Stanley Black & Decker, Inc. (NYSE:SWK) Q1 2023 Earnings Call Transcript

Stanley Black & Decker, Inc. (NYSE:SWK) Q1 2023 Earnings Call Transcript May 4, 2023

Operator: Welcome to the First Quarter 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 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 2023 First Quarter Webcast. On the webcast in addition to myself, Don Allan, President and CEO; and Pat Hallinan, Executive Vice President and CFO. Our earnings release, which was issued earlier this morning and the 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 and Pat will review our 2023 first quarter year 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, involve risk and uncertainty. It’s therefore possible that the actual results may materially differ from any forward-looking statements that we may 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-F filing. I’ll now turn the call over to our President and CEO, Don Allan.

Don Allan: Thank you Dennis and good morning everyone. Before we begin, I am extremely pleased to have Patrick Hallinan on board and joining our call today as Stanley Black & Decker’s newly appointed Chief Financial Officer. Pat brings to the team a deep track record of delivering business performance, growth and value creation and complex competitive consumer branded businesses. Following my remarks, Pat will take you through the financial highlights as well as our current outlook. Welcome Pat. Earlier this week we also announced that Chris Nelson will be joining the company in mid-June as Chief Operating Officer and Executive Vice President and President of Tools and Outdoor. Chris is an experienced global leader with exceptional industry knowledge and existing relationships with many of our customers.

His track record of success implementing growth strategies which have delivered customer centric innovation and profitable market share expansion make him the ideal leader for our tools and outdoor business. I look forward to partnering with Pat, Chris and the entire leadership team to streamline and optimize the company around our core businesses and strong portfolio of global brands as we execute our strategy and generate sustainable growth. In terms of our Q1 performance we continue to build momentum and make strong progress as the organization remains focused on our business transformation plan. We took additional steps forward in the quarter to better serve our customers and deliver for key stakeholders by reducing inventory, leveraging enhanced cost controls and optimizing our global supply chain while continuing to increase our investments in innovation and end-user activation.

The global cost reduction program delivered $230 million in pre-tax run rate savings this quarter which is modestly ahead of plan. Since we launched the program we’ve captured a total of $430 million of annualized savings. This is a great start and we believe we are on track to achieve the expected $1 billion of total program run rate savings by year end. Inventory reduction is also ahead of plan with incremental $200 million improvement in the quarter. Even while we strategically build inventory in some categories to prepare for the upcoming outdoor and Father’s Day merchandising season, we have now reduced approximately $1 billion of inventory since mid-2022. I am encouraged by our progress thus far and I am confident that by executing our strategy we are positioning the company for a strong long-term growth, cash flow generation, profitability and shareholder return.

Our first quarter revenue of $3.9 billion was in line with Q4 2022. This was down versus prior year as price realization and solid industrial and professional construction demand was more than offset by lower consumer and DIY volume, currency and the oil and gas business divestiture. Let me now provide some perspective on end market demand. The U.S. retail point of sale for our tools and outdoor products remained in a growth position this quarter versus 2019 levels bolstered by price and healthy pro demand. The outdoor season had a slow start in March but April weekly point of sale trends have been encouraging. Adjusted gross margin for the quarter was 23.1% up 360 basis points sequentially versus Q4 2022. While there still is more work to be done, we are seeing adjusted gross margin improve as destocking impacts moderate.

Adjusted EPS for the period was a loss of $0.41 significantly impacted by our plan prioritization efforts around inventory reduction. We are committed to advancing our business transformation plan and continuing our journey forward with persistent focus on what is within our control. We are monitoring the demand environment and global economic dynamics and planning for a range of outcomes which balance the potential continuation of the current trends with the possibility of improvement as well as the prospect of a further demand slowdown. We have planned for all three of these scenarios and will respond accordingly if we see current trends shift. We are reiterating our 2023 full year adjusted diluted EPS guidance range of zero to $2 as well as our free cash flow guidance of $500 million to $1 billion.

