Stanley Black & Decker Inc

NYSE:SWK

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the First Quarter 2022 Stanley Black & Decker, Inc. Earnings Conference Call. My name is Shannon and I will be your operator for today's call. At this time, all participants are in 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, Vice President of Investor Relations]

Thank you, Shannon. Good morning, everyone and thanks for joining us for Stanley Black & Decker's 2022 first quarter conference call. On the call, in addition to myself, is Jim Loree, CEO; and Don Allan, President and CFO. Our earnings release which was issued earlier this morning and a supplemental presentation which we will refer to during the call, are available on the IR section of our website. A replay of this morning's call will also be available beginning at 11 a.m. today. The replay number and the access code are in our press release. This morning, Jim and Don will review our 2022 first quarter results and various other matters followed by a Q&A session. Consistent with prior calls, we're 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. As 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 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 Act filing.

I'll now turn the call over to our CEO, Jim Loree.

[Jim Loree, Chief Executive Officer & Director]

Thanks, Dennis and good morning, everyone. As you saw from this morning's results, we achieved 20% revenue growth and over 200 basis points of sequential gross margin improvement in the first quarter. We benefited from a sustained strong demand environment, significant and growing price realization and our new strategic outdoor acquisitions.

The first quarter results illustrate the operational focus and agility of our teams in managing through a choppy external environment characterized by supportive demand. We are executing pricing to offset inflation and restore margins and beginning a very successful integration process with the new outdoor acquisitions. We will benefit from recent portfolio moves which render a more focused company, anchored by our core tools, outdoor and industrial franchises. In this regard, we announced last Friday the sale of our Access Technologies business for $900 million in an all-cash transaction at a compelling valuation. It represents the final step in our security divestiture initiative and was preceded by the announced sale of our Electronic Security business to Securitas in the fourth quarter for $3.2 billion. These transactions, along with the outdoor acquisitions, will further strengthen our position as the number one tools and outdoor company in the world. With these acquisitions and the security divestitures, we have created a business portfolio that is extremely well positioned for sustained long-term growth and margin expansion as well as one that benefits from several positive secular trends and competitive advantages.

During the quarter, we also initiated $2.3 billion in share repurchases through an accelerated share repurchase as well as open market buyback activity. These actions represent significant progress towards achieving our goal of returning $4 billion in capital to our shareholders through repurchases which we expect to complete in '23. Taking into account the approximately $0.5 billion in dividends we expect to pay in 2022, we will have returned $2.8 billion to shareholders by the end of the year, a record for Stanley Black & Decker. These important capital allocation actions along with, one, our now demonstrated and continuing ability to achieve substantial price inflation recovery; and two, progress in reducing supply chain constraints will result in higher growth and margin accretion and thus, significant value creation in both the short and long term.

To summarize our first quarter, revenues were $4.4 billion, up 20% driven by our outdoor equipment acquisitions. Organic revenue was down 1% and customer demand remained strong across many of our global markets and price realization accelerated sequentially from the fourth quarter. The volume could have been higher but for the supply-constrained environment that we continue to make progress on resolving, with added supply of semiconductors and electronic components during this quarter, we expect to be able to alleviate all major electronics-related constraints by the end of the quarter.

Our total company operating margin was 11.5%, up 250 basis points sequentially, reflecting the implementation of new pricing actions but down versus prior year due to cost inflation and supply chain challenges. This resulted in first quarter adjusted EPS of $2.10 which was ahead of our plan.

As we look forward, I'd like to share a few comments on what we're seeing in the demand environment. In Tools & Outdoor, end-user demand across most markets and channels has remained stable, led by pro construction. Absolute dollar sell-through in North America retail continues at high levels, especially when measured sequentially and/or compared with the 2019 baseline. Additionally, we believe that we are gaining market share in North America and other geographies. For instance, based on publicly available disclosures by our top 2 home center customers, our 2021 point-of-sale growth was above category line average for each of them.

In our end markets today, while the boom global conditions of 2020 and 2021 have leveled off, the fundamentals and secular drivers remain healthy and are still very much intact. As we look out over the balance of the year, the combination of repair/remodel, new residential construction and commercial construction have plenty of runway to continue to drive enduring demand in many of our markets around the world. Despite this factor of slowing global growth and increasing U.S. interest rates, repair/remodel activity is expected to grow at mid- to high single-digit rates over the next 2 years due to multiple factors, including an aging housing stock, record levels of home equity and strong price appreciation driving big ticket remodeling and tight existing housing supply leading consumers to invest in existing homes as well as spurring demand for new homes.

In terms of new residential construction, the years of undersupply of new homes post the 2008 economic crisis has created a significant housing stock supply issue as just as millennials reach the age when they're most likely to purchase a home. We expect that this will continue to support new residential construction activity, even with the interest rate increases currently being contemplated by the Fed.

