a, you know, volatile demand environment, to put it politely, the last sort of three years. Where do we stand right now? You know, how is that Q1 playing out on the top line, particularly as we think about tools and outdoor? Yeah, you bet. What's interesting is I would kind of put it into two buckets: consumer bucket and a pro bucket. The consumer, for the most part, has been pretty consistent since the middle of last year. You know, we saw during the pandemic, we saw a big decline drop, and we saw a lot of demand. Probably in the middle of the Q2 last year, we saw a pretty significant falloff in demand for the consumer. That stayed fairly consistent through the course of 2022 and even into 2023. The pro, you know, at points in time in 2022, we thought the pro would start to weaken, the pro was pretty resilient throughout all of 2022 and even through the beginning of 2023. Our guidance assumes that the pro will start to back off and weaken at some point in the Q2. We haven't seen that yet, but that is what our expectation is. As I said, so far so good on the pro. Got it. Okay. The sales base is kind of going sideways, kind of sequentially at the moment in tools. Okay. you know, if you think about that pro weakness that you mentioned. Sure. The guide weakness, you know, how did you think about sort of what are the parameters behind that guidance assumption? 'Cause it has been strong, that channel, for some years. You know, maybe help us understand how you sort of layered out the slope of that moderation. Yeah. Well, I would say the driver is, I think there was a big backlog. Mm-hmm. You know, I think a lot of us that were home during COVID decided we were gonna redo a bathroom or a kitchen. Yep. There was a huge spike in demand for the pro and for the consumer. It's taken longer for that load to bleed down that backlog, and that backlog still remains fairly strong. My sense is it's probably just a general decline as that backlog subsides and probably doesn't get refilled because people are feeling a little bit of pinch in their pocketbooks, or, as we all know, have shifted some of their spending from hard goods to services. Specifically, as it relates to, you know, the scenarios that we laid out on the call. Yep. If you think about a scenario where things kind of stay like what we've been seeing today. Yep. That's more kind of the upside case. The base case, assumes that the pro does retract. Mm-hmm. We've got, like, a 3% to 3.5% volume decline for tools and outdoor programmed in for the back half of this year. You know, that actually approximates, you know, kind of the garden variety of recession. Yep. for our business. If you look back historically, you know, the Great Recession. You know, the downside case would be a little deeper. Yeah. you know, versus those historicals. That's one way to frame up, you know, the scenarios and what and how we're thinking about planning for the year. That's helpful. When we're thinking about inventories in tools, you know, I think it's hard for people in this audience and myself to understand it because it, you know, it seems like you and a lot of your tools peers have a lot of inventory, but everyone says that the channel doesn't really have any. Sort of just help us understand kind of, you know, the confidence level in that channel inventory being okay and, you know, it's all on sort of your own books, if you like. Yeah. I think our view of the channel right now is that they are at pretty normalized levels of inventory for us and for our products. Yeah. For us, a lot of our inventory is in DCs, it's in raw materials, it's on the water. It's really just a function of, as you know, in the H2 of 2022, to try to reduce that inventory, we took out really big chunks of production, about 30% of the, of the days. Then there are also some commercial activities. You know, for us, you don't wanna stuff the channel. Yeah. You don't want to write off a bunch of inventory. The good news about the inventory is it doesn't become obsolete, it doesn't expire, it doesn't get old. A lot of our inventory has been built in the last 12 to 18 months, so it's good inventory. You wanna manage it in a way that's smart, but also aggressive to try to get that inventory down as quickly as possible without severely impacting your pricing or your growth outlook in future years. On that point on price, I think the assumption is it's sort of neutral in the back half. You know, are you seeing your peers, the other tools companies also kind of holding the line on that discipline? Yeah. It does feel like our peer set has been fairly disciplined on price. As you know, we had a lot of inflation early on. It usually takes three to six months for us to get price once we get that inflation. As inflation starts to subside, you wanna hold on to that price, you know, even longer so that you can recoup some of that lost margin. We've been very disciplined, our peers have been disciplined, and our anticipation is that'll carry forward in the future. You know, how do we think about the sort of future state of inventory? I guess it's about 30% of sales today. Pre-COVID was in the teens. You know, this year you've got that the up to $1 billion out. Sort of beyond this year, there should be more room then for working capital cash tailwinds after 2023. Is that fair? Absolutely. It's a good question, Julian. I said this in one of our meetings this morning. When I started, we had a big focus on working capital turns, getting to 10 working capital turns, and we actually got there. We probably freed up about $1 billion of cash. After the Black & Decker acquisition, we did that again. Historically, we've had a target of getting to 10 working capital turns. We're nowhere close to that now. If you look at our DSI, I think at the peak of inventories last year, we got up to about 180 days. Yep. Clearly too much. At the end of the year, we were at about 160. The target for this year is 130-140. I think a good long-term target, I don't know if we'll get all the way back to 10 turns or... Historically, that 10 turns probably equated to about 100 days of inventory. Mm-hmm. I don't know if we'll get back to 100 because our customers have changed their patterns a little bit, and rather than want product, you know, in 7 days, they want products in 24-48 hours. We'll also carry a little bit more inventory as we go through the supply chain transformation and shift manufacturing around