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

We're good. Okay, guys, good morning. We're going to get restarted with Stanley Black & Decker, and very happy to have Stanley here live in the flesh in New York City. And this is my first time meeting Pat Hallinan, new CFO of Stanley Black & Decker. And obviously, Dennis on stage as well, Dennis Lange, Head of IR as well. So Pat, I think you've got a few slides, so let's get into it and go from there.

Yes. Thank you, Nigel, and thanks for coming, everyone, today. Thanks for the interest. I was just going to kick it off with maybe 3 or 4 slides here. You do start with the normal safe harbor. Obviously, there will be some forward-looking statements and assumptions here, but I'll just take us through kind of where we are and the most recent chapter of our journey and then open it up for questions. So for those of you who haven't been closed to Stanley Black & Decker for a while, we are going through quite a change in -- the start of the changes, streamlining the portfolio. Last year, we sold off Oil & Gas business and the Security business, both of which closed in '22. And we're now a much more streamlined and focused company, both from a portfolio perspective and from an org structure and SG&A perspective. But the current portfolio is the Tools & Outdoor business. Just shy last year of about $14.5 billion of revenue, about 85% of our revenue. And when you put Tools & Outdoor together, the largest Tools & Outdoors business out there with great pro and retail channel exposure. And then we have an Industrials business. A big chunk of it is around fastening, both in auto and aerospace fastening, and then an Infrastructure business, about $2.5 billion or about 15% of our revenue. And from here, our growth platform in both of these businesses is to grow based on some great brands that have longstanding equity, very powerful innovation engine. I was in Maryland this week with our Tools team and our Outdoors team. Now that the supply chain has healed up and people can get back to their roots of innovation, we're seeing some really great innovation pipeline fill up. We have great channel coverage for pro and retail consumers with the channel exposure that we have. And through the transformation, we're building a much more leverageable business model with globalized operations and supply chain and a much more streamlined operating structure. So a little on the transformation. We are changing our business. A big part of it is how do you build the capabilities to get to the performance level that this business has long held, and we want to get it back to that level and beyond to drive value creation. So really, start on the right side of this slide with where we're trying to go, which is back to market-leading growth. Our market, we typically talk about it over the long term as GDP, nominal GDP. So if you think of that as a 2% to 3% type market run rate, we're trying to beat that by 2 to 3 times kind of in that 4 to 6-plus percentage range as a growth CAGR. Over the long term, 35-plus percent gross margins. Obviously, gross margins, we're very challenged by inflation and supply chain disruption and will be throughout this year, but we're making great progress on that this year, I'll talk about, and get back to high free cash flow conversion, both to get our balance sheet where it needs to be, but also to fund growth going forward. And we're doing that through changing the org structure, globalizing operations and supply chain and building a number of very powerful capabilities in there and leveraging that to fund growth and spend about $300 million to $500 million to get back to our roots, great innovation, accelerate electrification, especially in outdoors; enhance our commercial go-to-market capabilities; and have a -- not just a more efficient supply chain, but a more resilient supply chain. And the transformation, very much on track. Some of the key tenants have been things you've probably heard from other durable goods and industrial companies, but a supply chain transformation built around strategic sourcing, footprint rationalization, improvement of how we run the facilities we have in terms of continuous improvement in lean and SKU rationalization, complemented by SG&A simplification, not one to reduce cost, but also to get us close to our customers and our channel partners and speed decision-making. And our goal is to drive a run rate of $2 billion of cost out of our total cost structure, about $1.5 billion from COGS and $500 million from SG&A. And we're very, very much on track across all of those initiatives and on that dollar run rate. We'll finish '23 at a run rate level of about $1 billion across both COGS and SG&A. Now some of that will be on our balance sheet, but that's the run rate, leaving us with about another $1 billion after we get done with '23. But you see some of the numbers up here. In terms of cost savings in the quarter, $230 million and including what we pursued at the back half of last year, cumulatively $430 million. And of course, a big part of this is also to get our inventory down. This year, we're trying to get inventory down, and we'll get inventory down $750 million to $1 billion, but we did about $200 million of that in the first quarter. That's the first time since the Great Recession that we took inventories down in the first quarter. We typically build inventories in the first quarter, ahead of construction and outdoor season. And so where we would typically be building $400 million to $600 million of inventory, we took down $200 million in inventory. And so we're very much on track, and this has been something where down last year, really got the team refocused. And I'd say, impressively, the rate at which we're pursuing this. And we're going to push ourselves to beat these numbers and use them to fund growth. I think that's -- think of where we are in our journey, '22 -- the back half of '22 and all of '23 is about capability building and using that capability to get margins up and cash flow up and heal the balance sheet, and then with that to set a bunch of growth initiatives in motion, that '24 and beyond, really get the momentum beyond -- behind the top line. And we're going to leave where we started on this slide is really retapping the potential of our great brands with a very talented group of individuals and a very powerful innovation engine. And we like where we're headed, and we see a great value creation opportunity coming out of the tumult of supply chain challenges and getting these brands back to performing the way they long have. So thank you.