Commercial construction is still in the early stages of a post-COVID recovery and the secular drivers for safe, healthy, professional working spaces and more efficient buildings will contribute to positive activity levels in 2022 and the coming years. And lastly, we have strong backlogs in our industrial businesses and we remain optimistic that cyclical recoveries in the auto and the aerospace sectors are beginning to emerge. This is very meaningful to both revenue growth and profitability for the segment. To size it, we think it is a $300 million to $400 million multiyear growth opportunity with accompanying margins returning to the mid- to high teens over time. And while we see continued momentum within our core markets, we will monitor and respond accordingly if and when we observe any adverse impact from a higher interest rate environment and/or significant elasticity of demand effects following our pricing actions.

On top of the market, we continue to reinvest in growth, including leading-edge product innovation, e-commerce and electrification that will position us for sustained share gains. In fact, since the start of the pandemic, we have invested in over 1,500 human resource additions in R&D, commercial and e-commerce functions in Tools & Outdoor. And that is before the impact of any acquisitions. On that note, I'll now address our recent capital allocation and portfolio actions.

A key aspect of the Stanley Black & Decker value-creation model is our active approach to portfolio management and commitment to an investor-friendly capital allocation strategy. Over the long term, we look to invest 50% of our excess capital into strategic M&A and return the other 50% to shareholders through a consistent growing dividend and opportunistic share repurchases. The 2 security divestitures were at a trailing EBITDA multiples of mid- to high teens and have a headline price of $4.1 billion in the aggregate, resulting in approximately $3.5 billion of after-tax proceeds. These impressive results validate the investments we made in transforming our security business over the last several years and have enabled significant return of capital to shareholders as well as reinvestment in our highly focused core businesses.

Deploying capital into outdoor enabled us to acquire approximately $3 billion of revenue at 8.5x EBITDA and a material opportunity for margin enhancement over time as we fully integrate these businesses and leverage our combined scale, brands, manufacturing expertise, R&D and access to both the retail and the pro channels.

Now there has been some noise and misinformation out there about our recent outdoor acquisitions and I'm now going to present you with the facts. We have a sound strategy for outdoor anchored on 4 pillars: electrification, brand and channel strength, cutting-edge innovation and large-format manufacturing capacity and experience. Overnight, we have assembled a formidable leading player in the $25 billion outdoor power equipment market that is capable of growing 10% to 15% organically at mid-teens operating margin for many years to come. This business will lead the charge in the electrification of both large-format and handheld professional outdoor power equipment. We will also bring our outstanding differentiated line of autonomous electrified products under the DEWALT brand to the professional landscaping channel, where the acquisitions comes in network of independent dealers with 2,500 unique outlets, skewing towards the pro market and representing half of the $25 billion addressable market. Such channel access represents a compelling competitive advantage and it is critical to above-average growth and profitability.

I'm also excited about the breakthrough innovations resulting from the integration of the outdoor acquisitions. And even though the new team just completed its first quarter together, they've been working together for several years and will bring to market a strong set of new innovations at attractive margins just ahead of the 2023 outdoor season. We're off to a great start and I have strong conviction in our ability to deliver outstanding cordless and autonomous new products to the market that will result in growth and margin expansion. And the 13.7% operating margin delivered in our first quarter together is just a taste of the profitability potential ahead in the coming years.

And lastly, we have added 8 manufacturing locations through our outdoor acquisitions. In addition to the instant capacity to support growing demand, the resulting extensive manufacturing footprint gives us an enormous competitive advantage over our small-format, electric-only competitors. In short, despite what you may have heard, our outdoor acquisitions have enabled us to become the outdoor power equipment leader, best positioned to electrify the industry given our multiple competitive advantages.

Our outdoor business is now a powerful growth engine with approximately $4-plus billion in annual revenue with anticipated organic growth of 10% to 15% a year. This is an exciting period for our company with a portfolio focused on core businesses in tools, outdoor and industrial and attractive markets in construction, DIY, automotive and industrial.

And I'd now like to turn the call over to Don Allan, who will provide an update on how we're positioning our supply chain for growth as well as more detailed commentary on first quarter actuals and our full year outlook.

Don?

[Don Allan, President & Chief Financial Officer]

Thank you, Jim and good morning, everyone. As Jim mentioned in his comments, our focus remains on ensuring we serve the continued healthy demand and investing in our supply chain to further strengthen our position for sustained growth.

As I've highlighted on prior calls, we took multiple actions in 2021 to navigate through the global supply chain challenges and further strengthen our manufacturing capacity, sourcing, operational efficiency and agility. These actions are allowing us to better serve our customers and deliver growth in revenue and cash flow in 2022 and beyond. Key areas of investment included adding capacity consistent with our make where we sell strategy, co-investing with strategic sourcing partners with a focus on batteries and electronic components and deploying our manufacturing 4.0 automation solutions to enhance productivity, labor efficiency and competitive costs. Our investments in this area as well as our electronic component availability continue to progress as expected and remain on track.

