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

All right. Good afternoon. Thanks for joining us. We will keep the discussions going with Stanley Black & Decker. Thrilled to have Pat Hallinan recently joined Stanley as the CFO; and Dennis Lange, who runs the Investor Relations group. I'm Joe O'Dea. I lead the multi-industry effort at Wells Fargo. So thank you so much for being with us. The way we'll run this, I'll turn it over to Pat. He's got some opening remarks and slides, and then we'll dive into the Q&A and throughout sort of I'll give you opportunities to ask questions, if you have any. So with that, I'll turn it over to you, Pat.

Thank you, Joe, and greetings, everyone. As Joe mentioned, Patrick Hallinan joined Stanley about 10 weeks ago from another durables company, Fortune Brands. And I have a few slides. We'll go through about 3 or 4 slides that really serve as an update on the Fortune portfolio and the transformation that we have underway. And then Dennis and I are happy to answer questions from Joe to the extent Joe is taking them from the crowd. The first, a portfolio update. So obviously, a lot of strategic change and operating change at Stan Black & Decker over the last 12 to 18 months, but in particular, a portfolio streamlining and organizational streamlining. So the portfolio today is 2 businesses of global tools and outdoor business. That's just shy of $14.5 billion in revenue or about 85% of the revenue flow of the company. And then in Industrials business, that's about $2.5 billion in revenue or about 15% of the enterprise revenue base. The tools and outdoors business is a global leader in tools and outdoors equipment. Obviously, built with the acquisition of a number of brands, some highly focused brands and some broad-based brands. Each brand playing a little bit differently by category and geography. In the industrial business, is really 3 businesses. There's auto and industrial fasteners business and aerospace fasteners business and then there's an infrastructure equipment business, attachment to large construction equipment. But the leadership team at Stanley Black & Decker and the Board is in the process now of taking these 2 asset bases and really unleashing the full power of them. Getting back to the strength of the brands and innovations, improving the cost structure through a set of operating capability enhancement and rebuilding and then using that margin improvement to fuel investment and growth. And so the -- Don Allan, who's been leading the company as CEO since the latter part of last year, put us on a very, very important and powerful transformation journey. The endpoint of which is on the right side of the slide here, the endpoint of which is to get back to the historic growth rate of these brands, which these brands have traditionally grown in the mid- to high single digits. So if you're thinking about our markets globally over many years, it's tends to be a GDP -- nominal GDP market growth rates. So if you think of that given that we have a big portion of our revenue in North America, 2% to 3% market growth rate is getting these businesses back to growing 4 to 6 plus time and getting our margin structure such that the gross profit margins are back to 35-plus percent and significantly reducing our inventory and getting our cash conversion back up towards 100% of net income. But the first step in this journey is driving the cost structure improvement, and we're doing that through a set of very powerful operating levers, strategic sourcing, complexity reduction, footprint rationalization, product platforming and so forth. And so that initiative was kicked off last year in concert with some organizational streamlining. We globalized the operations and the supply chain team, along with the corporate functions and really streamline the SG&A. And so the goal of this journey is to deliver a run rate savings by 2025 of $2 billion a year of total savings. $1.5 billion of which comes out of COGS driven largely by these transformation levers, and the other $0.5 billion is coming out of SG&A, most of which was achieved by the end of last year. And we're already at the run rate savings for the SG&A by this point this year. And then once we get the operation savings to the level we expect and are on track to attain, we're going to start reinvesting in the business for growth. This year, fiscal '23, we'll be making a modest level of investment -- incremental investment of $100 million to $150 million of SG&A investments, mostly around product, a little bit around field, sales and support. But as the power of the transformation takes hold, we'll be stepping up that investment likely to the range of $300 million to $500 million a year. So think of it as planting out of the water at $2 billion plus annual cost structure improvement, reinvesting $300 million to $500 million of that once we get to 2025. And as an update on the transformation and that cost improvement journey, we're well underway and on track with our savings. In Q1, we drove $230 million of savings versus that $2 billion. It was a mix of COGS and SG&A. At this stage in the journey as far as the income statement is concerned mostly SG&A but the COGS stuff goes on to the balance sheet and will come off. And since the back half of last year, we've achieved a run rate of $430 million against that objective. And just as important as improving the cost structure is improving our cash generation. And so this year, we have an objective to say -- to reduce inventory, $750 million to $1 billion and use that to delever the balance sheet. And we delivered $200 million of inventory reduction in the first quarter, which is especially powerful considering that usually in our industry and for us, specifically, we're building inventory in the early part of the year to get ready for a construction and spring outdoor season. And so this First quarter, a $200 million inventory reduction is usually when you're in the $300 million to $500 million of inventory build. And we've seen -- we've reduced inventory over $1 billion since last year and are tracking this year to be in that $750 million to $1 billion of savings and $500 million cash generation out of that inventory reduction. As we also invest in this transformation initiative. So '23 is a year of cost structure improvement, that's sustainable cost structure improvements to fuel future growth and inventory reduction and cash conversion improvement. And we're well on track to deliver the levels we've guided to this year and the capabilities we're building are such that we have confidence that we're going to continue to achieve the savings that we've targeted for '24 and '25, which are an incremental roughly $500 million a year of COGS savings. And so we feel that the leadership team and the Board together, starting with the transformation that got underway in the middle of last year is well underway to drive the cost structure improvement to invest in growth and really get back to unleashing the power of our people and our brands and our innovation. With that, Joe, I'll turn it back over to you for questions.

