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

All right. Well, thanks for joining us. We're going to continue and actually conclude the first day of our 17th Annual JPMorgan Homebuilding and Building Products Conference. Saving the best for last, of course, with Stanley Black & Decker. Really happy to have with us CFO Pat Hallinan as well as VP of IR Dennis Lange. Again, my name is Mike Rehaut. I cover the builders and building product names for JPMorgan. This presentation will be a fireside chat, but we will have time at the end for Q&A.

So again, thanks, Pat, Dennis and team, for joining us today. I'm going to kick it off just with first question kind of around earnings power, kind of a little bigger picture. Your '24 guidance, EPS of $3.50 to $4.50, it includes about a 30% average gross margin. 2025 expected maybe to get on average to perhaps 32%, 33%. Not putting words in your mouth, but just kind of doing the math, on the way to 35%. There could be potentially some increase in growth investments. I'd love to hear your thoughts on that. But how do you think about earnings power over the next 2 or 3 years? And maybe within that context, Tools & Storage margins as well.

Okay. I think when I got here a little more than a year ago, I was already up against '24 guidance -- or '23 guidance that Don had given, right?

'24.

But I think it's a fair question. The macro and the deflation has been more of a headwind than we expected when we started on this transformation journey. But we have every confidence we're on the right path. And so as we think through the next 2 years, I certainly think assuming there's not a recession and assuming there's not some big inflationary shock that's outlandish, could our OM margins be double digits in '25 and beyond -- beyond the 10% or 11% in '26 is something -- is very much within the realm of possibility and certainly something we're trying to achieve. I think what people -- what you're getting at is, are you going to invest away your margin expansion? And I think the reality is we want to and will invest in innovation and brand building. But about the pace at which we can really make that productive on an annual basis is in that, call it, $70 million to $100 million a year. So I think -- could we go a little bit beyond $100 million? Perhaps, but we're not going to be consuming all the margin expansion. So we're very confident in our gross margin path of finishing this year at 30%, which has the back half of this year at 31% average, of getting to 35% by the fourth quarter of next year, which that means we're going to be in the 32%, 33% range for the average of next year, and then having a measured amount of SG&A expansion but therefore taking our current OM margin, which is barely high single digits, and getting it into that 10% to 11% range and then potentially 11% to 12% beyond that. We definitely believe that this business can and should be in the longer term beyond the '26 horizon high teens or better EBITDA margin business. So in terms of Tools & Outdoor, I think that pretax operating margin can and should be mid-teens or better? Most definitely. I think it would be the kind of business that's going to be 35-plus percent, probably at least that range on gross margin and SG&A in the low 20s, if not 21-ish. So that's a framework I would give you. I think if there was a macro, I'm kind of giving you that under the assumption that '25 and '26 are, at best, low single-digit macro. And that inflation or deflation is something moderate in either direction.

Okay. Thank you for that. Balance sheet leverage, I think, is another big area of concern. Maybe again, you could just kind of share with us your goals in terms of leverage and debt paydown over the next couple of years. And obviously, you've done a lot on the portfolio side to perhaps sell some assets, drive some additional cash, some additional debt paydown. So just how might that overlay as well when you think about the balance sheet?

Yes. Again, I'd start with the end in mind. I think probably at a time beyond '26, we're in that 2.5 net debt to EBITDA range. But I do think by the end of '26, we could be in the 2.5 to 3x, and probably by the end of this year, approaching 4x. I'd say that's mostly on the backs of we just closed our Infrastructure sale at the beginning of April, which was a little bit more than $700 million in net proceeds with debt paydown. And from there, that's mostly on the backs of organic cash generation. I think we will almost certainly do some very small and minor portfolio trimming within T&O when the M&A markets are appropriate for that, and we'll get a few businesses in a little bit better shape. I'd put that in the $0.5 billion or less range, which might then in '26, get you to the lower end of that range if the businesses are ready and the M&A markets are ready. I think there's been a lot of speculation on what we do within Industrial, which is a much bigger asset. And that -- the ranges and reference points I just gave had nothing to do with Industrial. I'd say we keep open-minded on that. That's a longer-cycle business that is recovering, especially we were mostly wide-body commercial aerospace. We've done a really nice job of getting more narrow-body and more defense in that business, and that aerospace business is recovering very nicely. And then it's our challenge. Is there enough synergies between these businesses? And are they similar enough that they should be together? But we're -- we'll always do what's right to generate the most value creation for our shareholders, but we're not in a rush in Industrial. And we feel like the overall balance sheet risk, while we fully acknowledge we have more work to do as we sit here today, and we're not really going to feel as comfortable as we'd like to fill until we're at 3 or below, we feel like we're on a good track with or without doing something with Industrial. That should be more of a strategic move.