Demand continues to outpace availability for our hottest products amid this constrained supply chain environment. First, as it relates to inventory, our actions will position us to meet the current demand levels while improving working capital to deliver strong cash flow generation. Greater working capital efficiency and cash flow generation remains a significant opportunity in 2022 and beyond. As a reminder, last year, we made significant investments in inventory to help meet the outsized demand in the tools business. Our 2022 cash flow guidance assumes that we can modestly reduce inventory versus 2021 levels and we expect much of that improvement to occur in the second half of the year once we get through this spring to early summer selling season.

Our inventory at the end of Q1 was up approximately $850 million versus the year-end '21 balance. The increase in our first quarter inventory was primarily due to working capital seasonality to support the peak outdoor buying season, spring merchandising and the Father's Day selling season. This investment in working capital, coupled with the earlier timing of certain tax payments, contributed to a free cash outflow of $1.4 billion in the first quarter. This Q1 performance will reverse as we execute on the remaining 2022 working capital initiatives.

Within the supply chain, tight component supply and elongated transportation times continue to be a challenge. However, we have seen some signs of stabilization. For example, our goods in transit for the quarter remained stable and similar to year-end levels. The Port of L.A. has seen improvements with reduced congestion and moving goods from the ports to our DCs is not a significant source of delays.

As it relates to China, we continue to frequently monitor our end-to-end supply chain. And while there has been some minor COVID-driven disruption to date, it remains manageable at this stage. This is a dynamic situation that we will continue to watch closely in the coming weeks. As it relates to semiconductors, we continue to see improved supply in line with expectations. Our Tier 1 contract manufacturers received more semiconductors in the first quarter which will enable us to increase the throughput for our professional power tools in Q2. We are on track for an improvement to our electronic component supply of approximately 20% in 2Q and further improvement in 3Q which will support better fill rates, customer inventory positions and higher revenues as we progress through the remainder of the year.

So in summary, we are actively managing a very dynamic supply chain and responding with agility to position ourselves to meet the continued strong demand we are experiencing, especially within the professional power tool portion of our business.

Turning to our segment results. The headline for the first quarter is that demand for our products remains healthy and we are executing the necessary pricing actions to mitigate higher input costs. In Tools & Outdoor, we grew revenue 24% as the strategic outdoor power equipment acquisitions contributed 27% and price drove 5 points of growth. Price realization accelerated sequentially because of the new global price increases implemented in response to commodity and transportation inflation experienced in late 2021. These factors were partially offset by a 6% decline in volume and 2% from currency. Volume was impacted by electronic component availability and we have not seen evidence of broad demand destruction related to price elasticity.

We estimate that supply constraints resulted in approximately $200 million in unfulfilled professional power tool opportunities in the first quarter which, if realized, would have resulted in volume growth and a record prior year performance comp. We will better position to capitalize on this volume opportunity as we improve supply in the coming 2 quarters.

Regional organic growth was relatively in line with our expectations, with Europe up 2%, emerging markets contributing 5% and North America down 3%. The Tools & Outdoor operating margin rate for the segment was 14%, representing a 260 basis point improvement versus the fourth quarter of 2021. We continue to execute on price to protect our margins and we saw the sequential benefit in Q1. Comparing the Tools & Outdoor margin rate versus prior year, we experienced the decline as price realization was more than offset by inflation, higher transportation costs, growth investments and lower volume. The outdoor acquisitions were near line average margin rates for the quarter, representing a very strong start to the year.

U.S. retail point-of-sale remains at healthy levels, supported by strong professional construction markets and our innovation. While the POS comps were down versus a stimulus-aided Q1 2021, the normalized 2019 comparative growth rates accelerated from the levels we experienced in the back half of 2021. This strengthens our conviction that we continue to experience a very solid demand environment.

Now turning to the Tools & Outdoor SBUs. Power tools was down 1% organically in the quarter. We continue to realize benefits from our price increases, along with continued demand for our innovative offerings for the pro and tradesperson. We have launched a series of products under our industry-leading CRAFTSMAN, STANLEY FATMAX, Black & Decker and DEWALT brands. Our recent breakthrough, DEWALT POWERSTACK, continues to be very well received by end users and is expected to be a multi-hundred million dollar contributor to growth in 2022. Hand tools, accessories and storage declined 1% in the quarter against a very difficult comparable. Revenue was supported by pricing and new product innovation. Some of our new innovations include extending our world's first DEWALT 20-volt laser platform with the new 20-volt MAX laser, expanding our DEWALT ToughSystem storage to include soft storage solutions designed to optimize efficiency in organization and we added a new IRWIN STRAIT-LINE tape to our industry-leading tape measure lineup.