closed distribution centers, consolidated distribution centers. You'll see that in 2024 and 2025. As we emerge from that, I would love to get us back to 110-ish type days so that we can free up capital. We probably won't get all the way back to 10 working capital turns, but getting to 8-9 feels about right. That, from today, will also free up a lot of capital. Got it. When we think about, you know, free cash is in particular focus 'cause of the leverage levels today, you know, there's sort of heightened scrutiny on the sort of quarterly cash flow and cash balance. How should we think about the pace of that, you know, $500 million-$1 billion of cash this year coming through? Sure. You will probably see us have negative free cash flow in the Q1, which is pretty typical. We'll have nice free cash flow in the Q2, and then in the Q3 and Q4. You typically seasonally see low free cash flow in the Q1, and then it builds throughout the year. That pattern will probably be consistent in 2023. I think one thing that will be different that we're targeting is if you think about taking the inventory levels down and making progress on that, even if there is some other seasonal factors in working capital that are typical for the business. We wanna try to make progress each quarter on inventory, even with, you know, the fact that we've got, you know, big selling seasons with outdoor and Father's Day. Mm-hmm. that we will be producing some inventory for during this time period as well. That piece of it will be a little different from the historical trend. The other. Yeah. working capital categories are probably gonna be consistent with historical trends, and that results in the cash, you know, profile that Corbin Walburger talked about. That's helpful. As we think about the sort of P&L margin, you know, price net of cost, how does that driver kind of move as you go through this year? Well, historically, we have not gotten all of our inflation covered by price. We've gotten close. Yeah. You make up the difference in productivity. Our anticipation is that'll happen again. I don't know what else you'd wanna hit on that one. Yeah. I guess as you think about pricing, the pricing that we've built into the plan is really related to the price increases that we put in place in tools and outdoor, across the board, in May of last year. You should expect that we're gonna have probably not the same pricing contribution that we had in the Q4 because. Yep. Some price increases are gonna roll off. Q1 will be positive, Q2 will have a little bit of positive, and then that's really, you know, the planned price for the year related to carry over. Cost inflation is a headwind all through the year. For us, it's, we're actually got net zero, so no inflation, no deflation, or they really offset each other. You'll probably see some inflation in the H1 of the year and a little bit deflation in the H2 of the year. We have some things like battery inputs, like lithium and nickel that are still going up, and then some commodities that you've started to see come down a little bit. Components and value-added products, we haven't seen a lot of deflation yet on the cost side. Got it. You're not dialing in any sort of big tailwind from gross cost in the back half. It's sort of flattish. Net zero. Yeah. There is a dynamic here too. When things show up, we do have to turn through the inventory, and that's another reason why the destock is important, 'cause you can't really start to see any of these types of benefits, the supply chain benefits, until you really get through the destock. Mm-hmm. Then turn that through inventory, and you start to see the benefits from the programs. Got it. Then you've talked about that sort of $5 of earnings number for next year. What sort of top line was that or is that number based off? Sure. Well, I think what Don was trying to do when he, when he talked about that was to annualize the H2 of 2023. Yep. Also think about the fact that as we look at demand right now, we kind of laid out our high, medium, and low. I think it's probably assumes that the middle case out into the future, you'll get benefits from the supply chain transformation that could probably push that up. But that's how we kinda thought about that number. The on-only thing just to make sure to add to is the annualization includes the fact that the back half doesn't really have a lot of contribution from outdoor. Mm-hmm. Where seasonally, you do get a much bigger contribution on an annual basis from the outdoor business when it makes much of the money in the front half of the year. Got it. Okay. It's assuming sort of steady top line with the H2 trued up for outdoor seasonality. It's not assuming a V shape on tool revenue. No. No. No. It's just as you said, plus, you know, you start to get a little benefit from the supply chain transformation, which could help that. Got it. I think on the sort of tools, you know, turnaround effort and getting market share back, you know, it's often described as sort of, you know, getting closer to the channel, closer to the customer, closer to some of the big box. Maybe help us understand, you know, in sort of practical terms, what does that involve exactly? You know, that sort of $300 million-$500 million, up to $500 million of reinvestment. Just sort of give us some examples or context. Yeah. You bet. It's a few things. One is reformatting the distribution network so that you can hit your key retail customers in 24-48 hours from the time that they order. Positioning DC centers that are close enough, that have enough of a range of inventory so that you can ship really quickly to those folks. From a manufacturing standpoint, we wanna get to about 70%-80% of our products that are sold in North America, produced in North America. I guess the last piece, which is probably more the investment side, is having more salespeople, better coverage, more people in the stores, more digital marketing, more commercial marketing resources available, you know, at the point of impact of the customer. Maybe innovation too. Clearly product innovation. I mean, the customers are demanding it. We're moving as fast as we can, particularly on the outdoor side, to electrify that product line, but really across the board. Got it. Is that sort of, you know, the outdoor business, I guess, has been bulked up a lot the last few years with MTD? Is the sort of the playbook on the turnaround in outdoor versus tool