Thanks, Pat. While you carefully come back to your chair, don't trip over my feet or anything, but we're going to have Q&A now. I'm going to stop after 10 minutes, see if there's any questions in the audience. Put your hand in the air. There's a mic that will come around. So obviously, you spent some time there talking about the cost savings as part of your programs. Those are set in motion, and the targets are set before you joined. So when you had a chance to dive into this and vet them, what was your reaction? Was it the case of, like, "Guys, there's way more opportunity here?" Was it -- these seem aggressive. I mean, what was your initial view on those targets?

I think it was impressive given -- even in my old world, but getting on the ground here, last year was a tumultuous year in general. And I think Don and team set a pretty aggressive agenda in the midst of a very unsettled macro and supply chain environment and made some leadership changes in ops and supply chain. And so I do think the opportunity can be bigger, but I -- what I'm very impressed with is the rate at which a relatively new leadership team and ops and supply chain has been able to put a program in place, make it bear fruit, get the whole enterprise aligned to it because you're moving a lot of people's cheese and make real progress quickly. I think it's too soon to make statements of how far beyond $2 billion could you go, but I think the potential is there most definitely.

Okay, $2 billion would be a good number to get there, to be fair. So the SG&A is done, right? So those actions have been taken. We're in the run rate already. What -- how does the investment -- the reinvestments profile look like? How much gets done this year? How much is beyond this year?

And Dennis, you can kick me if I misspeak here. Because we are -- what we're trying to do this year is make some of the investments this year because we want to see the more historical momentum behind the brands. This year's investments are going to be judicious given how the year unfolds, and so we're metering them out thoughtfully. It will probably this year, like on an incremental basis, start to approach $100-ish million in that ZIP code. We're not like plunking that all down in the first 1/3 of the year. We can meter that out judiciously because some of it is around how we activate some of these innovations and what collateral we build to do that. So you can, with the marketing side of it, dial it up or down, but a lot of it is really focused on electrification and products for the Pros. Our business model is to delight the Pros and then use that to create the brand halo and then monetize it more expansively in retail with consumers. And so I think, really getting energy electrification in the outdoors and some really exciting things for the Pros is where our focus is.

Okay. But it sounds like -- so $100 million run rate is reasonable by year-end. And it sounds like electrification-type investments are the priority here.

Priority, yes.

And then what about sort of marketing feet on the Street? Is that sort of more '24, '25, depending on the recovery profile?

No. Don is really pushing the team to get to that the back half of this year, especially feet on the Street focused on the pros and the pro channels, are really going to be part of this year.

And the only thing I'd add, Nigel, is these have been happening, too. So as part of our reprioritization last year, it was to make sure that we're focused on some of these priorities and starting to build those investments. And so what Pat is saying is absolutely right on how we continue that trajectory, but it's not as if we have to wait to get started. We're already getting started in a lot of these areas.