Moving to outdoor products. This business grew 4% organically, while the addition of MTD and Excel added over $800 million of revenue. Growth was driven by price realization, expanded distribution and new product innovations under the Black & Decker CRAFTSMAN and DEWALT brands. Our acquisitions are also benefiting from product innovation, including recent launches such as the redesigned FasTrak zero-turn mower line for commercial use and the first semi-autonomous zero-turn mower with the Cub Cadet SurePath. Despite the strong start for these acquisitions, this growth was modestly impacted from a later breaking outdoor season due to colder weather in many parts of North America. We expect these revenues to be recovered in the second and third quarter.

Our first full quarter as one outdoor team was very successful and we remain on track to integrate 3 assets into a new $4 billion revenue platform, as you heard from Jim. As the integration progresses, we continue to build conviction around the innovation, growth and synergy opportunities. We are even more excited about the electrification growth opportunity as we work to integrate these organizations and processes. The team is energized, focused and off to a great start.

I want to thank the Tools & Outdoor organization for their efforts in the first quarter. We made progress against our key operational goals for 2022 with strong price realization, improved power tool supply and actioning a strong plan for working capital reduction as we move throughout the year. This dynamic environment requires agility and I know we have the right people with the perseverance and dedication to be successful.

Now, shifting to Industrial. Segment revenue declined 2% versus last year as the 5 points of price realization were more than offset by a 5% volume decline and a 2% negative impact from currency. Operating margin was 6.9% as the benefit from price realization was more than offset by commodity inflation and market-driven volume declines, in particular, in our higher-margin automotive business where our customers remain constrained by their own supply chain challenges.

Looking within the segment, engineered fastening organic revenues were down 3% as 5% general industrial fastener growth was more than offset by lower automotive OEM production as well as a modest decline in aerospace. Our auto fastener business continues to successfully operate in a dynamic environment with customer production fluctuations. Despite this, auto fasteners once again demonstrated outperformance versus light vehicle production. And the business is also benefiting from accelerating growth and content gains across the electric vehicle production space. Our industrial fastener business enjoys a healthy backlog and delivered growth at nearly 2x global IPI in the first quarter.

The aerospace fastener business delivered its third consecutive quarter of sequential revenue improvement. This business is focused on capturing the recovery in the OEM production which is beginning to emerge. We expect in 2022 aero fasteners will begin to demonstrate organic growth as it starts the cyclical recovery back towards historical levels of revenue. Infrastructure organic revenues were up 4% as 13% growth in attachment tools were partially offset by lower pipeline project activity in oil and gas. Momentum remains strong in attachment tools driven by record backlogs, dealer inventories continuing to trend below targeted levels and elevated market confidence due to the U.S. infrastructure bill. Our Industrial team is continuing to make steady progress with its revenue and profitability improvements. And we are primed to leverage the cyclical recovery that is on the horizon and capitalize on the auto electrification trend as well.

Turning to the next slide. The operating environment continues to be dynamic and the recent invasion in the Ukraine by Russia has driven a new wave of inflation versus the backdrop earlier this year. From an input cost perspective, our updated expectations for 2022 commodity inflation and cost to serve is now $1.4 billion versus our January expectation of $800 million. The key drivers of the incremental $600 million reflects significant increases in battery inputs such as lithium, nickel and cobalt, oil-related inputs such as transport and resins and continued upward movements in other base metals and steel. Looking at the commodity indices since we issued our initial 2022 guidance, lithium, nickel and cobalt are all up approximately 90%, 50% and 7%, respectively, whereas oil is also up nearly 15%.

If we break down the $600 million increase, it is in primarily 4 major categories: $200 million in batteries, $200 million in transportation costs, $100 million in resins due to oil prices and $50 million in gas engine costs.

If you look at our commodity basket discretely, the increase to our total direct material spend is up over 30% since the end of 2020. Nearly half of this total impact occurred in February and March of this year. While these commodities continue to be volatile today, we do have solid visibility to the expected sustained impact. And we are building this into the plan and taking additional pricing actions to offset the impact to our margins. We have executed 3 rounds of price which are now in place across our global businesses. And we are in the process of implementing additional price actions in response to the new wave of inflation that has occurred in the last 60 days. These new price actions will be on top of the 6 to 7 points of price we included in our prior guidance and we now expect price to contribute high single digits for 2022.

Our teams remain focused on pricing actions to offset the cumulative inflation impacts experienced in the last 9 to 10 months. We believe this will allow us to expand our core margins and that will begin to emerge in late 2022.

As a reminder, before diving into the details on Slide 9, our guidance does not include our security businesses which are now recorded as discontinued operations. So moving on to our 2022 guidance. We are planning for total revenue growth in the mid-20s, inclusive of organic growth of 7%. We are updating our adjusted earnings per share to a range of $9.50 up to $10.50. On a GAAP basis, we expect the earnings per share range to be $7.20 up to $8.30, inclusive of onetime charges related to restructuring expenses, a voluntary retirement program, the Russian business closure and acquisition-related costs. The current estimate for pretax charges in 2022 is approximately $460 million.

