Stanley Black & Decker, Inc. (EPIA) Earnings Call Transcript & Summary

Hello, everyone. Good afternoon and good morning, depending on where you are in the world. And thank you for taking the time. My name is Helena Hedblom, I am the President and CEO of Epiroc and a happy employee in the group since many years. And by my side, I have my colleagues, Goran Popovski, President for Tools and Attachments business; and Hakan Folin, our CFO. So today, we have exciting news to share. We have announced the strategic acquisition of STANLEY Infrastructure. So I will start with a brief summary of the deal. So what are we acquiring? STANLEY Infrastructure is a global manufacturer of excavator attachments and handheld hydraulic and battery-operated tools used in infrastructure, construction, scrap recycling, demolition and railroad applications. So why are we then making this acquisition? We want to strengthen and diversify Epiroc's long-term presence in the Attachments business within Infrastructure and construction, especially in the United States. And STANLEY Infrastructure is a perfect fit for Epiroc for many reasons: industry-leading brands, complementing and filling gaps in our offering, strong people culture and solid customer relationships, Epiroc gains access to long-standing OEM relationships and an indirect sales network. And also, we get an increased exposure to attractive tailwinds such as the U.S. IRR bill. For 2023, STANLEY Infrastructure is expected to have $450 million to $470 million in turnover which is roughly SEK 4.6 billion to SEK 4.8 billion. And their EBITDA margin is in the mid- to high teens. So Hakan will cover the financials later. So I will move on to a quick recap of our strategy. So to our new colleagues listening in, a warm welcome and let me introduce you to our strategy for profitable growth. So we have had this strategy many years. We like it, and we remain loyal to it. We have a strong foundation. Epiroc has been an independent company since 2018 but our roots date back to 1873. And we can say for sure that Epiroc's historical success is based on a strong corporate culture. We have passionate employees, which creates the foundation for being an attractive employer and a high-performing organization. Sustainability is integrated into everything we do and our innovation agenda goes hand-in-hand with our customers' sustainability agenda. We are exposed to attractive niches. The mining and infrastructure industries, they benefit from structural growth in demand and we are present in niches where our technical advanced equipment and our aftermarket solutions are performance-critical for customers' operations and make a real positive difference. So we emphasize innovation. Together with customers and business partners, we develop safe and sustainable products and solutions that increase productivity and lower costs. Automation, electrification and digitalization are in focus in our innovation work. We have a large and resilient aftermarket and our aftermarket solutions and our global service presence increase the productivity and extend the service life of our equipment while also strengthening our customers' relationships. So by constantly developing new solutions and services, we can further grow our resilient aftermarket business. And on the topic of operational excellence, we have a focused and decentralized business that can be adapted quickly and efficiently when demand changes and we relentlessly strive for operational excellence. And finally, we aim to outperform. We create value for our stakeholders by conducting responsible business and also striving to achieve sustainable, profitable growth. Of course, creating options for the future, for example, by making acquisitions is also embedded in our strategy. A few words then on the attractive niches. We are exposed to the mining and infrastructure industries that serve an important purpose because they build societies. In addition, they benefit from structural long-term growth in demand. And over the years, our exposure has become more tilted towards mining. And by this acquisition, we diversify our revenue streams. Post this acquisition, infrastructure will represent roughly 1/4 of the orders received. And as you know, urbanization drives the demand for minerals, metals and aggregates used in the construction of buildings and infrastructure. Roads, bridges, tunnels, railways, airports and underground utilities are built around the globe and the excavation of hard rock is needed to create stable foundations or space. In fact, 1.2 million square kilometers of new urban built-up area is needed by 2030. And Epiroc's and STANLEY Infrastructure's exposure towards the construction market is expected to grow 4% to 5% per annum until 2030. So even if there is a weak demand at the time, we see positive long-term growth trends. Another market that grows well is the recycling and deconstruction market as we move from a linear to a circular economy. To recycle is very beneficial for lowering carbon emissions. So if we take a closer look at steel and copper, 2 commonly recycled materials, more than 36% of global crude steel comes from secondary raw materials or copper, roughly 70% of end-of-life products is recycled. And the global recycling market is expected to grow with approximately 5% per year, and STANLEY Infrastructure will help us gain a part of that growth. And to those of you that joined our Capital Markets Day in June, this is a very clear and straightforward picture of what our customer needs. They want the best equipment of the best carrier, they want the best service of the machine and they want the best tools and attachments. And this in combination will lead to the best performance. It's not harder than that. And STANLEY Infrastructure will help us to increase our assortment of high-performing attachments. So when we add capabilities through acquisitions, we normally seek for companies that strengthen our position within automation, digitalization and electrification or that closed product gaps. And it can be expanding existing product segments, consolidation, new customer segments and new value propositions, et cetera. And in this specific case, it is about joining forces in a perfect match in the hydraulic attachment space. So we complement each other well. Since the creation of Epiroc, we have been looking for suitable acquisitions in this segment. And STANLEY Infrastructure has everything we look for. It has stand-alone attractiveness with a broad product range to meet diverse customer demand. It has attractive margins and strong growth trajectory as well as strong innovation capabilities and unique patents. It is a strategic fit and offers synergies and has complementary products. It has strong exposure to North America. It further extends the reach of Epiroc's innovation and enables cross-selling and leveraging of brands and channels for both companies. Also, STANLEY Infrastructure has a market-leading position. We will get leading brands with established market positions. We will expand and deepen customer relationships and we can increase scale to create a leading tools and attachments platform. So Goran, can you please tell us more about STANLEY Infrastructure?