different? You know, maybe give us some sense of what state the outdoor business is in. You know, does it require sort of different things to be done to it than tools? It's a good question, Julian. The outdoor margins of the businesses that we acquired are probably still in the, you know, mid to high single digits. That whole portfolio is in much more transition than the tool. You know, maybe when tool was going from corded to cordless 25 years ago, it was there. Right now, in outdoor, you have this massive transformation. Handheld products are already there. Yep. Walk-behind mowers are moving very, very quickly. Large format right behind that. or I'm sorry, the ride-on right behind that. Large format's probably three or four years out, you know, that's gonna be hard. I would say the difference is that is a industry in transition from gas to electric, and getting the right products as quickly as you can that are comparable from a performance standpoint is really important. Yeah. I think as it relates to the transformation, you know, a lot of work was done around the footprint. Mm-hmm. before the business came into the portfolio. MTD was working on that independently. If you think about our strategy going forward, it's electrification, but it's also how do you start to deliver professional products to the pro and the independent dealer network in particular? Both of those assets came with very good footprints from an independent dealer perspective. We have great coverage We've got the product portfolio with DEWALT, we're working to, you know, exploit that as well. That's how you get the outdoor business from the margins that Corbin talked about up to the low double digits, then ultimately, you know, closer to that line average for tools over the longer term. Does that transition to electrical or the electrification of outdoor? You know, does that carry a sort of there's a margin dip reinvestment mix, and you come back up? Like, how do we think about the impact on sort of profitability of the business? I personally don't think there'll be a dip. Okay. I think it'll be a steady- Okay. improvement over time. The industrial business doesn't get too much air time, I suppose for obvious reasons. Like what's the state of play there? There has been some portfolio cleanup there. Yeah. Yeah. It is simpler, but is it the case that, look, in five years' time, maybe there isn't much left of it? You know, we have said that over time, we anticipate being a pure play tools and outdoor business. Yeah. They're incredible businesses. The engineered fasten business is a phenomenal business, impacted negatively right now by the automotive supply chain challenges that they've had over the last couple of years. That business will Mm-hmm. rebound over the next year or two. Aerospace in a similar way. The infrastructure business is a great business, gonna leverage the infrastructure build, but also all the building that's going on around the country. They're very good businesses. To your point, as we think about how we actively manage the portfolio, those are ones we talk about a lot. Got it. Then, you know, if we think about the sort of goals of that mid-30s+ gross margin, you know, OpEx to sales of sort of 20%-22%, let's say. You know, with a normalized revenue number, you get sort of earnings per share of well over $5. What's the sort of the realism or the ambition to get to those kind of, you know, $7-$10 of EPS? It's real. Yeah. It's a, it's a real ambition, and it's, and it's really what everyone is focused on. If you think about where we emerge at the end of the supply chain transformation in 2025, you know, getting back to $2 billion-$2.5+ billion of EBITDA is what the big focus is. You know, one of the things that maybe is implied in your, in your question is, do you try to drive towards, you know, high teens operating margin, or do you pull back a little bit and invest some of that in growth? I think at the margin, we've probably changed a little bit our view that we would rather take a little bit of- Yeah. money out of that margin and invest in organic growth to allow us to regain market share and grow it 2x-3 x the market than to try to squeeze every penny on the cost side. Yeah. Do you think that, you know, what do you think the sort of the industry entitlement is for a well-run tools business? Feel like sort of double, you know, low teens, mid-teens is the right level. Yeah. No. large players can get to. For us, it feels like that. Perfect. Good. All right. Thanks very much for those answers. Thank you. We'll now switch to the audience response survey. Everyone has these great devices. The first question, do you currently own the stock? There's some overweight, mostly not. The next question is around sort of general bias, positive, negative or neutral. Very even. Next, we'll move on to, you know, through cycle earnings. Good. The tricky thing here is, I suppose the peer set should be against the companies at this conference. Sort of in broad industrial or multi-industry is the peer set I think we're trying to use. In line with the peer set is where people's heads are at. You know, I suppose excess cash is not a major topic right now. It'll change over time. That will change over time. Exactly, exactly right. But for the near term, it's probably debt reduction. On that point actually, how should we think about the dividend? Like, is it safe? Is, you know Yeah. I mean, look, we paid a dividend, I think, for 140 years. It is incredibly important to us. I anticipate it'll stay that way for a long time. Perfect. That's very clear. Now this is sort of what PE multiples should span. Well, this year is, yeah, this year is a challenging sort of denominator, I suppose. We have to treat this one lightly. People have approached that as a through cycle. How many people are saying 10 x $1? This, yeah, people have approached it as a through cycle PE, I suppose. The next question, you know, this is why people don't own it or why they think it's worth a PE of 12 and not 17 or what have you. Execution, a lot of work to be done there, on tools, market share and so forth. The next question is around the last question, should I say, ESG. In general, it's been about one-third of answers for number one and two-thirds for number three. This is a new question, this year. similar to the average on that topic. Great. Well, thank you very much, Corbin and Dennis, for that discussion. Good to see you.