On the right side of the slide, we have outlined the components of our EPS adjustment versus our prior estimate. We made 2 portfolio decisions since January guidance which reduced EPS by $0.45. The divestiture of our Stanley Access Technologies business reduces EPS by $0.30. And there will be a $0.15 impact from the closure of our Russian business. Therefore, the January guidance midpoint adjusted for these 2 decisions is $11.80.

Incremental commodity and cost to serve just discussed results in a $3 cost increase or reduction in EPS. Then you have the offset of the outlined price actions which add $1.70 benefit which is a net of a lower volume planning assumption to protect ourselves for any potential demand elasticity. Below-the-line items are relatively neutral as a lower tax rate and other expense assumptions are offset by the impact of shares from an adoption of a new accounting standard in Q1 related to preferred shares. This accounting standard change will only impact 2022 and reverses in 2023 as these shares will be retired in November of '22.

Turning to the segments. Tools & Outdoor organic growth is expected to be in the mid- to high single digits, supported by price, core and breakthrough innovation and healthy demand across our end markets. We expect that our strategic outdoor acquisitions will contribute just over $3 billion in revenue in 2022.

For the full year, Tools & Outdoor consolidated margins are expected to be down on a year-over-year basis as inflation and acquisition mix pressure margins. As you think about Tools & Outdoor margins, excluding acquisitions, our plan calls for a relatively similar OEM in the second quarter to what we just delivered in Q1. We then expect year-over-year core margins to be up in the back half. There is a meaningful midterm opportunity to improve margins within the outdoor acquisitions over the coming years. And this continues to be a significant priority for us. We expect high single-digit margins this year and we see the potential for low double-digit margins over the next few years. We believe the Industrial segment will achieve low double-digit organic growth driven by innovation, pricing and cyclical recoveries across much of the portfolio. The Industrial margin rate is expected to be positive year-over-year. Leveraging strong revenue growth, productivity and price, this segment will experience sequential improvement each quarter in 2022.

Let's now shift to some color on Q2, full year cash flow and our share repurchase program. We expect the second quarter adjusted EPS will approximate 21% to 22% of the full year. This assumes low single-digit organic growth and a strong revenue contribution from acquisitions.

Now, turning to cash flow. As a result of our lower full earnings guidance and higher inventory values at year-end due to the additional wave of inflation we experienced in the last 60 days, we expect free cash flow to now be in the range of $1 billion to $1.5 billion. This range does still reflect a modest working capital reduction year-over-year. We still plan to complete our $4 billion share repurchase program. However, since we see a lower cash flow performance in 2022 for the reasons just articulated, we will defer the remaining portion of -- or $1.7 billion until 2023. We continue to pursue a disciplined capital allocation approach that aims to balance share repurchase activity with a commitment to dividends and strong investment-grade credit ratings. We are committed to the completion of this repurchase program in 2023.

The organization is focused on execution in this dynamic environment, with the key operational priorities centered around the following areas: improving supply chain and customer service levels, driving above-market organic growth, delivering on our price and cost control measures, successfully integrating our strategic outdoor acquisitions, closing the 2 security divestitures later in this year as planned and leveraging the SBD operating model to improve our working capital efficiency in 2022 and beyond.

With that, I will now turn the call back over to Jim to conclude with a summary of our prepared remarks. Jim?

[Jim Loree, Chief Executive Officer & Director]

Thank you, Don. There is no question that we are operating in one of the more challenging environments in recent times. And to succeed in such an environment, we are intensely focused on the inputs we can control. We've strategically optimized our business portfolio, creating a stronger, faster growing and highly profitable company with distinctive competitive advantages. We've continued our long history of returning excess capital to shareholders through our impressive annual dividend record and share repurchases, together totaling almost $3 billion in 2022 with more to come in 2023.

We've reinvested in our core businesses, adding resources to support our growth catalysts in electrification, e-commerce and innovation. This type of focused reinvestment will be an ongoing and consistent approach for us and the company going forward and we've made substantial progress in resolving supply chain constraints, most of which are expected to dissipate during the balance of this year. And we have now proven our ability to offset the impact of hyperinflation through pricing actions that stick. We've made an enormous commitment to ESG as we've shifted our business portfolio to areas that both support growth and benefit our stakeholders and society. For an impressive immersion into this topic, I refer you to our 2021 ESG report which is available online effective today.

And we are confident in the strategic positioning of our company and look forward to continuing to demonstrate our ability to thrive in 2022 and beyond by driving top and bottom line growth and shareholder value creation.

With that, we are now ready for Q&A. Dennis?

[Dennis Lange, Vice President of Investor Relations]

Great. Thanks, Jim. Shannon, we can now open the call to Q&A, please. Thank you.

[Operator]

[Operator Instructions] Our first question is from Jeff Sprague with Vertical Research. Your line is open.