No, terrific. Thank you for that. And sort of related, I wanted to start on more of the cultural side of things and really a question for both of you. Fresh eyes perspective and Dennis may be seeing some of the transformation that's been underway. But maybe what stands out to you most in terms of a cultural shift as you go to a leaner organization. And any anecdotes about how Stanley today is able to operate in a more agile manner.

Having, in a prior life gone through the journey of an enterprise that's built through acquisitions like products, but not the same and one in either brand or product silos, where somebody who's driving the revenue also controls their own operations and supply chain. That flying formation can be powerful in that the leader of the business feels in control of the whole value chain. But rarely in that flying formation, do you get to the optimal cost structure? And do you have the ability to build -- first of all, a track world-class operating and supply chain talent but also unleash the potential of it. And so most consumer businesses, whether they're durables or faster-moving consumer goods have gone to a globalized ops and supply chain transformation. And what's really impress me about Stanley, I'm 10 weeks in is how quickly they were able to make that pivot and unleash the power of it, right? I mean you're talking -- this is the middle of last year the first time that the Tools & Outdoors business has a globalized operations, supply chain capability. And we're already in the run rate savings of hundreds of millions of dollars in a quarter. And with the stereotypical types of cultural change and some frictions along the way, but the fact that it's happened this quickly and had results this quickly is pretty striking. And I think speaks to the decisiveness of Don and his leadership during a challenging time of really making this call and making it work and bear fruit this quickly, I think that stands out to me.

Yes. I'd say the biggest change in how the company managed versus the past year. I really would say it comes down to the focus that we're trying to communicate. And in the past, we were more a portfolio of businesses and we ran them that way. Where today, it's much more set up like an operating company and the day-to-day operations of the tool business. Our Dons radar, day in and day out. And that's something that it's just a different company now and we've kind of set up the corporate structure to be able to run it that way.

Got it. And then I think as part of the transformation efforts, the revenue growth objective is to grow at sort of 2x to 3x GDP. When you kind of break that down, how do you think about the pricing component of it? Because I think historically, pricing hasn't been a big top line driver for Stanley and then how do you think about sort of the tools market contribution in terms of the tools market can grow at a certain pace, but what your share gain opportunity is to sort of reach that 2 to 3x GDP.

Yes. I think -- and Dennis can layer on if I missed something, but I think broadly, tools and outdoor equipment there, especially given the bulk of our revenue being U.S., Canada and Europe is kind of in that GDP is the market. And you're right, not just for us but for the industry, I would say, aside from innovation, the market grows at nominal GDP, and the pricing is kind of that inflationary difference between nominal and real GDP. I think the [ onus ] on us so is to be focused on our innovation because we are in a SKU rationalization journey, but to be using innovation as a driver of margin enhancement that might drive the price points up, and it would show less as a price increase when we give an external reconciliation as part of a quarterly close but drives pricing and margin improvement up. And there's been -- the good news is, I think, a long-standing, high-quality innovation engine inside the business and now a renewed set of energy focus and resources being put to it.

And then I wanted to shift to the cost side and the costs that you target taking out. And if we think about the $1.5 billion related to COGS and I think cadence, it's about $500 million a year, and you've expressed pretty good visibility into that. So can you just talk about -- we think about sort of each of the next 3 years what the most important contributors are to achieving, say, that $500 million in each one of those?