Pat will provide more color on this later in our presentation. As we generate cost savings, we are continuing to make strategic investments in our iconic brands, innovation engine, electrification and commercialization activation to position the business for sustainable growth and margin expansion. This includes hiring additional engineers focused on product platforming, electrification and innovation as well as speed on the street to elevate user activation activities which will ensure we extend the leadership positions of these iconic brands. Our priorities in 2023 remain unchanged. One, strong focus on cash flow through inventory reduction to assist with on-going debt deleveraging. Two, sequential improvement in our adjusted gross margin as we drive further supply chain transformation initiatives.

Three, get back to gaining market share in all major categories of our Tools & Outdoor business. Successfully executing these priorities will result in a stronger balance sheet and significantly improved EBITDA in the second half of 2023 as we head into 2024. Now let me walk through the details of our business segment performance. Beginning with tools and outdoor. Revenue was $3.3 billion, a decline of 13% as price realization was more than offset by decline in volume and a negative impact from currency. Volume was impacted by lower consumer and DIY market demand modestly reduced channel inventory and a slow start to the retail outdoor season due to a cold March with temperatures well below the 5-year average. Tools & Outdoor adjusted operating margin was 3% down versus the prior year as price realization was more than offset by inflation, higher supply chain cost, production curtailment and lower volume.

North America and Europe were both down 12% organically as both reasons were impacted by the factors covered for the overall segment. Emerging markets were down 2% organically, but excluding the impacts from our Russian business access the region had 6% organic growth. This was led by strength in Brazil, China and the Middle East. Moving to our strategic business unit performance, power tools and hand tools were primarily impacted by softer consumer demand declining organically 12% and 6% respectively. The Outdoor business declined 16% organically, largely impacted by softer consumer demand and the cooler weather. The slow start to the season pressured our outdoor results versus planned by approximately 5 to 6 points. We are monitoring demand to determine if this could be potentially recaptured in 2023 with encouraging POS in recent weeks signalling the season is now ramping up.

A key growth area for outdoor is leveraging the 2500 Pro dealers that we acquired with our acquisition. This channel delivered a strong performance in the quarter and was up double-digits year-over-year. Pro products under our Cub Cadet and Hustler brands had a solid start and we are building traction with our DEWALT cordless handheld products across the dealer network. Now shifting to our industrial business, which had 3% organic growth in the quarter with double-digit operating margin. Total segment revenue declined 5% versus 2022 as price realization was more than offset by last year’s oil & gas divestiture, currency and volume. The team leveraged price realization and productivity to deliver adjusted operating margin of 11% up 410 basis points versus the prior year.

Within this segment Engineered Fastening organic revenues were up 3% led by aerospace growth of 30% and auto growth of 7% offset by softer industrial market. Attachment tools organic revenues were up 5%, driven by strategic pricing actions and continued conversion of this businesses significant backlog. In summary, this was a job well done across the board of our team we continue to reduce inventory and drove improved gross margin in a mixed revenue environment. My thanks to the entire team as we maintained our focus on the right areas and we are seeing the results of our efforts. On the next slide, I would like to review our long-term strategy that we launched last July as we transformed Stanley Black & Decker to drive consistent organic growth at accelerated levels well above market growth.

Our teams around the world are gaining traction and executing on our primary areas of focus. One, streamlining and simplifying the organisation as well as shifting resources to prioritise investment that we believe have a positive and more direct impact for our customers and end users. Two, accelerating the operations and supply chain transformation to return adjusted gross margins to historical 35% plus level while improving fill rate to better match inventory with custom advance. Three, prioritizing cash flow generation and inventory optimization and four, continuing to advance innovation, electrification and global market penetration to achieve organic growth of two to three times the market. Our business transformation remains on track to deliver on these financial commitments as we strive to elevate our customer and end user experiences to world class level.

The streamlining of our company and the supply chain initiatives are tracking to expectations and continuing to gain momentum. The four value creation streams within our supply chain transformation strategy are advancing with meaningful strides forward and a $110 million of savings achieved in the first quarter. Our global team is activating against our strategy with speed. The energy and passion is evident and I’d like to extend my sincere thanks to our operations associates across the globe. We have made so much progress in the last nine months and every completed milestone is contributing to our shared vision for the supply chain of the future. Now a few updates in this particular area. Within the few rationalization and product platforming value stream we have approved the reduction of 60,000 SKUs across the portfolio of which 16,000 are now decommissioned.