[Jeff Sprague, Vertical Research]

Thank you. Good morning. I guess just on price and I guess it's going to be a multipart question. But the argument here is you're pursuing price to offset cost. But based on the bridge, it looks like pricing is aiming at maybe offsetting 1/2 to 1/3 of the cost pressure. So maybe you could put that in some additional context. Perhaps it's the annualization of the way things work through the system. Are you actually targeting full recovery at a run rate with the price actions that you're taking? And separately, I wonder if you could just provide a little bit of color on what you might be doing to try to mitigate the incremental cost pressure that you laid out for us here.

[Don Allan, President & Chief Financial Officer]

Yes, Jeff. So you're right on the commentary around the timing of the pricing. So the pricing impact in 2022 will be about roughly half the impact of what the annualized amount will be. So there'll be a carryover positive into 2023 related to pricing. And it's really due to the timing of -- as the inflation comes in, you have a timing aspect of being able to get price increases into the market. That can be anywhere from 3 to 4 months depending on the customer or the region. In some cases, it can be faster in certain regions around the globe. And so it's just factoring in that dynamic that is -- like we experienced last year and in early parts of this year as well. The question around -- what was the second part of the question, Dennis?

[Dennis Lange, Vice President of Investor Relations]

What are you doing on the cost...

[Don Allan, President & Chief Financial Officer]

The cost mitigation as you related to, the inflationary costs as they come in, we go through a very similar process, frankly, we experience with our customers which is justification of the cost, what's driving the cost increase. It's got to go through a review process with our GSM procurement organization and then has various approvals that has to go through as well before we can accept the cost increase. The projection that we're putting forth out there related to inflation is based on current spot prices for the most part. And so it assumes these spot prices stay in place for the remainder of the year going into next year. We don't know if that will be the case, they could go up or they could go down. And that's something that we'll see over time. But we manage it through a very robust process on the input side, very similar to what we see what our customers do with us to help justify why we're doing price increases as well.

[Jim Loree, Chief Executive Officer & Director]

And just for clarity, I think Don made this clear but I'm just going to emphasize that we are aiming to offset with our fourth price increase now over a 2-year period the entire amount of the inflation. So it's just a matter of timing. We got hit with this latest tranche of $600 million of inflation in the last 2 months. It takes a little time to get that price -- those price increases implemented and that's the dynamic at play here. There's no long-term degradation of margins associated with the hyperinflation because we are absolutely and I'm very, very pleased actually with the ability to implement price and offset the inflation with price increases because, historically, we never had this type of hyperinflation and we never had 100% price coverage of the inflation. And this era that we're in, we've been able to prove that we can do that successfully and that's what we're going to do here and the fourth increase as we go out to market.

[Operator]

Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is open.

[Julian Mitchell, Barclays]

Hi, good morning. So I just wanted to home in on that sort of price-cost delta again. So I think pricing was maybe -- I don't know, maybe $200 million or so in Q1. Maybe help us understand what was the gross cost headwind in Q1. And then how do we think about those 2 numbers in the second half? And as you kind of snap the line today, what's the cost headwind looking like for '23 at this point?

[Don Allan, President & Chief Financial Officer]

Yes. So obviously, we had, as we mentioned in January, a very significant inflationary impact in Q1. And the number approximated a little more than $400 million. We expect probably a very similar number in Q2. And back in January, we were assuming in Q3 and Q4 those numbers were going to become very small. With the new wave of headwinds, we have a number that's about $300 million per quarter in the back half of the year. So that's a large part of the change. You've got certainly a bigger impact in Q2 than what we saw in the January guidance. That's about $400 million, where that was supposed to be ticking down. And then you had close to almost a neutral impact in the January guidance in Q3 and Q4. And now it's going to be roughly $300 million per quarter. The carryover impact, you'll have some inflationary carryover impact, obviously, with this new wave, maybe a quarter to 1.5 quarters of that into next year. And then you'll have a substantial price increase carryover as well that the price should exceed the inflation in 2023.

[Operator]

Thank you. Our next question comes from Michael Rehaut with JPMorgan. Your line is open.

[Michael Rehaut, JPMorgan]

Hey, good morning, everyone. I appreciate taking my question. I wanted to actually -- a lot has been talked about, obviously, pricing, cost and I appreciate all the details. I wanted to actually shift a second to the outdoor business and the comments around the 10% to 15% annual growth that you highlighted. It sounds a little more bullish than before. And I just wanted to make sure that I was thinking about that correctly that this is -- the statement of a double-digit organic growth rate is something new into the equation. What's kind of driving that statement either from organic growth or new product introductions, distribution gains, etcetera? And then just one technical question, if you can lay out the share count progression over the next couple of quarters, understanding there might be some accounting issues that go away for next year. But just from a modeling perspective, that would be very helpful as well.