Yes, I'd say -- and you have it correct, right? I think '23, '24, '25. Obviously, there was a modest portion in the latter part of '22. $500 million a year, you're going to see strategic sourcing and continuous improvement and lean inside of our facilities are bearing the early fruit. They're going to bear fruit throughout and probably strategic sourcing is disproportionately the driver across the whole program. But I think what you're going to see this year in '23, where we'll have about $500 million in COGS savings this year, disproportionately strategic sourcing and continuous improvement inside of our plants, lean and otherwise. And then underway, but less impacting the income statement this year, are footprint rationalization and the full potential of lean and continuous improvement initiatives. So I think what you're going to see over the course of '24 and '25 is the effects of the footprint rationalization that accentuate all the implant performance improvement. But the early years and throughout the program will be dominated by strategic sourcing, continuous improvement. But the footprint rationalization that happens across '24 and '25 will get it to the full optimal expense.

And does that footprint rationalization, does that envision some sort of footprint CapEx at the same time that there's rationalization of other just...

Correct. On a few fronts. One is the CapEx that is invariably required to either move existing product lines or if you're going to enhance automation and bring those into where you're moving things. But while there's a net reduction in the capacity in the footprint, there is an increase in our distribution that is happening in North America to improve service levels and ground logistics optimization.

And then I think if we factor in SG&A as well, talk about sort of a total $2 billion opportunity with $300 million to $500 million of that kind of earmarked for reinvestment. You focus on the reinvestment part of it. Can you just talk about sort of the phasing of that? And what are some of the highest return investments that you're targeting?

Yes. I think I'd start it with really kind of what's the most constructive way to pursue accretive growth that's sustainable, which is and there's been a longstanding tradition of the business, especially some of the most powerful brands like DEWALT, which is win with the Pro in innovative product that improves the productivity of the Pro and then use that as a halo that allows you to succeed with consumers often in retail. And so right now, the emphasis of the innovation engine aside from the -- I should say, in addition to the outdoor electrification, but it's a bunch of pro tool and tool storage innovation that eventually makes its way into the retail arena. So that's the reason I bring that up is you ask kind of what's the phasing of the investment. It's going to be around innovation for Pro and tools, electrification and outdoor and then amplifying the field sales and support we're giving to the Pro, not just in the U.S. but globally, and then flowing that through towards monetizing it fully in retail. And as you go down that path, you're going to be enhancing digital capabilities and doing more consumer brand building. But I'd say like we mentioned this year, $100 million to $150 million of innovation and field sales and support is heavily focused on pro tools electrification of outdoor.

Is there anything on the innovation side that we should be mindful of when we just think about sort of time line, next 12 months planning? What you're thinking about whether they're sort of product or capability gaps or just sort of new waves of products that we should sort of have our ear to the ground waiting for?

Well, I think the things that are going to be most visible to someone who's not in the trade and living with what's coming out for new concrete equipment, which probably most people in this room are dialed into that in their daily lives. So I think the things you're going to see from Stanley Black & Decker that is most visible to you is electrification and outdoor equipment, really innovative storage solutions and further electrification of power tools that today are largely cord in things like miter saws and that kind of -- that's going to be the stuff that is most tangible to the infrequent do-it-yourselfer or the very serious do-it-yourselfer through the retail channel. I think when you're talking grows, you're talking a whole host of battery-powered nailers -- battery-powered construction equipment and an increasing amount of pro caliber battery-powered handheld outdoor equipment. Those will be kind of the initial wave that you'll kind of see latter part of this year and throughout most of '24.

And how has electrification changed the R&D considerations? Have you seen sort of across the competitive landscape? Is there a faster flywheel on sort of innovation front? It is requiring that much more sort of investment dollars?

Most definitely. And it's not -- I mean, some of it is what anybody would guess, which is power and run time. Those are obviously 2 key-key variables. But part of it is when you're starting to put batteries on to corded power equipment, there's a balanced element and the hand feel element to it. And then as you're putting batteries on outdoor equipment, there's -- outdoor equipment consumes a lot of energy for secondary task. Like when you cut grass moving the grass either into a bag or injecting it from lawnmower. So how power is used, what purpose it serves and the role of the battery and the equipment, isn't just purely power run time. It's more than that. And there's multiple battery technologies that allow you to get to smaller, more powerful batteries and so forth. So a long-standing capability in the business has been working with stereotypical battery suppliers on taking capabilities they have and tailoring them to power tools. And it's been a huge part of what we do so much so we're -- we've been meaningfully upgrading our battery R&D and testing facilities in [indiscernible].

And then I want to ask one on inventory before switching to the Tools segment, and then I'll open it up for any questions in the audience as well. But you touched on the $750 million to $1 billion targeted to get inventory down this year. It would still put the company in a position where kind of days of inventory would be well above where it was in that 2017 to 2019 period. So how are you thinking about inventory beyond what's targeted this year and what do you think about is the right amount of inventory for the company.

