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

Good morning, and welcome to day 3 of the Morgan Stanley Laguna Conference. I'm Josh Pokrzywinski, the firm's electrical equipment and multi-industry analyst. With me this morning is the team from Stanley Black & Decker, including Chairman and CEO, James Loree; as well as the VP of Investor Relations, Dennis Lange. Guys, thanks for joining us this morning. Before we get started, I do need to read a brief disclaimer, if I can find it. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. So if you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. So if you have any questions please reach out to your Morgan Stanley sales representative. With that, welcome, guys. Appreciate you taking the time. Apologies. It's not on the beach. Hopefully, we'll get them next year. Jim, maybe just to start us off, any opening comments? And I think you have some slides as well that you'd like to walk through.

Thanks, Josh. I just have a few brief remarks maybe for folks that aren't familiar with the company, in particular, on this page that's titled A Global Leader with World-class Franchises. Just a quick look at the portfolio of $14 billion in revenue last year, running around $25 billion in market cap, cash dividend, about at 1.8%. A very long history of dividend increases in this company, over 50 years of dividend increases annually. Wonderful portfolio kind of highlighted by the Tools & Storage business, which is the world's largest Tools & Storage business at $10 billion in revenue. Has some fantastic brands like DEWALT, Stanley, Black & Decker, Craftsman, et cetera. And just a global business with incredible strength of the franchise. And it's basically, over the last 20 years, grown from about a $600 million business to a $10 billion business as we've consolidated the tool industry and really had some tremendous organic growth over the years. And then we also have 2 other elements of the portfolio. The Security business, which is the world's second largest security -- commercial security services company which also includes a health care division, which does things like contact tracing and proximity sensing. And also an automatic door business, so touchless doors and then in commercial electronic security business, which serves commercial customers, in particular. And then finally, an Industrial business, which is headlined by a very, very, very profitable engineered fastening business, which has a great business model. Supplies fasteners and engineered components into automotive and general industrial markets as well as aerospace and then an infrastructure component. So that is the portfolio. 5 years -- almost 5 years ago when I took over this role, I created a vision, which was to continue our top quartile financial performance. To become known as one of the world's great innovative companies and to elevate our commitment to social responsibility. So we are one of those companies that supports social responsibility, stakeholder capitalism, but also focuses on financial performance and shareholder value creation. Next slide. The pandemic, obviously, has thrown a real curveball into everybody in every company. And we were early movers to focus on key priorities around the pandemic and the #1 priority that we've maintained the entire time is to ensure the health and safety of our employees and our supply chain partners. And that's been really important because we've been able to operate continuously during the entire pandemic. The world needs tools when you have natural disasters, when you have construction in factories and production. The world needs tools. And so it's been really, really important for us to keep our employees safe and to keep our supply chain partners as well. #2 priority was to maintain business continuity. There were days in April when the revenues were down 40%, 4 weeks in a row, that was a very daunting proposition. But today, we've had tremendous rebound in revenue. One of the most staggering and volatile changes from negative 40% revenue to today, when the revenue was solidly up in the double digits, the POS at our North American retail customers has been running plus 40% for several weeks in a row in the middle of the year, and now it's kind of stabilized in the 20% to 30% range. And so we've been having to manage this very volatile supply chain channel. These challenges in managing the supply chain, we've done really well at that, maintaining our financial strength and stability. And serving our customers who, as I said, provide these essential products and services to the world. And then finally, doing our part to help mitigate the impact of the spread of the virus in many, many different ways from making parts for respirators and ventilators to just our -- through our philanthropic activities for donating to local hospitals and elder care facilities and these types of things. We've really gone out of the way to make sure that we're doing everything we can to help mitigate the spread of the virus and also to mitigate the impact on our employees and our partners. Next slide, and I think one of the most interesting things that come out of this for us is the world has changed dramatically, as we all know. And in many respects, it's changed -- in several respects, it's changed in manners that really are very favorable for our company. So several opportunities have arisen in this pandemic era and will continue to be there in the post pandemic era for years to come. And I think the first one is the rapid acceleration of e-commerce. We are the industry leader in e-commerce by a factor of 3x. And we've been working on it for 10 years. We have a tremendous relationship with both our home center, e-commerce divisions as well as the large e-commerce players in the world, players that you're all familiar with. And I won't go -- I won't list them, but they're the biggest in the world. And we are doubling down and investing in e-commerce. Now so we've got the lead, and we're going to continue to drive e-commerce across our portfolio. It's growing. At the moment, it's growing around 60%. To put it in perspective, it's becoming a bigger percentage of our total revenue by the day, and it's just a very fortunate position that we have in this regard. The second thing is this reconnection that people are finding with their homes, spending so much time in the home and doing a lot of remodeling and upgrades and things like that and also just people with idle time that are looking for something to do, and they're doing a lot of projects. So obviously, you've seen the numbers from the home centers in the second quarter same store sales. One of them was up 34%. One was up 23%. And that's -- that business is booming, and it has to do with this reconnection with both home and also the garden and the outdoor space, which is also enjoying some of the same benefits. And then finally, the societal obsession with health and safety that we're all experiencing right now plays extremely well to our Security business. I mentioned that we have the automatic doors. I also mentioned the health care with its contract -- contact tracing, proximity sensing, temperature sensing, applications. And so that is also very, very favorable for us right now. And we expect demand to be very, very strong in that business for periods to come. So that kind of sums up my opening remarks, Josh, and we can go anywhere you want from here.