The remaining balance is no longer being manufactured and we are working with our customers to transition to new SKUs in the coming quarters. Strategic sourcing has been a strong contributor to savings as we complete the $2 billion first tranche of spend assessment. We are on track to achieve the targeted savings. Our supply base will include both existing and new vendors with a deliberate intent to improve geographic diversification and consolidation. Our dedicated team is capturing cost savings while deploying new processes to ensure sourcing changes are executed successfully. Our initial announcements related to the manufacturing footprint optimization were made in March, which includes site expansions, transformations into manufacturing centers of excellence, as well as site consolidation.

We are on track with our expectations and are taking a holistic approach to our manufacturing base and logistics network to ensure we optimize the efficiency and utilization of our asset base. Finally, we are increasing our focus on manufacturing excellence and re-emphasizing the SBD operating model along with lean manufacturing practices at our factories. We deployed this playbook at four plants in the first quarter and in March we kicked off at nine additional sites. We are seeing strong traction and are capturing improved productivity efficiencies where these tools were activated. We are excited with the progress and you can expect us to continue to make strides in the coming months and quarters. Turning to SG&A, we captured approximately $120 million of savings this quarter and are on pace for $500 million of pre-tax savings by the end of the year from simplifying the corporate structure, streamlining leadership spans of control and organizational layers, and reducing indirect spend.

We are confident in our ability to capture $1 billion of run rate savings by the end of 2023 and $2 billion of annualized savings by 2025 from this program. A key tenet of our strategy is the acceleration of investment in innovation and electrification. We are making deliberate strategic investments to maintain our market-leading innovation ecosystem. A couple highlights from this year’s outdoor season. In terms of delivering innovative cordless products, the CRAFTSMAN 20-volt line-up is designed for extended runtime and better performance. This includes the new brushless string trimmer that is lighter weight than its gas-powered equivalent and carries more runtime and force than prior generations. The new cordless pressure washer also joins this line-up in addition to the range of other new 20-volt cordless lawn and garden tools.

Continuing to expand our 20-volt system is enabling users to go wherever the work is without the limitation of cords or gas engines. These items are currently available for this season and we are excited about the initial market reception. Additionally, we just received notice that we won eight 2023 Popular Mechanics Yard and Garden Best New Product Awards across DEWALT, CRAFTSMAN, and Black & Decker. In addition to the CRAFTSMAN offerings just highlighted, the DEWALT pruning saw and String Trimmer were awarded as Best for Contractors and the Black & Decker pruning chainsaw was named best for light duty use. This is a great recognition of the quality of the innovation we bring to the market and our ability to serve our entire user base from the consumer to the most demanding pro.

Let me now turn the call over to Pat for some further financial highlights on the quarter and our latest outlets.

Patrick Hallinan: Thank you, Don, and good morning everyone. I’m honored to join Stanley Black & Decker, the worldwide leader in Tools & Outdoor, at such a pivotal moment in the company’s history. I have tremendous respect for the leadership team and Stanley Black & Decker’s iconic portfolio of professional and consumer brands. During my initial weeks, I have been impressed with the breadth and depth of the company-wide transformation underway. Observing the early traction of the multi-year program and the savings captured during the initial phases, it is clear that the company’s transformation is progressing rapidly and powerfully. I am energized to help accelerate the company’s journey forward and to enhance our long legacy of market leading innovation and profit performance.

Now let me walk through the details of the company’s progress towards reducing inventory and improving gross margins. We exited last year with $5.9 billion of inventory. We reduced his by over $200 million in the first quarter. Since mid-2022, we have successfully reduced inventory by approximately $1 billion. This achievement was driven by improved supply chain conditions and planned production curtailments instituted during the back half of 2022 and which continue today. The targeted inventory reduction helped minimize the magnitude of the seasonal working capital build typical of our first quarter. As a frame of reference, our first quarter working capital build has averaged $700 million over the last five years, while this quarter it was $200 million, improving our cash performance primarily via inventory reduction.