[Jim Loree, Chief Executive Officer & Director]

That's an artful one question but we'll take it. Don will take the second part, I'll take the first. We didn't get into this outdoor business because we thought it was low margin, low growth. And we are extremely pleased with what we've acquired and the teams that have come with these acquisitions. The innovation or new product development pipeline is revolutionary and especially in the professional products area and especially as it relates to the large format, zero turns and riders. It is clear that electrification will be an increasing force in this market with the advent of ESG and with the increased energy prices. So one of the factors that has slowed the adoption of electric large format has been the differential between the price for electric and the price for gas. And it historically has been fairly wide but it's coming -- it's converging as electric gets down the cost curve through innovation and cost reduction and energy prices drive higher prices for internal combustion-powered equipment and regulatory action has begun.

So in the States, you have heard about regulatory action in several states, led by California. And so there is going to be a very, very significant amount of pressure to convert much of the gasoline to powered unit sales to electric. And we see that accelerating. We see the fact that we have been working together for several years on revolutionary innovation in electric and autonomous. And by the way, the labor shortages that exist all around and the cost of increasing labor are another factor getting us excited about the growth because the autonomous units that we have can literally cut lawns for landscapers without people on the mower.

So there's a bunch of factors that make us very excited about what's happening in the market. And then there are the 8 facilities that we own that are up and running that make everything from walk-behind mowers to zero turns to basic riders. So we are poised and ready to go with products, with capacity and with a great team -- management team. So 10% to 15% in a market that has historically grown in the high single digits, mid- to high single digits is something that we think is very achievable. And we're going to make investments to support that.

[Don Allan, President & Chief Financial Officer]

And your question on shares, Michael, it's -- I think the easiest thing, if you look at the next 3 quarters for the remainder of the year, it will average about $155 million. In the first quarter, it was about $165 million -- shares. Sorry, not dollars, shares [ph].

[Operator]

Thank you. Our next question comes from Tim Wojs with Baird. Your line is open.

[Tim Wojs, Baird]

Hey everybody, good morning. Maybe just on the volumes within Tools. It does seem like there's a little bit of a lower assumption there. I think volume kind of on an implied basis might be kind of flat to down now and you had kind of low to mid-single digits before. So could you just maybe walk through the drivers of that, especially since it sounds like POS is still doing pretty well and the inventory in North America is pretty low versus the industry?

[Don Allan, President & Chief Financial Officer]

Yes. As I have mentioned in some of my comments, Tim, we have done a little bit of a haircut on the volume side versus January. It's down about 3 points from our original assumption. And that's really factored in just more price increases going into the market, maybe being a little more cautious on the impact on volume. It's not necessarily a view that we think demand is slowing. It's just more of with all the price increases going in, you're going to have -- we had almost 5.5% of price in the first quarter. We're going to have somewhere between 7.5% to 8% of price in Q2 and then it's going to get close to 10% in Q3 and Q4. That's a lot of price in the market very quickly. And so we thought it was prudent to just do a modest haircut on the volume side to represent the potential impact of all those price increases. But it is not an assumption that there's some significant slowdown related to overall demand. Other than what's happening in Russia which is relatively modest, it's an annual revenue of about $150 million.

[Operator]

Thank you. Our next question comes from Nigel Coe with Wolfe Research. Your line is open.

[Nigel Coe, Wolfe Research]

Good morning. I think I will keep this to one question. So obviously, Don, you've been chasing the curve on inflation all the way up here. What -- you've kind of reset the inflation expectation. How do you take a step to try and ring-fence the plan now for FY '22? I mean, is there any buffer in there to maybe protect into further inflation? And then broadly speaking, it seems that the China supply chain, the context of the supply chain is really causing a lot of transportation and freight inflation. What steps are you taking to accelerate the transition back to domestic manufacturing?

[Don Allan, President & Chief Financial Officer]

Yes. I would say that the first question, as I said, we're projecting inflation assuming current indices. And so we're projecting that's going to continue for the remainder of the year. Some people view that as maybe potentially conservative view. It's hard to make that view based on the level of inflation that we've seen over the last 12 months. Like any guidance we provide, we always put some level of contingency in there. It's usually in the $100 million to $150 million range. And I would say that's consistent with this particular guidance we just provided. As far as the China situation, yes, we're obviously watching what's happening very closely from a tactical perspective. But as we had mentioned in previous calls, we did open several plants in the North American markets between U.S. and Mexico to really be able to -- before the pandemic, to really receive a lot of the Asian production, in particular, the China production into those Mexican facilities and some -- and one U.S. facility as well. Because of the volume increase of roughly 20% in '21 and 20% in '22 -- I'm sorry, '21 and '20, you've had a significant spike in the overall output and therefore, it's been difficult to ramp down the Asian production.