Yes. I think by the end of this year, we're in the kind of 140-ish, 150-ish stays or thereabouts versus maybe a more historic norm of 120 or less. 120, [ 115-ish ] or something like that. We'll get it towards the 140-ish level at the end of this year. And then we have 2 years of a fair amount of footprint rationalization distribution center expansion. And so I think there'll be a reduction over '24 and '25, but it will be in the modest hundreds of millions of dollars range as we use some inventory slack to move things around in production facilities or to stand up new distribution centers. And so we'll make modest progress for a couple of years. And then as we get towards the end of '25 and the network is set then we'll be pointing ourselves towards more historic levels of inventory reduction. But that's probably a late '25, early '26 I say.

Any questions in the audience? All right. Let's move on to the Tools & Outdoor. And I wanted to start on the do-it-yourself segment. And if you can just talk us through sort of the experience kind of through COVID. How strong things got as you started to sort of see all that activity, how far they've come down and sort of where we are today from a volume perspective relative to kind of pre-COVID.

Yes. I think the best way to think about it is as we kind of diagnose where is on demand, particularly after things reset last year on the consumer side of things. You're seeing growth over 2019 on a dollar basis. So much of it is driven by price. So overall, the business from a volume perspective is relatively flat to slightly positive. If you kind of go under the covers 1 layer deeper, Pro is still showing strength from a volume perspective. And then the consumer side of things now is below where it was from 2019 volumes [ standpoint]. So overall, you saw just a really strong environment that started in the middle of 2020 and lasted through the first quarter of last year and into part of the second quarter. That broadly has reversed, but it depends on the consumer segment on how complete.

And I'm not sure share gain in other factors, but any sort of context around you think about those Pro volumes relative to 2019 or the do-it-yourself volumes relative to 2019, how much above or below those might be?

I mean, broadly, if you think about how much price was put in the channel, you're somewhere in the double digits, like 12% to 13%, 14%, somewhere in that zone. And you're going to be showing a few points of volume on top of that in the growth scenario. And then obviously...

And then how do we think about it moving forward? So just in terms of stabilization that you've seen into it yourself or how you're thinking about the Pro cycle, I think the guide embeds some slowing in Pro, not sure kind of what you're seeing relative to kind of that guidance outlook as we go through the year.

Yes. Yes. So overall, I think we're pleased with kind of where the Pro has trended this year, especially versus kind of how we set up the year. I think you've heard us at other conferences, the outdoor season has been choppy, mostly because of the late start and the weather. It's not something [indiscernible] company, just more what many customers and manufacturers have been [ reporting ]. But all told, I'd say we feel very good about where the volume trends are. And obviously, from a Pro perspective, which is a big piece of the business and tools, trending in a good spot.

Related to the outdoor side of things, I mean how are inventory levels there? Like how well positioned are you to kind of manage the weather unknowns with where inventory is.

I'd say the outdoor season this year, the spring summer one, not over yet. Dennis said, it's been choppy, a bit softer than we'd like in the tools business benefit a bit better than we like. That kind of keeps us in our guidance zone. But as we get towards the end of this outdoor season, we'll have to make decisions with our channel partners on how best to manage the inventory that's been deployed. I think it -- in outdoor specifically, we have less hangover from the prior year and the COVID period, and it's more just the setup for the season and what you plan to do for the season. So I think we'll have to make a decision on how much do you try to discount and move at the end of the season versus where do you hold over. But I think it's going to be within the bounds of managing the outdoor business in its normal seasonal kind of rhythm.

And how does that inventory management factor into innovation, new product launches, if you're thinking about, we're going to carry this much excess inventory at the end of the season, and we're carrying that over. Does it really make sense to do this product launch or we push out that timing are these linked or do you generally [indiscernible].

They are. But I don't -- given what I've seen in the product map around mowing and what will be in the winter snow blowing. We have very targeted and impactful innovation that's coming out as opposed to like whole category product line blow it up and replace that type stuff. So I think we're going to be able to get the targeted innovation we have in for this winter season and for next year's summer season.

And then on the pricing side of things and in particular, on tools, kind of 2 areas to address this. One, just any level of competition that you're seeing and if you've seen that step up on the pricing front? And then two, just let me see what's happening with some of the input costs are you starting to sort of face any pressure from your customers on sort of pushing for price down?

