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

Good afternoon. I'm Tim Wojs, I cover building products here at Baird. And we're delighted to have Stanley Black & Decker join us again at our Global Industrial Conference this year. Stanley is one of the largest tools company globally. And they own several brands, including DEWALT, CRAFTSMAN and STANLEY among others. So from the company, we have Pat Hallinan, who's CFO here; and we have Dennis Lange, who's the VP of IR. We're going to start with a few prepared remarks from Pat, and then we'll go into Q&A. So I will turn it over to you.

Tim was joking before our microphones were on, how much time I'm spending on tariffs. So we decided to at least start off with tariffs. Myself; our CEO, Don Allan; and Chris Nelson, our President of our Tools business, will be out quite a bit between now and the early part of December. So we wanted to be consistent in what we are saying. And also, we have an Investor Day at the New York Stock Exchange next week. And so we wanted to be consistent in what we're saying. Obviously, tariffs are something that could affect our industry or for that matter, any durables manufacturer with a good portion of their business in the U.S. And so we wanted to put something out there that gave people a framework for how to think about tariffs and how they might affect our business. We certainly don't know if something will happen or for that matter, if something were to happen, what would happen. But we at least wanted to share what's been running through our minds. So tariffs were put in place starting in 2017. And the waves of tariffs that went from like '17 to '19 affected our business back then to the tune of about $300 million annualized. And over that period and in the subsequent years, we mitigated those tariffs down to about $100 million, a little bit less than that, that course through our income statement today. And so one scenario that seems possible to be coming at us and as a business, we wanted to be in a proactive set from a planning and mind share -- and mindset stage is what if the tariffs that are already in place get raised. So right now, you have List 301-Tariffs that go through List 1 through 3 and 4A that are at 25% today. Those are the ones that are costing us just shy of $100 million today. If those went up to 60%, which is where some of the rhetoric has been, it would add -- that move from 25 points to 60 points would add $200 million of annualized tariff expense. Again, we don't know if that will happen or won't happen. It is certainly one of the quickest things that could happen because it could kind of happen with the stroke of a pen as opposed to a whole new framework needing to be put in place. And our teams are already planning in case this does happen. So planning on what would be some of the supply chain moves that we would take, what might be some of the pricing moves that we would make and then how would we continue ongoing government relations. And we'll keep all of those things in play. I don't know that we'll take any firm actions before something actually does occur. Though I would say reducing the U.S. market's reliance on China was always part of our longer-term supply chain strategy. So some of this swims towards our longer-term supply chain strategy to diversify the U.S. market away from China more. And while it certainly could give us something to manage in the near and medium term, our leadership team remains very confident in our ability to get the business back to the gross margin that we think it deserves and had prior to COVID at 35-plus percent. And we're making a big pivot towards growth. We've had some really nice growth from our DEWALT brand, and we fully intend to accentuate that. And while tariffs might pose a time wrinkle and all of that, we are very confident we get through them, and we start to mitigate them like we did in the prior wave of tariffs. But that's -- we at least wanted to open up with that and put forward our U.S. COGS base, which you see on the slide, we have about $6 billion of U.S. COGS broken out at least where the product ultimately comes from, the 45%, 50% U.S., which I think people lose track of. We're still pretty heavily U.S.-based by our heritage and then the rest of the world, about 25% to 30% in China -- 20% to 25%. Just so people want to run their own scenarios, they run their own scenarios. We're trying to avoid a lot of speculation on this topic, but we didn't want to avoid it all together.

Yes. No, I appreciate that. I guess maybe one topic -- one question on that and then we can go to some other things. But if I remember last time when this happened in 2017, 2018, there were some intra-industry kind of differences, too, where you guys might have had some tariffs, and other players in the industry might not have had the same. So I guess, a, is that true? And at least this time around, like it would kind of be a little bit more uniformly applied, and it could potentially not be quite as big of a competitive disadvantage than it was?

Yes. I think we believe that to be the case. I don't know. None of us knows what will happen. I think a big dynamic that Tim is referring to is components versus finished goods. I think all of us have as much as we can. And our percentage out of China used to be like 40%, 45%. So you see it's down to 20%, 25%. And all of us have kind of diversified as much assembly as we can out of China. But a lot of the guts and power tools, ultimately, whether it's us, whether it's TTI, Makita, Bosch and others, we're all pretty similarly exposed in that regard. And so yes, we feel like strategically, probably a bit more level playing field, but we'll kind of see where it goes from here.

Okay. Okay. Great. So you mentioned you're going to have an Analyst Day next week. I, don't want to spoil all your fun, but I don't know if there's any high-level topics, what you plan to present to investors at the day next week?