Thank you, Helena. And yes, very big welcome to everyone. I'm really looking forward for welcoming STANLEY Infrastructure in the family of Epiroc. I have been with our company since 2005, and today will be really a milestone to remember. STANLEY Infrastructure has around 1,300 employees. Its revenues are expected to be in the range of $450 million to $470 million in 2023. It has a mid- to high-end EBITDA margins. It has 100% infrastructure and construction exposure and they are very strong in North America. STANLEY Infrastructure has several strong brands. To start LaBounty, the inventor of the mobile shear and the global market leader of mobile shears for the recycling industry plus hydraulic demolition attachment tools for demolition industry. Pengo is the industry leader in auger drilling attachments. Furthermore, Paladin is one of the largest independent manufacturers of coupler systems and attachment tools for carriers from small compact tool carriers to large excavators. Furthermore, DUBUIS, global hydraulic and battery hand tool manufacturer with products for electrical utilities and railroad industries. Finally, Intaca is the leading manufacturer of hydraulic handheld tools and auxiliary equipment for the railroads infrastructure and utilities to focus on China. So what we both share, our 2 companies, is the long legacy and history of innovation, lasting customer relationships. Epiroc turned 150 years this year. And even though the brand is only 5 years old, the majority of the brands you see here on this slide have several decades of strength and together, we'll have more than 500 years of experience on how to take care of customers in the best way possible. Onwards, our customers will benefit from having access to more complete product portfolio, which we together will continue to develop to meet our customer increasing need for versatility and productivity. If we go into further details, STANLEY Infrastructure offers a strong presence in U.S. and broad business partner network. United States nationwide network consists of over 2,700 independent and OEM affiliated brick-and-mortar business partner locations, which will give us a broad reach to a large and diversified customer base. This acquisition also gives us a vast distribution network, driving ability to cross-sell products, which is a great complementary business. In addition, network in Europe and China will provide additional opportunities. And also on the map, you can see the production sites and their locations. And this acquisition is a strong cultural fit for Epiroc. In Epiroc, we have around 18,200 employees or roughly 20,000 if we include all additional employees that also are part of our team. In my segment and division, we have almost 4,000 colleagues and including additional workforce. I'm excited to soon be welcoming another almost 1,400 new colleagues to the team, fantastic opportunity. What STANLEY Infrastructure brings us and what we share in culture is a very customer-centric mindset. This is important for success, and we both have shown that we have successfully built a very long-standing OEM and business partner relationships, a leading innovation capability with in-house laboratories to validate design expectations and unique patents. Together, we are highly competent, motivated and committed teams with strong historical brands. We really look forward to welcome the great team of STANLEY Infrastructure to the Epiroc Group and grow successfully together. And speaking about growth, everyone knows that 2023 is not the not the best year in regards to construction growth. And we do not expect that this will be over in the short term. We foresee that construction will remain weaker in housing and aggregates, while historic infrastructure, including tunneling, will continue to develop well. Also, as Helena said, in quarter 3, the weakness in construction weighted on margins and we do not expect this to be a quick fix. However, looking forward together, STANLEY Infrastructure and Epiroc will be a stronger company that will be offering customers more and better solutions so we can benefit from the strategic long-term growth opportunities. Hakan, would you mind saying a few words on the financial side?