Absolutely. So I would be negligent if I didn't start off with hey, I guess people are buying a lot of tools. And obviously, with the 8-K out, I think over the past few weeks back, you guys have kind of crystallized that. Maybe talk about for a bit, Jim, just what you've seen kind of region-by-region. Obviously, North America is on fire, but I think maybe some surprises out of Europe as well coming back to life. And then what you're seeing in terms of replenishment activity that goes along with that.

Yes. I mean, the 8-K that we issued at the end of August was when -- I think it was the third significant upgrade in sales that we had from the April time frame. In April, we were guiding -- we were -- our planning [ assumptions ] were minus 35% to minus 45% in the second quarter. We ended up doing better than that. And 15 -- 25% to 30% down for the year. And so today, when we're looking at a second half in the low to mid-single digits, that's a pretty significant change. And so let me kind of walk you through what happened, okay? So in the April time frame, the world shut down basically, and we were down 40%, as I said, for 4 consecutive weeks. The inventories in North American retail at the customer level plunged and point-of-sale went down modestly, but not significantly. But the sell-in was down 40% when you take into all our -- account all our businesses. And so shortly thereafter, the fifth week of April, all of a sudden, the point-of-sale started going up, and it went up in -- maybe the first week might have been like plus 5%. And then the second week -- first week of May, it might have been 10% or 15%. And the third week might have been 20%, 25%. And then all of a sudden, it hit 40%, and it stayed at 40%, and this is North American retail. So it stayed at 40% and their inventories just plunged. So they were down. They troughed out at 9 weeks of inventory, which is about 7 weeks lower than the averages they normally have. And so you can imagine that the shelves were kind of bear at retail, but people were lined up outside of these home centers to get products. And so in May, and they hadn't started reordering yet for -- in a large part, even in the beginning of May. And so we started looking at this in May and said, "We better build inventory because some of our supply -- a big part of our supply chain comes from China. And it takes 11 to 13 weeks to get the material over here." So we built $600 million of inventory in the May, June, July time frame to bring it over here. And thank goodness we did because if we hadn't done that, we wouldn't have been able to serve the demand because that 40% POS sustained for a long period of time, until, frankly, just recently when it's kind of more stabilized around in the 20s. And so the tools have been flying off the shelves in North American retail. So the upgrades that occurred during the summer months had to do with this trend that nobody expected in this company. And I think many of us were surprised by the absolute robustness of the sales. And then what happened in the -- so we issued guidance after the second quarter. And then what happened, and it was all based in -- at that point in time on a very favorable North American retail outlook. And then Europe started getting better. And Europe went from negative to plus -- it's running around 20% positive now in the tool business. So it appeared -- it appears that the phenomenon that occurred in North America extended over to Europe as well, where we have a very significant business. And then the last thing that happened that I think relative to demand that surprised us even -- perhaps even more than Europe was the emerging markets started to become significantly positive. Now they're running probably about plus 10% or so right now. And so it's been a tremendous, tremendous boost in the demand here in the company. And so when you couple that up, with the cost savings that we undertook in the beginning of the pandemic, our $1 billion cost takeout program, much of which is in place, in fact, substantially all of it is in place. Then you have a wonderful margin, cash flow, et cetera, story developing in this company right now.

Excellent. So if I was just listening to some of the numbers you threw out there in terms of being above point-of-sale relative to the home centers running in the 20s, 20% in Europe, now the emerging markets turning positive. Needing some of my fingers and toes to get to the numbers, it seems like maybe high teens in tools is something that's, I'll call it, readily achievable.

Absolutely.

Anything that you're seeing out there in terms of sustainability or maybe some abatement in restock that would cause that to decelerate in the near future?

I'd say for the better part of this volume boost, all we've been doing is able to keep up with POS. So as much as we're producing, it's pretty much been consumed by POS around the world. North American retail inventories are up probably about 2 weeks from the trough. So there's a way -- there's a long ways to go in terms of inventory replenishment for them. And in -- and one thing that we -- even with that fantastic growth in the Tool business in retail, what we -- what a lot of folks don't realize is there's a pretty substantial Industrial segment to the Tool business as well, which has been depressed. And so when I think about sustainability, I do think about -- retail is not sustainable at these levels, okay? It's probably going to -- it's gradually going to subside. Inventories will be replenished. It's going to take long -- a long fair amount of time. But Industrial will come back too. And so that will be a very -- a positive offset to some of the abatement that you will -- that we will see experienced in North American retail and in some of the other markets around the world.