Yes. I don't know I'm going to spill all the beans, Tim, but I would say we obviously knew this could be a noisy time to have an Investor Day, both politically and macro-economically, and it certainly is that. But we have a relatively new leadership team, and we're at an important part of our journey. For those of you who haven't followed our old story, we certainly put ourselves on a much needed turnaround late '23 -- or late '22, early '23, but those goals only went through 2025. So what we plan to talk about next week is how do you think about earnings potential of the business and the financial targets that we'll have beyond '25. More specifically, how are we pivoting towards growth and going deep on our 3 big brands of DEWALT, STANLEY and CRAFTSMAN. And then in some of the key parts of our industrial fastening business around auto, aero and general industrial, and then finally get to meet the new leadership team. So where do we go from '25, how do we pivot to growth and meet the new leadership team, those will be the focal points of the Investor Day.

Okay. Okay. Great. I guess as you think about next year and just the swing factor, we talked about tariffs, we don't have to talk more about that. But I guess aside from that, how are you thinking about the swing factors on the sales side? You've got transformation savings that will run through the P&L. What are some of the big bucket puts and takes as you think about next year?

Yes. I think I will start with the top line. I think while we don't yet see in the Tools & Outdoor space broad-based growth yet, we do feel like the marketing is starting to show some green shoots and turning. It hasn't sustained positive POS. I mean those who saw Depot's POS today, it wasn't positive yet, but better than expected. And I think that's a pivot point for next year. I think the fact that inventories are relatively low across the channels is a potential pivot point. And hopefully, in our Industrials business in the auto sector, the auto sector kind of corrects its production schedule by the latter part of this year, early part of next year. And that at least cleans the deck for an uptick. And then I think where the 10-year goes is going to be -- where the 10-year and the actual effects of immigration are going to be the unlocks for kind of growth off of what I think could be a pretty clean slate as we head into the year.

Okay. I mean on the DIY side, do you think it's just rates at this point? Or do you think there is a way -- there are ways to stimulate demand outside of just the 10-year going down 100 basis points?

I think when you're talking particular DIY, I think always innovation can play a role, but I think a bigger role would be housing churn and therefore, rates. I do feel like that's the key. I do feel that there's still enough going around in the pro space where innovation is a key unlock there. You don't need only rates there. So...

Yes. So really more on the consumer side, it's kind of -- rate piece.

Yes.

Okay. Okay. And then I guess on the transformation, just what are the things internally -- so I mean historically, you guys have made acquisitions as a way to expand brands, expand product categories, those types of things. And now it sounds like you're really coalescing around 3 brands and taking -- you always had organic growth, but I mean, maybe taking a little bit more of an organic approach internally. So what do you need to change like within the organization to get everybody swimming on that more organic path?

Yes, I do think you're hearing and witnessing a real pivot towards a bias more towards organic. It's not that we won't ever do M&A again. I don't know that in the medium term or the near term, it's going to be a major contributor to our growth. And in fact, I think I speak for the whole leadership team that we'll -- we're going to make sure we have a really good organic platform before we start piling acquisitions on top of it. So we are going to be focused in our Tools & Outdoor business on those 3 big brands: DEWALT, STANLEY and CRAFTSMAN. And Chris Nelson, the leader of that business, has really made a very significant pivot in that he's completely retooled the leadership team. We have a new brand leader, we have a new sales leader, and we have a new Chief Technology Officer. And he has the strategy being brand-led much more than sales-led and a very focused effort on how to grow organically within each of the major trades category. So a very focused brand-building initiative, a very tailored new product initiative and all the engineering resources in the new product initiative being run through one Chief Technology Officer to accelerate pace of new product introduction. So I think those are big levers to drive organic growth, and that's what he'll be talking about a lot next week.

Okay. Okay. Can you just give us a flavor of like -- we've talked about kind of complexity reduction a lot, over the last, I'd say, 2 to 3 quarters. And I think that's a big part of your savings this year. Just how -- I guess how complex is some of these operating platforms in terms of different brands -- smaller brands, bigger brands? I mean what are you kind of doing differently to kind of lever that complexity reduction effort?

The complexity angle has had 3 different roles in our transformation. The initial wave that got a lot of airtime was around pure SKU reduction. And a lot of those SKUs are either low-volume SKUs that probably weren't generating enough contribution relative to the holding cost and complexity they brought or where we had a lot of abundant substitutes where we could streamline things. And the teams ran through that very quickly. I mean we're fully through those dynamics. That complexity reduction allowed us to move footprints around and to have fewer roofs -- and then when we have fewer roofs to have centers of excellence under each roof. And that's the part of complexity reduction that is ongoing. So for a long time, Stanley, we had acquired a bunch of companies. We had done some back-office integration and route-to-market integration, but we had largely left the value chains distinct. And we needed to get value chains across brands and product lines shared to a much greater extent and creating centers of excellence for whether we're talking about cutting tools or whatnot under one roof. And then we're just now starting platforming, and platforming will be a third wave of complexity reduction that runs through the transformation. And so all of these things are going on. They all have an overlap. The first wave was really to reduce the clutter so we could move the plants around. Now that we're moving the plants around, how do we get better platforming so we get better procurement scale and are more able to introduce automation into processes.