We are on track to achieve our expected $500 million of first half inventory reduction as we work down raw material and component inventory while selling out finished goods. Our full year 2023 inventory reduction target remains $750 million to $1 billion to drive significant cash flow generation and to pay down debt, strengthen our balance sheet, and back our long-standing commitment to return value to shareholders through cash dividends. Overall, the pace of our inventory reduction will be demand dependent and in a few moments I will cover the range of demand scenarios we are considering within our 2023 guidance. Turning to gross margins, which are also improving in a manner consistent with our plan. First quarter adjusted gross margins were approximately 23%, up 360 basis points sequentially versus the fourth quarter 2022, as we saw a smaller headwind from destocking actions and as our transformation initiatives provide a greater income statement benefit, something we expect to continue.

Production containments in the first quarter were at levels relatively similar to those of the back half of last year and the destock impacted gross margin by approximately 400 to 500 basis points. We expect a similar impact to the second quarter resulting in second quarter adjusted gross margin consistent with that of the first quarter. Our base case guidance anticipates the adverse margin impact from our targeted production curtailments and destocking will ease through the year. Supporting adjusted gross margin expansion into the mid-to-high 20s for the second half of the year. The timing of normalized production and improved gross margin could shift earlier or later depending on the demand environment and corresponding speed of inventory reduction.

We will actively monitor demand and adjust our supply chain to optimize the pace of margin improvement and inventory reduction throughout 2023. An important leading indicator for gross margin is the 110 million of supply chain transformation savings delivered in the first quarter. As these savings turn through inventory later this year, gross margin will expand further. It is encouraging to see the initial progress towards our multi-year target to return adjusted gross margins to the 35 plus percent range. We are prioritizing cash generation, gross margin improvement, and balance sheet strength. By executing against these priorities, we are positioning the company for long-term growth and value creation. Now turning to 2023 guidance. We are reiterating our four-year adjusted earnings per share guidance range of $0 to $2 per share.

On a GAAP basis, we expect the earnings range per share to be negative $1.65 to $0.60, inclusive of one-time charges primarily from the global supply chain transformation and outdoor integration. The current pre-tax charges estimate was narrowed to 275 to 325 million with approximately 25% of these expenses being non-cash. We continue to target free cash flow generation of $500 million to $1 billion, primarily driven by inventory reduction. Consistent with the framework shared in February, we planned and continue to forecast around three 2023 demand scenarios as the macroeconomic outlook remains dynamic. Our base case scenario assumes a modestly unfavorable market demand environment compared to what we experienced during the second half of last year.

In this scenario, we are assuming total organic growth to be down low to mid-single-digit, incorporating the softer start to the outdoor season. Tools & Outdoor, total organic revenue is expected to be down low to mid-single-digit, while we expect low single-digit growth for industrial. The base case also assumes that we maintain the production curtailment with the intention to return to normalized production levels during the third quarter. As a result, the under-absorption of fixed manufacturing costs would continue to constrain second quarter operating margins to low single-digit. As production returns to normalized levels in the back half of the year, we expect operating margin to improve to the mid-to-high single-digit range, resulting in full-year operating margins in the mid-single-digit.

Finally, the base case includes approximately 125 million of annualized reinvestment targeting Tools & Outdoor growth acceleration and complexity reduction. We plan to be measured with the magnitude and timing of such investments depending on the demand environment. The second half acceleration scenario contemplates a stronger demand environment, supporting organic growth in the second half of 2023. In this scenario, we would expect a quicker normalization of inventory levels and gross margin improvement. Total organic growth would be relatively flat for the year. This scenario would position the company to deliver high single-digit operating margins in the second half, as well as a larger level of reinvestment to accelerate our transformation.

The downside case reflects a deceleration of demand due to elevated recessionary pressures. If this scenario becomes the macro reality, we would expect full-year organic revenues to decline by mid-single-digit, with volume declines in both the Tools & Outdoor and industrial segments. In this scenario, production curtailments would likely remain in place through the end of 2023, extending the timeline of our gross margin recovery. With lower demand, we would adjust the level of reinvestment in CapEx until we have more clarity on the extent and duration of the macro impacts. We believe it is prudent to maintain these ranges of 2023 demand outcomes, production levels, and approaches to reinvestment as we prioritize our transformation and inventory reduction and cash generation.