And just to make sure that was clear, too, sub-3 is kind of exiting '25.

Yes.

Correct. So '24 end around 4x, ending '25 that you hope to get to below 3.

Around 3, yes.

Around 3. Okay.

Yes.

Okay. One of the things mentioned on the recent earnings call was the outdoor business, having some encouraging U.S. retail POS data, maybe showing a little bit of an early start to the selling season versus last year. If that type of trend continues, what type of impact could that have on the Tools & Storage business in terms of revenues for the year?

Yes. I think -- I don't know if we're at a point where you -- one would want to predict that and then therefore change guidance. But I'd give like an order of magnitude. Our legacy handheld outdoor business is around $800 million in revenue. And the kind of current status, if you want to call it the year-end '23 status of the acquired business, is around $2.2 billion of revenue. So you got about a $3 billion business. And if the season kind of kept the shape of a seasonal curve that was traditional, could that be a couple of points of growth on that? That's not in our forecast. I think that's somewhere in the 1 to 3 points of that. That's very possible.

On the $3 billion?

On the $3 billion.

Right. Okay.

That's why I wanted to give you that. I don't know if that will be the case or not the case, but I certainly think that's possible. And I think if that were to occur, most of it would probably fall down. I mean I think at any given point in time, you can make some incremental investments, but we want to make incremental investments thoughtfully. And Chris Nelson has his team with a very specific game plan for this year. And while there's room to do a bit more, we don't just want to invest to invest. So I think there's a good chance that a good chunk of that would slow down.

Right. Okay. Competitive environment, another big area of investor focus. On the last call, you talked about the competitive environment being stable, although -- and with the promotional environment kind of returning to historical levels. So how do you expect the backdrop to continue this year given that consumer DIY is still a little bit muted. How do you think things can progress in that type of scenario as it might continue?

Yes. I would echo what we said on the call. I'd say even through -- I would say the consumer demand became particularly soft, and this is -- obviously, most of last year was soft on the outdoor front. But kind of I'd say and broader tools kind of became soft in the middle of last year that I'd say retailers and manufacturers alike have been pretty disciplined. In large part, I think it's because it wasn't like they had a lot of traffic that was coming in and leaving with nothing. They had an absence of traffic. And so that steered them away from over-amplifying promotions. And that's still, I would say, the general experience. And I'm sure many people in this room took some time today to peek at Depot's earnings, and they're broadly in line with their guidance. And I would say, like much of the sector, a little bit softer on the top line, marginally than anybody would have liked. That's where I would say we were hoping that our demand would have been better in the first quarter but making it up on margin and expense management. And I think if the rest of the retailers and pro channels play out that way, I think they're going to end up staying disciplined this year. I think the competitive dynamics stay healthy. They stay focused on innovation, focused on brand building, focused on smart working capital reduction. Those are the things we're focused on, and we haven't seen any dynamic that suggests that's changing.

Right. Okay. On the growth side, I mean, you did highlight in the first quarter that DEWALT did grow a little bit and maybe highlighting some of the drivers of that growth. I believe volume was down maybe 1% for Tools & Storage, if I remember right. So I'm assuming, correct me if I'm wrong, if there was some growth in the DEWALT, it wasn't that -- I would think probably in the low single-digit range if I can...

You're in the ZIP Code. You're in the ZIP code. And I would say that's even controlling where we had some placement gains where we had ship-ins, and that would be even controlling for that.