So we are looking at 2 different things. One, some additional expansion opportunities in both those countries of Mexico and the United States. But we've also been accelerating our manufacturing 4.0 automation and digitization efforts across the supply chain to try to accelerate that. We believe at this point we can make significant progress in this transition over the next 18 to 24 months. We will not completely mitigate the risk in that time frame but we have an accelerated plan based on the current revenue projections as well as the potential for more revenue growth to accelerate that progress over that time frame and we believe we can dramatically mitigate that risk and concern.

[Jim Loree, Chief Executive Officer & Director]

And it goes beyond just risk management. That's a huge part of it but also working capital management and efficiency. Getting the production closer to the market, within the home market, enables faster cycle times. It enables more ability to respond to volatile changes in demand which is the nature of the world today. And I think as e-commerce becomes more prominent, it's more important to have that production and supply chain closer to the customer, again, for purposes of agility and responsiveness. So there are offensive reasons for doing this as well. So it has a double benefit, a defensive risk management side to it but also an offensive go-to-market advantage in supply chain responsiveness for a changing end market in terms of what's expected and changing channel needs as well.

[Operator]

Thank you. Our next question comes from Joe O'Dea with Wells Fargo. Your line is open.

[Joe O'Dea, Wells Fargo]

Hi, good morning. I wanted to circle back to volume. You gave some helpful color on price and cadence over the course of the year and wondered if you could talk a little bit about the volume cadence specifically in Tools. And as you have maybe a little bit of -- I don't know if you call it buffer or cushion in there just related to uncertainties around what the pricing is going to do on demand. But generally, what the framework looks like and whether kind of back half of the year, we're talking volume that's more kind of flattish? Or are you anticipating volume declines in each quarter?

[Don Allan, President & Chief Financial Officer]

Yes, I would say that you'll see a volume decline again in Q2, mid- to low single-digit decline. You'll see modest growth in volume in the back half, 1 or 2 points in Q3 or Q4 as the supply continues to improve, in particular, in the professional power tools space.

[Operator]

Thank you. Our next question comes from David MacGregor with Longbow Research. Your line is open.

[David MacGregor, Longbow Research]

Yes. Good morning, everyone. I guess a question on volume and you made reference to some of the new plants that you were ramping. Just wondering if you could talk about kind of the progress there and whether that's representing a sort of a bottleneck right now because maybe there's supply channel issues associated with supporting those plants as they ramp or if maybe that's not the case, maybe you could address that. And also just talk about the unabsorbed cost of ramping those plants through 2022 and what that might represent.

[Don Allan, President & Chief Financial Officer]

Yes. The unabsorbed cost is not significant. Those plants have been ramping up for a period of time. And as the year goes on, they're going to continue to become more and more efficient. The main bottleneck is really semiconductors and the electronic components that they go into. As I mentioned in my commentary and Jim's commentary, that's going to continue to get better. There's a big step-up happening in Q2 of about 20% improvement. And we'll see another improvement in the back half of the year as well. And so as that starts to shake loose, we'll be able to meet the current demand levels and hopefully be able to look at other opportunities above and beyond the demand levels at that stage. The capacity in our plants is not really the challenge. The challenge is really in one particular area that I just touched on.

[Operator]

Thank you. Our next question comes from Eric Bosshard with Cleveland Research. Your line is open.

[Eric Bosshard, Cleveland Research]

Thanks. You talked about favorable tool market share performance over the last year. And I know this is a point of discussion. Just curious what you think you're doing, what you were affected at in 1Q with tool market share and then what your assumption is for further tool market share progress in the back half of the year, especially with your thoughts on volume and guidance on volume for tools for the back half.

[Jim Loree, Chief Executive Officer & Director]

Yes. I mean we've been gaining share year in and year out for a long time. During the pandemic, the competitive dynamics are such that we have been gaining share at a slower rate than one of our other competitors. And we're roughly the same size now in power tools and we're bigger in total with hand tools and other items. But the share dynamics as we look at this year will be very interesting. This competitor ended up buying pretty substantial quantities of batteries and semiconductors prior to the pandemic. They've built several billion dollars’ worth of inventory during the pandemic. They have -- a lot of their business is done on an FOB Asia perspective which means -- they're not reporting sellout. They're reporting sell-in. And a lot of the challenges that we have with the supply chain and the congestion on the Pacific Ocean, in their case, relate to their customer and who bears the burden of, at least for a good part of their business, those challenges.

So this supply constraint issue has resulted in their ability to grow share a bit faster in this time period. When that gets resolved, I would bet on our channel access, our product innovation and our growing reinvestment in tools and outdoor and our outdoor platform in general to continue to help us grow the market share. And it will be an interesting couple of years as we go forward. But we're still very, very focused on gaining share, growing above market and continuing to, with our new focused portfolio, compete very, very aggressively and effectively.

[Operator]

This concludes the question-and-answer session. I would now like to turn the call back over to Dennis Lange for closing remarks.

[Dennis Lange, Vice President of Investor Relations]

Shannon, thanks. We'd like to thank everyone again for calling in this morning and for your 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.