Turning to important remaining elements of guidance, for the full year, we expect the below-the-line expenses in total to be relatively similar to the guidance issued in early February. We are building an expectation for higher interest expense, which is offset by a modestly lower 2023 tax expense assumption. For the second quarter, we are expecting a sequential improvement in operating profit, primarily from seasonally higher levels of revenue. Adjusted gross margin is planned to be in the low 20s, relatively similar to that of the first quarter. Adjusted EPS is planned to be at a loss of approximately $0.40 per share at the midpoint, incorporating an expectation for a higher tax expense versus the first quarter. Free cash flow is expected to be positive in the second quarter, primarily from inventory reduction.

Our plan calls for earnings to inflect positively in the second half of the year, generating an annualized EBITDA run rate of approximately $1.3 to $1.7 billion. This range is similar to our view in February, and we believe this is the appropriate base to build off as we deliver our transformation savings over the next couple of years. We are planning for the dynamic operating environment to continue, and feel we have the strategy in place to successfully navigate our path forward as we remain focused on driving above-market, long-term organic growth and margin expansion. With that, I will now turn the call back over to Don.

Don Allan: Thank you, Pat. We are continuing to forge our path forward. We made solid progress again in the first quarter with strong cost savings, inventory reduction, and advancements across all elements of the transformation plan. As we execute against our strategy in 2023, and over the three-year time horizon, we believe our transformation efforts will begin to drive more material financial benefits. Our focus will be to continue to reinvest $300 million to $500 million of these benefits toward faster growth as we strengthen the innovation machine and stimulate demand with enhanced end-user activation. We believe our actions to reshape, focus, and streamline our organization, as well as reinvest in our core businesses, will enable us to deliver strong shareholder value over the long-term via robust organic growth and enhanced profitability.

We have the best people, the best brands, and the most powerful innovation engine in our industry. Combine this with the passion, energy, and commitment I see across the organization every day, and it gives me great confidence that we will focus on what we can control to be successful, and we ultimately will recreate a significant market share gaining machine. With that, we are now ready for Q&A. Dennis?

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

Q&A Session

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

Nigel Coe: Thanks. Good morning, everyone.

Don Allan: Morning.

Nigel Coe: Morning, and Pat, look forward to meeting you soon, and Don, congratulations on hiring Chris Nelson. He’s someone we know really well, so good guy.

Don Allan: Thank you.

Nigel Coe: So my question is really just — maybe just more detail on the Tools & Storage sales in North America. You talked about footprint of sales being above 2019 levels, but just wondering how that looked year-over-year, maybe the fact the Pro and DIY. And then the pricing of 2%. To what extent was that a lot of promotional activity around maybe outdoor? And how do you see pricing trending through the year? Thanks.

Don Allan: Yes, I’ll give a little color on POS, and then ask Pat to give a little color on the pricing part of the question. So I, the POS trends are obviously, when you look at them year-over-year, for some of our customers, they’re down in the mid-single digits to high-single digits. Other customers are only down in the low-single digits to flat. So you got a mixed bag of different things happening there, but overall, we are seeing, POS down year-over-year in Q1, and that trend will likely continue in Q2 at a lesser magnitude, because as the comp gets easier from Q1 to Q2, that trend will continue. The trend around PRO continues to be very healthy. We’re not seeing any major shifts in that dynamic. The consumer side continues to be relatively flat sequentially to what we’ve been experiencing for the last, two or three quarters since the second quarter of last year.

No major shifts there, but certainly not any strengthening on the consumer side as people continue to shift their dollars to different areas across the United States. But overall, I would say POS is kind of trending the way we would expect. Outdoor is a little choppy in the last six to eight weeks, as we saw a pretty rough March due to the weather. Things got better first half to the later stages of April as the weather got better, and then obviously we’ve seen a little bit of bumpiness in the last week or so as the weather hasn’t been great in the Midwest and New England and Northeast in that time frame. And not to be a weather forecaster, but the weather is looking much better as we go into next week, so hopefully that trend shifts back to a positive.

But it’s a little bit of choppiness. I think, all of us, the retailers, our customers, ourselves, are all looking at probably the next month or so as to what the trends will be in POS, and that will really ultimately define the success of the season. But I do think we’ve factored our guidance in a way that allows us to navigate that effectively. And, Pat, maybe a little color on price now.

