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

Good afternoon, everyone. I'm Josh Pokrzywinski, Morgan Stanley's U.S. electrical equipment and multi-industry analyst. Welcome to the Life After COVID Thematic Conference. You're joining us for the work-from-home track this afternoon with Stanley Black & Decker. We are pleased to have joined us today on this discussion, the President of the Power Tools Group, Frank Mannarino; and Allison Nicolaidis, the President of Hand Tools, Accessories & Storage; as well as Dennis Lange, the Director of Investor Relations. So thank you, team, for joining us. Before we get started here, I do need to read a quick disclaimer, though. 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. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see Morgan Stanley's research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. With that, let's kick things off. Team, thanks again for joining us. Dennis, if you wouldn't mind just giving us a bit of an intro here and what -- who we have joining us today and why folks should be excited.

Sure. Well, first of all, thanks for hosting us today, Josh. It is a really great opportunity. And when this came up, the topic of the conference, obviously, there's been a lot of positive trends that have emerged during COVID and the pandemic surrounding our tool business. And there's been a lot of interest in what's driving those trends, what insights can be drawn from the activity. And no one is closer than Frank and Allison both to what's happening inside of the various channels and geographies for our categories as well as a lot of the growth prospects for the future as well. They lead 2 of our major SBUs, strategic business units, within Tools & Storage and are very close to not only the commercial execution of those businesses, but how we're leveraging our brands, innovation as well as the future growth pathway for those businesses. So we're excited to talk a little bit more about some of the exciting things that are happening in tools.

Excellent. Well, appreciate the time. Maybe just to start things off here for Frank and Allison, the both of you, if you want to take these in sequence. If you wouldn't mind just kind of walking through the cadence of activity as COVID broke out, give us a bit of a time line as homeowners were stuck at home. And then any of the trends and divergence of activity given that there's a lot going on in retail that maybe doesn't look quite as much as your business is seeing with things like inventory. So basically, a way of saying, can you rewind the last 6 months for us and talk about some of the major trends you've been seeing?

And before Frank jumps in, if you kind of think about what happened in this period. First of all, you kind of started off with a period where there was uncertainty and a retraction and some inventory reductions in the channel. And then you kind of fast forward to a lot of positivity that happened as well and potentially an inventory recovery heading into next year. Some very strong trends emerged as well around DIY, e-commerce reconnection with the home, and you're going to hear a lot about that. And Frank is going to kind of kick us off with the power tools story.

Yes. All right. Thank you, Dennis. Yes. So I kind of guess it was middle of March where we really started to see -- as shelter in place started to take place throughout many of the regions of the world, we really saw a downturn in POS. And that really took place through the end of March, first part of April. But as we got to the backside of April and then into May, we saw a pretty significant increase in POS. And we've really sustained that sell-through on point-of-sale right through Q3. So that part has been very encouraging, and we've seen it pretty consistently throughout North America as well as the regions around the world. At first, we thought maybe it was stimulus-related, but we've seen it sustain right through stimulus, and we're seeing more and more of our end users doing projects either at their home or on job sites. So we're seeing it to be sustained really strong demand. If we look specifically at some of the key categories where we're seeing the strong demand for the power tool business is definitely in the wood working categories. And these are categories like sanders, jigsaws, circular saws, miter saws, table saws that are sold not only to pros but also to some homeowners in some of those categories. And we're seeing across our brands of both DEWALT as well as Craftsman that we're seeing that strong demand in those categories. And specifically in Craftsman, we're seeing more and more of our end users get into the cordless system of Craftsman. That's the V20 cordless system. We now have about 4 million battery packs in the field. And as we expand that system, we're seeing more and more end users enter into the system and building upon that system. So we're very encouraged by the trends. And then in our Black & Decker home products business, which is our cleaning products business, obviously, our end users have had a new obsession with cleaning their homes and their apartments. So we've seen very strong demand in categories like dust busters, steam mops and stick vacs that we believe will continue to sustain as we move forward. So encouraged by the results and the sell-through that we're seeing. And I'll turn it over to Allison.