Yes. Thank you. And also from me, a very warm welcome. So Hakan Folin is my name, and I joined Epiroc Group -- sorry, Epiroc as a group CFO in 2021. And if anything, I can only agree to the words about the strong and innovative culture here at Epiroc. So a few words about the financials. The purchase price is $760 million, which is equivalent to about SEK 7.8 billion. In 2023, STANLEY Infrastructure is expected to have revenues in the range of $450 million to $470 million, which is corresponding to between SEK 4.6 billion and SEK 4.8 billion. In 2022, the revenue was USD 547 million. So they are facing the same headwind in the market in 2023 as our Tools & Attachments division. The EBITDA for 2023 for STANLEY Infrastructure is expected to be in the mid- to high teens. This should be compared to Epiroc Group where in Q3, if we look at the 12-month rolling figures of EBITDA, we had an EBITDA of around SEK 15.7 billion, or 26.7%. And this implies that you can expect roughly a 1 percentage point dilution on group EBITDA once we close this acquisition. This is an all-cash transaction with secured financing through a bridge facility and it will lead to an increased net debt to approximately SEK 15.4 billion if we look pro forma Q3 2023. And in other words, we would go from a net debt to EBITDA of 0.49x to somewhere just below 1x. Thank you, and over to you, Helena.

Yes. Thank you, both. So this is a summary slide again. And the only thing left to cover is the timing. So we expect that this deal will close at the end of quarter 1 2024. And once finalized, STANLEY Infrastructure will be part of the Tools & Attachments segment. And as you see, we are excited about this opportunity, and we are very much looking forward to grow together. So with this, happy to conclude and open up for questions.

[Operator Instructions] The next question comes from John Kim from Deutsche Bank.

It'd be helpful for us if you could expand a little bit more on what you see as cost and revenue synergies. I understand the logic of the deal, but if you could put any sort of quantum and time frame around what you hope to do with this asset? And maybe just a little bit of color on why you might be a better owner or how you might leverage the platform.

Yes. So maybe I can start on the synergy side. So we see great opportunities when it comes to sales synergies. It's complementary products. As Goran also said, a very strong channel that we're adding. So cross-selling of the STANLEY Infrastructure products through the Epiroc channels and vice versa, that's where we see the biggest opportunities when it comes to synergies. So it's very much a growth case. Can you repeat the second question?

Just if you could touch a little bit on cost synergies, if you could give some color there, please.

Of course, we have not really -- we don't see that much cost synergies. This is very much a sales -- the sales synergies are -- of course, there will always be over time, efficiency that we can gain on admin, et cetera. But I think sales synergies are the biggest synergies in this case.

The next question comes from Andreas Koski from BNP Paribas Exane.

A question on the margins. I understand this is not a cost synergy case, but you mentioned in the press release that the EBITDA margin for STANLEY Infrastructure is mid- to high teens. And I think your attachment business is generating quite a lot better margins than that, probably in the 20s. So how do you look at the margin progression for STANLEY Infrastructure? Is it possible to improve the margin towards your levels for your attachments business? Or is it something structurally different with the U.S. market, then it will be a mid-teens margin?

I think of course, we will get a much stronger platform with a combined set of offering. I think really, of course, long term also, our focus on innovation, bringing technology and let's say, increasing the value proposition, that's, of course, something that we are -- we know how to do, and we're looking forward to do that also with the complete assortment now that we will have. So of course, over time, our ambition is always to improve margins. But of course, I think it will mainly come from an innovation dimension.

Yes. But you see upside potential from the current liabilities.

Over time.

[Operator Instructions] The next question comes from Jonathan Day from HSBC.

I was just wondering if you could comment a little bit on the portfolio. I know you said you got 90% U.S. exposure within STANLEY and there's about 15% handheld tools. Are there any parts -- when you look at the different sort of end markets for the portfolio, are there any parts that you would see a sort of less of a good strategic fit for Epiroc? Just trying to get a sense as to how you think about the portfolio as a whole, what's core and what maybe would be noncore?

Well, we believe that the portfolio coming from STANLEY Infrastructure is a very good complement to our portfolio. It closed a couple of gaps. So with this acquisition, we are going to be able to provide our partners with a one-stop shop solutions. So we are going to become better to serve the needs of our customers. And of course, with the portfolio and the competence that comes together with the people, we'll be able to accelerate the development so we can further improve the ability to deliver the right value proposition to different customers in those segments.

And to answer your question, we see good growth opportunities within all the different subsegments of STANLEY Infrastructure.

The next question comes from Andreas Koski from BNP Paribas Exane.

And yes, just a few follow-ups. Could you -- by how much have STANLEY Infrastructure grown in the past? Is it similar to your Tools & Attachments business? Or has it underperformed your business?

It has -- it's -- if you look over the years, this is, of course, both organic and inorganic growth that they've had. But we can say that they have outgrown the underlying growth within construction over the years.