Okay. And obviously, the big nuts is the $1.5 billion of supply chain sourcing. How do we think about structural cost savings versus some good news on raw materials? And maybe just catch us up in terms of -- there's a lot of volatility in commodity prices. Lithium is down huge. Steel is a little bit high. I mean, how does that bucket of cost look today versus maybe Jan 1 when you forming the plan?

Again, I'll start, and Dennis can either correct me, given my newness, or amplify some things. But in the $2 billion run rate that we're speaking to, there's nothing in there that is a bet on deflation. Deflation would be kind of in addition to that. And our overriding assumption for this fiscal year as it pertains to our income statement, so the things that would roll off our balance sheet on to our income statement this year is, really, we weren't making a big deflationary bet this year. And the stuff that we're seeing in real time other than container rates is not -- we're not seeing this year in our income statement some big tailwind from deflation. I think deflation is a possibility, and how it unfolds is still to be determined because it's not outside of container rates. It's not ubiquitous significant deflation yet. But everything we're focused on, controlling our own destiny and getting our margins to 35-plus percent with or without deflation, and deflation can add to that. And we -- this year, could there be especially as you're even seeing I think some people reevaluate what is really happening with China, and you're seeing -- like with copper recently, you're seeing copper come off some recent highs because of that. If that kind of stuff starts to happen in our commodity streams, that will be on the balance sheet, and it will come off in the early part of next year.

Right, so 2024. And just one -- maybe one more on the supply chain SKU reduction. I think, 80,000 SKUs is the target reduction, if I'm not mistaken. Dennis, kick me if I'm wrong.

60,000, I think. Well, we've approved 60,000, yes.

Yes, 60,000. So I just raised the target there right now. So what is -- some investors have said, "Well, that sounds like a big number for a retail-focused company." Maybe just put that in context of the total SKUs you're having. And any sort of areas of focus that we should be monitoring?

I'll start, and Dennis will probably add to it. So first of all, for us, think of a SKU as could be a single drill bit, right? And then you might have brand exclusivity with certain channels. So it's the combination of product and packaging. So to put it in context, it's probably not 80,000 bespoke unique things, in general. There's probably 1 drill bit, and 4 packs could be driving that. But we're approaching it thoughtfully. Where SKU reduction is critical to the journey is, one, when you're trying to rationalize your footprint and optimize the performance inside the 4 walls, any complexity you could take out in that journey before, during and after is going to help the cause. And then you want to make room for innovation. Our facilities and our channel partners only have so much room for innovation. And so it's key to innovation, and it's key to optimizing our own facilities. And we're going to go about it thoughtfully. The first wave, which I think is 10,000 to 15,000 SKUs, there was little to no sales, and this became a reduction of some underutilized inventory and tooling and, therefore, it's a space play. And you go to a next wave with very low sales. And you got to go about this methodically to not take opportunity away from your channel partner and swap in like product that you have. And so we're going to approach it methodically. But it is a key space creator on the journey to optimizing our footprint.

And what sort of taxing of sales growth does that have? So if we delete 15,000 SKUs, I mean, recognizing that these are somewhat peripheral, but what kind of growth impact does that have, top line?

Yes. I don't think we're -- I mean, we're -- it's going to be -- we're in Phase I, which Dennis talked about. We've already kind of approved and activated the things that were super low volume. We're starting Phase II. Our approach is going to be to do it in a way where it's not a material net sales headwind. I don't know that we're far enough down the road to say there's nothing there, but we're not going to -- certainly not going to do anything that's not value creating. And we're certainly not going to do anything that tips the competitive dynamic in the wrong direction. And we're going to be approaching it, so that our channel partner is the same or better off, and our stakeholders elsewhere are certainly better off. And I think we see the opportunity to do that. I think the work will get harder the closer we get to things that have meaningful volume to them. But so far, we're confident in our ability in navigating that.

Okay. That's very clear.

And the only other thing, Nigel, that's important in this, too, is that's just one component of this complexity reduction. Equally as important is platforming around power tools, getting more common components, taking some complexity out of the plants that way as well. And so it gets a little less focus in question, but it's actually from a value perspective, as important of an initiative that we're going after.

The common platform is the biggest driver of that.

Yes.