Yes. On the first, we've seen no meaningful change in competitive dynamics. I mean we're not alone with other manufacturers of wanting to reduce inventory, but we're getting that done through production curtailment as opposed to price. And I would tell you, we're seeing like pricing discipline from other manufacturers. I'd say the retailers, given the retailers are experiencing a traffic pattern that is the Pro is still on their store, but the consumer and the -- especially the discretionary consumer is much less so, they're monetizing the more focused set of traffic that they have. So retailers have been -- other than traditional seasonal promotions, retailers have been biased to be price disciplined themselves and to keep prices high. And in fact, when we look at our list prices at retail, they're even, in some circumstances, higher than we would advocate they be, so the retailers themselves are driving pricing. So I'd say -- the pricing environment is appropriate given the traffic and its discipline. I'd say when we flip it to is the change in the commodity dynamic resulting in some level of price pressure from large customers of buying power. We have not seen that yet. And the reason we haven't seen that yet is, I'd say, other than container freight rates, which started falling pretty much at the end of last year, it's pretty early days of seeing metals and minerals change significantly. And they're one only spotty starting to affect our procurement and going on to our balance sheet. And there hasn't been a big fall. And I would say for us and most of the industry, we never passed along the 100% of the inflation that was in there. So we're not yet to levels where we've seen some collapse in commodities that is beyond that is below our pricing. So if and when that type of stuff happens, I'm sure we'll be talking with our channel partners constructively, how do we both grow sales and margins. I'm sure those discussions will happen, but we're pretty far from that level of commodity change. And I'm learning the Stanley Black & Decker business. But if you look at U.S. and European durable businesses in '17 when there was a pretty big deflationary period, in particular, metal deflationary period. Most companies saw margin expansion in that horizon.

And then on the market share side of things, what do the sort of the cost initiatives underway, if any, what kind of impact have they had on sort of market share and your ability to sort of grow market share as costs kind of take in front the front seat, share gains have taken a back seat? Or when do you think about being able to maybe engage in a more assertive way around share?

Yes. Dennis may chime in. But I think the last year or 2, where we've maybe had some share issues in spots has been really supply chain-driven and the help of -- did we have the product available to compete. And certainly, as we go forward, our objective is to win over the users and the customers with innovation, not trying to price to get back to that. I would say, our organization probably this year has a bit of a bias towards margin and cash, but not really at the expense of growth. I would just say we're just trying to be judicious of where we really invest for growth because we need to get our margin on our cash generation where it could be to drive a returns profile that then makes you want to put that much more money on growth. And so I'd say it's something that's on the margin, but it's not like we've told our people forget about selling stuff to save money. It's -- let's get the margins and the cash conversion, where it needs to be, and then we'll give you more resources to compete for growth.

And then I want to circle back to just a couple on outdoor. The -- first, by what point in the year should you have a pretty good idea of how kind of outdoor has played out. So as we deal with the sort of oscillations and weather and uncertainty there. I'm not sure at what point in the year, you kind of feel like you have a much firmer view of where outdoor demand will be for the full year. And then the other part is related to MTD and the channel. And I think part of the value add was the opportunity to leverage that channel through some legacy family product is where you are in that process?

Yes. Yes. Dennis can maybe hit on where we are on leveraging the channel, but I would tell you that the choppiness and softness in outdoor has been much more retail oriented than independent dealer oriented. I think similarly, the Pro and outdoor has been there. It's been less of that. I think we'll obviously, we can't give results until the end of the quarter. We'll know by the end of June kind of where we sit in the outdoor season, and we'll talk about that as part of the quarterly results. I think as we get through the 2/3 through the month of June, we'll know largely where we stand with outdoor.

Yes. And as it relates to the independent dealer network, we've -- obviously, we closed on the transaction towards the end of 2021 December. Last year was about really getting organized around what is not only the selling organization that's going to go after this, but what's the product portfolio that we're. Then this year has really been -- in late last year into this year, it's been about activating them. And so we have a dedicated sales force that just works with the 2,500 unique pro dealers that we have out there. One avenue is DEWALT handheld products, being able to sell those in for pro uses. There's not only outdoor products in that space, but also there are some tools that those landscapers, those users tend to use that could be part of that solution. And then over the long term, it's looking at the floor and saying, how can we electrify zero-turn mowers, platform movers, think along those lines that the Pro can demand and also work DEWALT as well as our legacy brands with Cub Cadet and Excel to have a whole solution for these this network. So I'd say it's early days, but obviously, last year was about kind of bringing the businesses together, and now it's about kind of going and activating. And it's going very well. I'd say a lot of success in that channel. It's one of the fastest-growing parts of outdoor as we started the year, and we expect it will continue to be.

Perfect. Well, I think that brings us to the end of our time. So thank you very much. Really appreciate you being here.

Thank you Joe.

Thank you. Appreciate the interest.