Okay. So you talked about growth being driven by a combination of factors, higher fill rates, new products, customer engagement, highlighting the brand. How do you kind of segment out those factors in terms of contributing to growth? And how might those different factors drive growth going forward?

Yes. I would say those were things that were all helpful. They were all taking effect in the back half of last year. And while there were -- there was innovation shipment in there. We still have growth without innovation shipments in the mix. DEWALT's been a brand -- I think our whole portfolio has been so challenged that the strength of DEWALT hasn't got an opportunity to shine. And it's been a brand. It's maybe not in perfect health, but it's certainly in good health. And it's certainly been performing better than the market. Last year was a market where the whole market was probably down mid-single digits and DEWALT was just barely below 0 last year. And so what we want to keep doing as we pursue increasing organic growth is get DEWALT's performance amplified. It's been positive. It can be a lot more positive. And then in some of our more challenged brands, in particular, CRAFTSMAN and STANLEY, get them back to the brand health they should have. And I think that's why you don't see the strength of DEWALT when you have some other brands that are performing as well as they can and should. And Chris Nelson's team is focused equally on both as a new Chief Growth Officer who's working on taking DEWALT to higher highs and making some big turnarounds in CRAFTSMAN and STANLEY.

Okay. No, that's helpful. I mean it kind of leads into my next question because certainly -- and the question I have now is -- kind of refers to that 2023 highlight where you said that DEWALT did kind of outpace the industry. But at the same time, maybe kind of take a step back and think about maybe holistically, your tools share, where it is today versus 3 or 5 years ago. And to the extent that there have been share changes in the industry, maybe some of the other shifts with other -- the other participants, how things might have played out. And how does that kind of then impact what you want to see or what you want to accomplish over the next 2 or 3 years?

Yes. And I'll touch on some of it. Dennis might be able to add a little bit more to the arc of 3 to 5 years that I underappreciate. Certainly, as you think of -- and I'm assuming because you're focused on this topic, mostly kind of the power tools chunk of the world. The DEWALT hasn't been the top grower, but it's been better than average in a category that's been pretty challenged from the early days of '22, probably the second quarter of '22 or thereabouts. And I think what has been helping DEWALT and one other brand you're probably thinking of in your head is, one, the pro has been disproportionately the share of wallet of power tool purchases, which has helped any pro-centric brands at the expense of some non-pro-centric brands, some that we own like CRAFTSMAN and some of that maybe somebody else owns. And then what we've seen is some of the European and Asian brands really kind of retrench and go back to their home ground because they've been having a hard time holding and gaining share in the U.S., especially post COVID as they retrenched on the expense side of things. And so I think the share gains that have been happening have been happening at the price points below the pro price points and at the expense of some European and Asian manufacturers. Can we and should we be getting more of that? Yes, and we will. But I think that's been -- those have been the recent dynamics. And I and the leadership team is focused on getting all of our brands to be growing anywhere from 100 to 200 plus basis points higher than the market. But I don't know if you would add anything on the kind of the longer arc of history.

No, I think you have it characterized right. One thing to keep in mind, too, is where some of the brands that you referenced earlier -- I mean, we didn't have a CRAFTSMAN power tool business 10 years ago as an example. So there are headways that we've made over this time period. There was obviously a big disruption period where it was noisy. It was harder to parse out share, market, et cetera. But we've come out with kind of what have Pat's describing it, and we have priorities right. And we feel like it's a big opportunity to be able to have more consistent and larger share gains in the business, which is what we're investing in.

Right. So I mean on that, obviously, you continue to put out there an organic growth goal of 2 to 3x the market. And I don't know, I think you just kind of mentioned 100 to 200 basis points, but I don't know if it's part or...

Yes, I would say we kind of think of the market. Our market is kind of real GDP. If you're talking 2 to 3x that you're talking, the 4% to 6% range is kind of where you're talking. And I would tell you that in the very near term, given that the macro is still a little bit soft, we're probably on the lower end of that range in the next couple of years.