Got it. And then just given that there's still kind of 5 weeks of inventory that need to be replenished to get back to normal levels, I can't help but notice there's only 13 weeks in any given quarter. So 5 weeks is a big number, especially if it's over a short period, maybe it takes a couple of quarters. But just based on your own experience, how long would it take to get that -- get back to normal, understanding that the supply chain is finite?

Yes. A lot will obviously depend on the point-of-sale performance, right? So if it were to gradually kind of work its way back into the teens over the next quarter or so, which I think is pessimistic relative to some of our customer expectations, by the way. But if it were to do that, I would say no, it would probably take about 2 quarters to get back to normal inventory levels.

Got it. And then you mentioned kind of the normalization that you expect to happen over time. I mean, clearly, we can't run at these levels. And I hope not because I can't keep any more drills in my house. I have already made a purchase this year. So I guess thinking about what does this look like going forward? Because clearly, there's a lot -- there's been a lot of DIY activity done over the past several months that either would have gotten done over a longer length of time or maybe wouldn't have gotten done at all. The pro has been slower. So there's a lot of balls up in the air right now. But is there something that you're seeing there that gives you confidence that this is going to be something other than a tough comp when we get into the anniversary of some of these items?

Yes. And there's no doubt it's going to be a tough comp. Just based on record levels of volume. But there's a couple of things. You do have the pro coming back, okay? So that's going to be a positive, I think, over time. Obviously, this has been very DIY-driven. This resurgence has been driven by DIY. And so the pro has been on the sidelines. It's gradually coming back and the Industrial will come back. And also the industrial segment that we have in the company, which has been running down significantly. So not just the industrial tools, but the Engineered Fastening business, which is tied largely to automotive production, that's going to come back. And so I think there's a number of things that are going to help us deal with some of those comps, including a tremendous amount of share gain that has occurred during this time frame. Because we've been able to serve the customers. We got all the brands aligned with the right end markets. And of course, our e-commerce business, I think, will continue to stay strong as well. I mean, as I said earlier, we have a competitive advantage in that regard. So there's a lot of things, I think, in -- as we move into '21 that will enable us to kind of digest these comps. And then I'm really excited about the MTD acquisition that we have coming up, which is an option that we acquired several years ago to buy 100% of MTD, which is one of the largest outdoor power equipment companies in the world. And definitely one of the largest in the U.S. as well. Great company, excellent products, excellent innovation, terrific manufacturing, okay brand, okay? Troy-Bilt, Cub Cadet, good brands, but they're not brands that are like DEWALT or Stanley. They're not at that caliber. So our brands in concert with MTD in the outdoor space, now the outdoor space is even more attractive than it was when we cut the original deal a couple of years ago. So we're very excited about that. That -- people do different math when they look at what the accretion might be, but many, many people think it's going to be in the neighborhood of about [ $1 ]. I think it's a $2.5 billion company. So it's pretty substantial when you look at the impact that's going to have on us. And one of the great things about it is that the structure was such that we bought 20% and we own 20%. And when we bought the 20%, we paid 11x EBITDA. But we also agreed to work with MTD to get their EBITDA up substantially, and we think it will be up $200 million to $300 million by the time we execute the option in a run rate. And that -- what that means is that, ultimately, we will pay between 7x and 8x EBITDA for this asset, which is one of the world's great Lawn & Garden outdoor power equipment franchises. We'll then be able to take that asset and gradually, over a long period of time, electrify using our battery technology and working with them, electrify the gas installed base that they have and their products. And then also they're -- they've made enormous progress on autonomy. So -- and also in the zero-turn part of the segment, which is the fastest-growing segment in outdoor, they have a fantastic array of products and an innovation pipeline that should carry us for about 3 years in terms of growth. So I'm ecstatic about that. And I think our organic growth is going to help us with the comps in '21, but I think the MTD will be icing on the cake.

Got it. And then I guess, a couple of initiatives that I know you guys are working on. The outdoor piece that you touched on is a big part of that. I guess one of the other ones is Jeff Ansell is stashed somewhere working on Black & Decker right now. So when should we expect that initiative to start showing up in the marketplace? Obviously, probably too early to call out specifics or put numbers to it. But when is he ready to kind of emerge from the Black & Decker cave?

Yes. My scientific analysis of that is the numbers is big. It's going to be very big. Jeff ran the tool business for years. I mean, he -- he's been -- he ran it for almost 20 years. Back when it was $600 million, he was running it and he grew it to $10 billion, of course, with the team's help. And so he's a master at this game, and one of his -- he wanted a lifestyle change. He wanted to have a little bit less stress and a little bit more time with family and so forth. So he volunteered for this project. And he also felt like we've done such really good work with Stanley and DEWALT and Craftsman and so forth. But he really felt like this was the 1 brand that we didn't really unlock the potential of historically. And so -- and it has a tremendous amount of potential. So he's working diligently on that and with his usual passion and he thinks big and it will be big and I'm looking forward to that. I think we're going to see some of that in the marketplace in '21, and I think we're going to see big in '22, '23.