Patrick Hallinan: Pricing environment has been stable. The price increase dynamic for us that you referenced in the first quarter was largely a carry-in price increase. Broadly in the channels and across competitors, the pricing environment remains stable. It appears to us that most in the market are focused on margin enhancement and, therefore, preserving pricing. We don’t expect additional price in our outlook through the balance of the year, so stable pricing. We will be, given the supply chain improvements we’ve been making, we will be engaging in traditional seasonal promotions throughout the year, so that dynamic will be returning, but that’s less of a new pricing dynamic and more of a return to traditional seasonal promotions.

Operator: Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Your line is now open.

Julian Mitchell: Thanks very much. Maybe just my question would be around, when you think about that uplift of margins from sort of low single digits amid the high single digits in the second half, maybe try to parse out how much of that is sort of sales uplift versus less destock versus less underproduction, and how we think about the phasing of third quarter versus fourth quarter earnings, anything major to call out there?

Don Allan: Yes. Most of that margin uplift from the first half to the second half is driven by gross profit margin uplift as opposed to some particularly strong volume or SG&A component, and most of it is, as we get into the back half of the year, you’ll have more of the progress and the transformation going through the income statement and less of the inventory destock and production curtailment providing headwinds in that. And the order of magnitude is in the 300 to 500 basis points of gross margin improvement first half to back half.

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

Tim Wojs: Hey. Good morning, everybody, and welcome Pat. Maybe just on the channels, I guess, what do you – it sounds like you’ve got kind of varying levels of kind of POS activity between your customers. I mean, how does that kind of translate into channel inventory and kind of what they’re holding and kind of what their comfort of, you know, current channel inventory is looking like?

Don Allan: Yes. Thanks for asking that question, Tim, because I didn’t really get into that when I was talking about POS. But, yes, I would say the inventory levels in the channels and our major customers in North America and Europe are still high when you kind of look at traditional historical levels of inventory, but they are starting to come down. And so we’re starting to see improvement in that. And I think for us in particular, the good news has always been that we weren’t starting with a high level of inventory compared to maybe other folks within the industry and other competitors. So when you look at Home Depot as an example, we’re not far away from where you would traditionally see. We’re within a week or so of what we would typically want it to be and what they would want it to be.

Lowe’s is a little bit higher than that, but Lowe’s tends to run at a much higher level of inventory, as we all know, versus Home Depot. So we feel pretty good about it. I think you’ll see a continued little bit of working down of our inventory and our customers in Q2 and maybe a little bit of that in the Q3 as we work through the year, depending on where demand goes. So I don’t think we’re done with the de-stocking, but I think it’s something that’s very manageable for us versus maybe what some of our competitors are dealing with right now.

Operator: Thank you. Our next question comes from the line of Josh Pokrzywinski with Morgan Stanley. Your line is now open.

Josh Pokrzywinski: Hi, good morning, guys.

Don Allan: Morning.

Josh Pokrzywinski: So, Don, I just want to maybe follow up on the SKU reduction. So for what you guys have contemplated and maybe what you’ve done so far, what has been the drag on organic growth? I guess how much of that drops through to, you know, just kind of, you know, shelf space loss, etcetera, versus something you can backfill with similar products?

Don Allan: Yes, that’s a good question for me to clarify. Thank you for asking that. So we’re being very thoughtful on how we do this. And so those 60,000 SKUs is a lot of SKUs. When you hear about that, you start to wonder if that’s going to have an impact on revenue. But the ones that we’ve eliminated in the first phase really had, very little revenue tied to them and very little inventory in the system. So, it was really just eliminating something that hasn’t really been selling over the last several years. What you’re left with now are the ones that, which is about 45,000 SKUs, that we stopped manufacturing, there’s revenue tied to that, and there’s inventory in our system tied to it as well. And so, you need to go through a thoughtful process with all of our customers of conversion from those products to other products that exist in Stanley Black & Decker that are very similar in nature.

Now, whether that’s an upgraded version that has been upgraded through innovation and the customer is still selling the older version, it could be an example of that. It could be an example of a brand being sold under a certain product and that we want to switch that brand over in that particular customer to a similar product but a different brand. And that takes probably 12 to 18 months to navigate through. And so, it’s going to be a very slow methodical process with the overall objective being to not have an impact on revenue and to really minimize any potential write-outs that might exist in the world of inventory. And so far, the team has been very successful in doing that, but there’s still a lot of work ahead of us. And we have dedicated resources that are focused on this within our tools and outdoor business.