Thanks, Frank. I'm going to take you through outdoor as well as cover Hand Tools & Storage, a little bit on Power Tool Accessories, which is an exciting category in COVID, and then hit e-commerce before we turn it back over to Josh. I think you heard Frank mention that this middle of March time frame, we really saw things start to lock down. And with Stanley, that is typically the time where people really start to consider what they're going to do about spring and care of their home. And I think it coincided with a lot of people being trapped in the house and looking out and having a whole lot to do with their houses. So we immediately saw what we would consider a little bit of an early break [indiscernible] and across every facet, every brand at Stanley Black & Decker business. We were performing at really high levels early in the season. That's corded as well as cordless products. It's Black & Decker Craftsman and DEWALT, which covers a really wide variety of end users from do-it-yourselfer to this sort of ambitious enthusiast who we say spends a lot of money on outdoor power equipment, although they're not a professional. And even a professional end user [indiscernible] very quickly and remain kind of in motion and handling all of their accounts. And therefore, they were busily buying in the outdoor segment of the business. So great growth potential for the outdoor [indiscernible] not only because we put that many more people in our system here in the season across all of our brands, but also we're not in every category to them. So we certainly look forward to expanded participation in outdoor. In the Hands Tool & Storage business, Frank mentioned woodworking and DIY, very similar trends. In fact, there are categories of Hand Tools business that are pretty much -- we say are fairly predictable relative to their run rate and their promotional performance, things like clamps, sawhorses and a handsaw, a traditional back and forth handsaw. You can see all 3 of those things in your hand if you picture do-it-yourselfer in a garage with 2x4s sitting on top of the sawhorses clamp down and the person is sawing, you can kind of get a visual of that. And those are the types of categories that really took off for us very early in the spring, have not yet settled down anywhere near the run rate that we would see prior to COVID, and it is across the board. So we also saw e-tool categories that are very distinctly do-it-yourselfer categories, often used for things like picture hanging or buildings like stud sensors, take off as well. Those are not products that are particularly purchased very far and wide by a professional end user. We know them to be very DIY. So we're really encouraged by that trend. On the accessories side -- or on the garage side of the business, we also saw people engage in organization of their garage with large toolbox purchases. And also in the automotive specialty bay, where you find specific buyers and things of that nature to do your own oil change at home, those products started to fly off the shelf as well. So we believe we accelerated the penetration of Craftsman substantially in a lot of that garage product. Power Tools Accessories, performance there leaves us extremely encouraged also that this isn't just a thing in COVID. In fact, Power Tools Accessories, I'd say, performed at the top of the heap of all the categories. And what's interesting there, you can't use a power tool without a power tool accessory, accessory being drill bit, saw blade, a grinding wheel. And not only do we think people -- we know people went out to the stores to support the usage of the tools they already own, they added a lot of products and continued to use them. Because PTA or the accessories business is a consumable, we know it indicates not only are people to stop [ filing and ] collecting tools, but they're actually using them with leading applications because they continue to go back for that consumable item. We love accessories because certainly, it's consumable. We make a lot of profit there, and we participate in all categories globally, many of which [indiscernible]. So lastly, bringing it home is the e-commerce business. Strong performance here. We think we closed about 3 to 5 years minimally of share shift from our brick and mortar to the e-commerce world simply by people being at home in COVID and changing their behaviors around having a lower-touch purchase. So across the board, outdoor Hand Tools & Storage, power tools, Power Tool Accessories, e-commerce, Stanley Black & Decker really did see great, great traffic for our products, our brands from all walks of our end users.

That's terrific. And that's good color all around. I guess the 2 things that have been pretty topical as of late. I guess, first, on sell-in versus sell-out. Clearly, inventory phenomenon seems to be running white in especially retail channels. Anyone who's been in a Lowe's or a Home Depot lately I think would acknowledge that maybe shelves aren't quite as full as they normally would be. I think Jim and Don have talked on some of the earnings calls about particular kind of low points in weeks on hand versus normal. I guess what's -- what are both your senses on some of the bigger categories where fill rates are low and need to come up and hopefully come up sooner than later? And where you've seen kind of the most significant, I guess, destocking?