And was it just like as you built some of the brands or just want to [ being ] silos so that you just have certain components in this brand that should overlap with that. And so you're bringing a lot of that together?

And we also had -- we had never until Chris reorganized the business had a single point of engineering so that every product leader could start an engineering initiative virtually from scratch and wasn't compelled to standardize across whether we're talking motors or circuit boards or any part of the componentry, which didn't mean we were always bespoke, but it certainly didn't prevent a lot of unique things from happening.

Okay. Okay. I guess you have this 35% plus kind of gross margin target that's out there. It doesn't sound -- correct me if I'm wrong, but it doesn't sound if -- that, that's not achievable in your mind anymore. It's just the environment is slower, and we just -- I mean we haven't had volume growth in 8 quarters. And so it's just -- there is a natural kind of volume leverage that you need to kind of get back to that. So just -- it could push that out into 2026. Is that kind of how you were trying to frame that on the call a couple of weeks ago?

Yes, yes. And Tim is referring to our third quarter earnings call. There were some questions around, hey, are you going to get to 35% gross margin by the fourth quarter of '25, which has been one of the targets out there since we started this transformation. And I would say we still haven't given up on that. It still could happen. And if you put tariffs aside for a second, there has been mounting volume headwinds, longstanding in the Tools & Outdoor space, but I think somewhat recently in the automotive space and our fasteners business. And there's been a measure of ground freight inflation that hasn't been tied to petrol prices, which have actually been pretty reasonable. It's been more tied to labor and the cost of trucks. And so those headwinds have been mounting now for 2 or 3 years. And they probably raised the challenge to that fourth quarter, 35%. But you're correct. We don't believe it's out of reach. In fact, we believe we get to 35% and beyond. Platforming probably allows us to go meaningfully beyond 35%. That's something we'll talk about next week. But I do think whether it happens in the fourth quarter of '25 or sometime in the midst of '26 is going to be determined a little bit by the volume, a little bit by the inflation or deflation dynamics in the market. But I'm heading to Baltimore tomorrow to work with a team to see how do we make sure we're getting there as quickly as we can. So we're constantly scrubbing the options in front of us to do that.

Any questions from the audience? Maybe just kind of focusing on tools just a little bit. I mean maybe just with the 3 brands that you have today or that you're going to focus on, CRAFTSMAN, DEWALT and STANLEY, I guess what is the health of those brands just in general? I mean I think DEWALT has been growing a little bit. CRAFTSMAN has maybe been a little bit more challenged because of DIY, but just maybe level set everybody on where those brands are kind of currently performing.

So we have brands beyond that, that are also being actively managed, but most of our attention and resource allocations are on those 3 brands, DEWALT, STANLEY and CRAFTSMAN. I think DEWALT is still in a healthy spot. It's grown the last 6 quarters in a row in a down market and continues to resonate very strongly with users around the globe and with channel partners around the globe. I do think you're going to see much more intentional new product development in that space, meaning rounding out specific opportunities we see by trade and much more in the way of post-launch activation in the market, whether that's with end users or with channel partners to drive demand. And that's a brand -- could be healthier, but it starts from a good spot in that it's growing in a down market. STANLEY is a brand, a bit of a mixed story globally, right? STANLEY is truly a global brand. It's probably every bit as big, if not bigger outside the U.S. They're kind of roughly equal parts of the business. But outside the U.S., it has a sizable power tools component, sizable pro and DIY component, whereas most of us here in the States know STANLEY as kind of a hand tools brand in the States. We haven't done everything with that brand we probably could have and should have. It's a brand that could benefit a lot from some innovation, but also some industrial design and packaging refreshing and some additional brand building. And so all of that will be going on, not just in the U.S. but globally. And we intend to get that brand back to the health that it once had. And then many of you know CRAFTSMAN is a brand we bought from Sears some years ago. We've had it heavily focused on the DIY space, and in particular, in Lowe's and Ace. And that's a brand where we stretched it very quickly when there was maybe a bit less going on at Lowe's and made some hay there. We still see it as a very high-quality DIY brand. And we're going to be a bit like DEWALT focusing the innovation there on some of its traditional core places like in the garage, outdoor, hand tools and being very intentional where we take that brand. But we think both STANLEY and CRAFTSMAN while the health isn't where it could and should be, we still feel like there's a big opportunity in front of us to get that where it needs to be.