And they have a very good grasp of the commercial aspects of this as well as supply chain. And I think they’re doing an effective job so far navigating through it.

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

Michael Rehaut: Thanks. Good morning, everyone. And Pat, welcome and nice to see you again, so to speak. First, well, I guess my only question; I wanted to get a sense of maybe if I can kind of break it into two parts, actually. One is just a clarification on the first quarter results. What drove the upside on the operating margins? I believe you’re looking for something more flattish to 4Q. But then secondly, on the guidance, you talked about PRO remaining healthy. I was just curious in terms of how you’re thinking about PRO, particularly in the back half. And when you think about tools and storage with the guidance in the base case, if that is looking for a positive inflection or just being more flat, and how PRO figures in that?

Patrick Hallinan: Yes, Mike, thanks for the question. In terms of the first quarter favorability, we are executing well on the transformation. And so the transformation is running ahead of plan. And we’re feeling good, not just about 2023, but about the road beyond 2023 and delivering on that transformation. So I would say just, when you get to the phasing of it throughout the year, that’s more just it’s difficult to predict perfectly how inventory rolls off your balance sheet and what level of inventory rolls off your balance sheet. So I would say having guidance that’s highly consistent with the original guidance of low 20% gross profit margins in the first half and high 20% gross profit margins in the back half is the way you should think of the business.

You should have confidence in the transformation delivering that. And the way it flows quarter to quarter is always going to depend a little bit on mix and what type of inventory is coming off the balance sheet. So I wouldn’t subscribe anything other than that to the first half gross profit margin. Solid transformation performance and just an update on where the inventory is falling off the balance sheet. In terms of the outlook of the end market dynamics in Tools & Outdoor for the balance of the year, we would expect what we’ve seen in the first quarter to persist throughout the balance of the year, which is continued strength in the pro-environment and a softer consumer environment and that dynamic to be relatively consistent across the quarters.

But as Don mentioned earlier, Q&A, the comp gets easier as we get from the second quarter to the third quarter. So it’s less about a change in end market buyer behavior in the last three quarters of the year, and it’s more the comp easing in the latter part of the year.

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

Chris Snyder: Thank you. So the Q1 inventory reduction certainly seems to be tracking ahead of expectations. But you guys left the 1 HD stock guide unchanged at 500 million. Does this signal that maybe some of the destock was pulled forward into Q1? Or should we think about potential upside on the rate of the first half destock? Because it does sound like outdoor is improving in April relative to March. Thank you.

Patrick Hallinan: Yes, I’d start by reiterating that, we’re committed to destocking 750 million to a billion for the year. And that’s the commitment. And the team is working through that, given a dynamic macro environment. The reason to not change the flow throughout the first half and the second half is really, channels remain conservative as you would expect with a dynamic macro environment and relatively high short-term borrowing costs. And so, we’ll continue to navigate the same environment that they’re facing and achieve the year. But right now, it’s just too soon to change our outlook on the first half and the second year, second half inventory changes.

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

Eric Bosshard: Thanks. Good morning. Patrick, I hear the guidance on the 750 to a billion. I’m curious as you think about solving that in an environment where retail inventories are a little bit heavy. The demand is where it is. I’m curious as you think about promotions and really working through your inventory into an environment where things are slow and the inventories are a bit heavy. Is there a desire to be patient in the pace at which you work through that inventory? Or is there an opportunity to be more aggressive through promotions to clear out that inventory through 2023 to be better positioned for 2024? How do you navigate or solve through that dynamic?

Patrick Hallinan: Now, thanks for the question, Eric. Our inclination is to be more thoughtful around sales and operations planning. It is not our intent, except for around the SKU rationalization areas, it’s not our intent to drive an inventory change through aggressive pricing. That is not our intent. We’re going to be disciplined on pricing and we’re going to be focused on improving margins throughout 2023 and beyond 2023. So we’ll be addressing that, Eric, really by internal planning around production relative to sales and we’ll update, the guidance as appropriate as the macro unfolds and as channel behavior unfolds.

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

Dennis Lange: Thanks, Shannon. 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. Thank you.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.