Okay. And then maybe for Hakan, should we expect any acquisition costs in Q4 or in the coming quarters? And have you already decided or looked into what the PPA will be from this?

On the PPA, the answer would be no so that we don't know yet how much will be more amortization. That's also why we talked about EBITDA dilution as we don't have the PPA ready. Yes, there will be some acquisition costs also in Q4 and probably as well in Q1 for advisers mainly.

The next question comes from Andrew Wilson from JPMorgan.

I just wanted to -- I don't know if you'd be prepared to provide or not, but it would be helpful. I think in your comments, it sounded like -- I think it was at [ 5 -- $470 million ] of revenue in 2022. Can you talk about the EBITDA margins in that year? Like is there a lot of operating leverage in this business? I'm just trying to think, I guess, an earlier question as well, just the trajectory of the business in recent years, recognizing that clearly the market right now isn't as favorable as it has been and probably will continue to be.

The market was -- also in 2022, the market was in the what we call mid- to high teens.

The next question comes from Anders Idborg from ABG Sundal Collier.

Just a question. I mean, you recently announced this production restructuring in Europe, obviously, closing down a plant in Germany, et cetera. Should we -- could this, in any way, impact your global production setup? Or should we look upon this as a completely separate manufacturing setups in North America versus Europe?

I would say it's complementing what we already have. So we have a strong production base today in Europe, and we are working on the efficiency there, and that is the reason behind the announcement. This will be a complementary footprint to serve the North American market, which is a very -- it's a big market for these type of products.

The next question comes from John Kim from Deutsche Bank.

Just a quick follow-up on the deal. As we move forward, if you assume the deal completes and you move away from the bridge finance, how much leverage would you want to put against the asset or the deal value incrementally? Or is it too early for that?

Not sure if I fully understand your question. I mean, on group level, as I said, we will go from roughly 0.49x to a bit less than 1x in net debt to EBITDA. And then in terms of how we structure the financing, yes, we will, of course, try to match as much financing as possible versus the asset value, which is mainly then in the U.S.

Did you just try to say dollar debt?

Yes, dollar debt or we can do basis ops. It depends. We will -- most likely, the bridge is in dollar, but then we'll see how we take out the bridge eventually, what's the most beneficial for us.

The next question comes from Magnus Kruber from Nordea.

Magnus from Nordea. A couple of questions from me. Could you talk a little bit about how this business compares to in size versus your current corresponding business within T&A? And ideally, also something about joint market shares in this business after the deal, that would be very helpful.

Can you repeat the first one?

Yes. So how does this new business correspond in size to your current...

Okay. So we have not shared the sales in the year. We have not shared the split between the different parts of the Tools & Attachments business. But clearly, STANLEY Infrastructure is a very good contribution here, and it is larger than what we have within Tools & Attachment. What was the second question? On market share, I would say the products are very much -- they complement each other. So we are [ also ] strong in some of these products but it's very much that they complement each other. So we will have a broader assortment and we will be able to capture a bigger set of the excavators out there. And we will also be more -- I think, for the indirect channels, we will have a better solution for the indirect channels when we bring these assortments together.

Okay. Got it. Could you just talk a little bit about key player there on the Paladin business?

We have quite many players in these segments. And of course, we have the companies like Lifco, like NPK, like Komatsu and many others.

The next question comes from Anders Roslund from Pareto Securities.

Yes. I have 2 questions. One regarding the sales in Europe. Is the remaining -- if you expect 90% of sales in the U.S., is it 10% in Europe? And number two, do you see any synergies from the IRR legislation in the U.S.?

So the remaining 10%, it's not only Europe, it's global, South America and Asia and Europe which, of course, gives good opportunities when it comes to cross sales through the Epiroc network. And yes, we see good potential with the IRR bill. When that starts to kick in, of course, this will give us a very good foundation to build on with a very strong footprint in the U.S.

Could it be that you transfer some production to the U.S. then?

I think we -- of course, that could be the case at a later stage. But when we look at the footprint as it is today, I think we will have a very good footprint together. If you look on that map that Goran showed, STANLEY Infrastructure have a very strong position already and from a manufacturing standpoint, a very strong -- strong capabilities in U.S. But of course, over time, we will optimize this so we make sure that we produce as close to the market as possible. Okay. I think that was the end, no more questions. So thank you so much for calling in with a very short notice. We very much appreciate it. And if you have any further questions, Karin, Alexander and the IR team there, of course, here to help and answer any remaining questions. So by that, we conclude and thank you so much for listening in, and I wish you a great weekend.

Thank you very much.

Thank you.

Thank you.