Yes. I guess, Josh, the -- if you kind of think about the landscape as it relates to inventory and POS, we really have been operating with kind of a 3-pronged priority. One, as the POS started to accelerate, we wanted to ensure that we're servicing demand. And the team has been very successful in continuing to do that throughout this environment. The second priority was to make sure that we had a phenomenal and successful holiday season. That's a big promotional area for our products -- I mean, for our customers, and we wanted to make sure that they had sufficient product to have a great holiday season that we're all planning for. And then the third really surrounds safety stock and inventory repair. And so if you kind of think about that story, it's -- end of the second quarter, the trade, particularly if you kind of think about that North American retail side of the business was at historically low inventory levels. And as we moved through the third quarter, we were able to get those up to some degree. Now we're kind of at a zone where we're focused on the holidays. So they're building inventory for the holiday season here in the fourth quarter that we'll sell-through as we move through this quarter. And we'll probably end with inventories in a relatively similar position that we exited 3Q. That's the assumption. And so from our standpoint, if you kind of think about those 3 priorities, it's probably first half of '21 when you start to see those inventory levels come up in the train. And the phenomenon that's helping us do that is you typically see our volume kind of slow down as you exit the year and into early next year. And we tend -- in normal years, we tend to take the plants down and get a large amount of inventory liquidated off our balance sheet. And this year, we're going to do things a little differently. We're going to continue to run. And that way, we're going to get ourselves in a much better position as we enter 2021 and gear up really for the next big selling season as well with Father's Day.

Got it. That's helpful. And I guess, related to that, given that the inventory situation doesn't sound like it's moving anytime soon, Frank, Allison, how are you thinking about promotional activity here going into the holiday season? It seems like this is probably an abnormal time. People are still fresh DIY on their minds. I don't know how many drills are going to be under the Christmas tree this year. But at some level, that's a big phenomenon that happens in promo. What should we expect to maybe look different this year versus kind of normal activity we would see otherwise? And what are you seeing so far?

Well, Josh, I think I can speak a little bit for some of the businesses that I covered earlier on. And as you probably know, much of the process that we go through related to promotion with our partners and distribution happens 9 to 12 months before you ever even see it hit the stores. So there was an element of surprise, I think, sort of in the middle of the promotional period where we had planned. And then COVID came, and everybody really questioned, well, is there going to be a promotional period? What will holidays look like? But I think, in general, you'll see us put a lot of the highest-running categories that we have like mechanics tool sets, like our mechanics tool storage. Fortunately for us, those are some of the most promoted items and the items that tend to fly off the shelves during the holiday season to begin with. I think there's opportunity that goes even deeper for some of our categories. Frank talked a little bit about cleaning. And we've had the dust buster as a major part of Black & Decker's portfolio for decades now since the '70s. And at the end of the day, we still lead in that space. And we think that with some of the trends changing and the focus on areas like cleaning as one example that more and more people will consider that category in that area of a store to shop for a Christmas present versus kind of a more vast array of electronics and other things that they could have picked from in prior years. So I think we feel great about the promotional products that we put on the floor. We also feel great about the attraction to some of our products with even greater upside than what we would see in a natural holiday season.

Perfect. Frank, anything on the power tools side that we should be aware of?

I think what we've seen really from our customers is probably, in years past, maybe a broader assortment but not as deep. And this year, skinning down some of the assortment but went deeper as far as the number of units coming into the store to prepare for the holiday season. So that's from a power tool perspective. But we're very excited about the promo offerings that we have coming into the holiday season. We expect it to be strong. Our customers are anticipating a strong holiday season as we are as well.

Got it. And then just pivoting over to talk about a different topic on innovation. I think some people on the line, if they're newer to the story, probably don't appreciate that in this space, it's kind of the lifeblood of pricing activity. And I think of it as Stanley's kind of big barrier versus peers, just given your relative size versus everyone else. You can just afford to spend a lot more, and other folks have a hard time keeping up and certainly don't have the category breadth. But maybe talk about the broader list of categories, FLEXVOLT, Craftsman, I think you have a revitalization of Black & Decker coming on. Where do you see kind of the biggest innovation opportunities happening? And where have you seen kind of the biggest successes in the market currently?

Yes. Josh, I think you're going to hear all of that come through. And if you think about at least how we kind of pitch the corporate catalysts, it's e-commerce, which the Black & Decker revitalization will fit square in that front. We've got the reconnection with the home and garden, and you're going to hear a lot of that come through. It's core innovation. It's breakthrough innovation. It's continuing to build out Craftsman. It's all of the outdoor opportunities that are out in front of us. And then lastly, around security, we have a health and safety trend that has fallen into that business, which we won't spend more time building out. But that's kind of how to think about the company catalysts, and we tend to not talk about them unless they're at least in that $50 million to $75 million per year of revenue. So that at least gives you a sense. These have the ability to be major growth drivers as you aggregate them. So I'll turn it over to Frank to go a little deeper into the innovation pipeline around power tools.