And I guess like when you look at like the outdoor power part of the business, I mean, there's a couple of other brands there. I mean are you kind of using DEWALT as the vehicle from a brand perspective in PE? Or is it still going to be a mix of kind of DEWALT in the battery side, but then also Cub Cadet and some of the other brands that were there as well?

Yes. I'd say in simple terms, DEWALT playing a pretty big role anywhere that's handheld, anywhere that's battery even if it's not handheld and in particular, in retail, you're referring to some other brands we have like MTD and Excel, Cub Cadet. And those brands still really resonate in pro channels. And our focus there is getting cost efficiency into those products so we can make them more competitive in those channels.

Okay. Okay. And then I guess, something that maybe -- I don't know why, but it kind of flies under the radar is just how do you think about like -- or how would you articulate your approach to battery systems? Because I think over the last 10 years, obviously, we've gone from corded to cordless. And there are benefits to that in terms of locking in users, creating a moat, creating an aftermarket stream. So I guess it's something that doesn't come up as much with investors as maybe one would think. So I guess, how do you guys kind of think about batteries and trying to build these moats and -- these battery pack moats?

Yes. And I'll start on a few things and Dennis, who's been in the business longer than I, may add to it. So what Tim is referring to is, any of these power tool companies, we have battery systems. It's not a trivial part of the purchase. And so once you buy it, it's a bit of a switching cost. It's not the only switching cost. So I'll get to the battery part. But we've been doing a lot of strategy work the last 2 years under Chris Nelson and pro users, if you can give them something that enhances productivity, safety or durability, those things resonate every bit as much, if not more than batteries. Now battery is a nice complement to that, but I wouldn't say your only moat is a battery moat. We have pros across the trade telling us, if you improve our productivity, safety or you improve tool durability, you'll get our business, and we'll pay for it. In terms of batteries, our 20-volt system, as far as we can tell, has as many users as anybody's, including maybe somebody else you're referring to there. And I think that will be an anchor to a lot of the handheld tools for both pros and DIY-ers. And then you're aware of the fact that we do -- as we bring some applications like concrete and so forth into this, you have some even bigger battery systems. But I would say our 20-volt system is going to continue to be the anchor. And it is an important moat, but it's not the only moat. I don't know if there's something you'd add to that, Dennis.

No, that was very comprehensive, Pat. But the only other thing I'd add is if you think about how much opportunity is out there in our markets, it's vast. I mean you take the top 2 players in the industry, and we have less than a quarter share. So there's a lot that we can expand into and continue to push into with the attributes that Pat was mentioning.

Okay. Okay. Good. And then I guess from a -- I guess maybe switching over to like the balance sheet and kind of cash flow. Obviously, just inventory build, trying to get that kind of worked off the balance sheet? I mean what's the, I guess, intermediate-term opportunity to continue to take inventory and working capital kind of out of the business?

Yes. Right now, we'll finish this year '24, probably around low 150s, 155-ish days of sales on hand. We'd like to get that down to 130. Again, like anything, tariffs could impact that pace. But again, tariffs aside, we'd probably be on a pace in any given year of $300 million to $500 million. That would be kind of the ZIP code that we'd be in because we're doing this inventory reduction while we're also doing a distribution network retool and a plant moves. And so those things kind of work counter. And so that's why it doesn't just all happen at once where we drain the pool all at once. But I'd say having us on that pace of $300 million to $500 million a year, probably closer to the $300 million than the $500 million, but that's kind of the trajectory we'd be on absent any kind of tariff disruption.

Okay. Okay. And from a deleveraging standpoint, I mean, it does seem like you're pretty focused on getting that back below 2.5, 3x over the next couple of years. Obviously, improving EBITDA is a big piece of that. It does sound like maybe you could look at divesting something within the tools business to also get there.

Yes. I would say our objective is to get under 2.5x net debt to EBITDA as quickly as we can. And next year, again, assuming anything from tariffs is modest, you're probably like at 3x or thereabouts if you don't have any big tariff impact altering that course. And then you probably need to divest something if you want to get that last $500 million to $1 billion, at least within that time frame. Obviously, we could go out. But we've -- we're investment grade. We've been talking to the agencies for a long time. We've kind of held a rating for some time now, and we'd like to get to 2.5x as quickly as we could. And that probably means divesting one asset of size, and it's probably something that will generate $0.5 billion to $1 billion. I'd say it's more likely to be something from our industrials portfolio than our tools portfolio, but we'll have to see kind of what's the nature of the M&A markets, what's the state of the business readiness, that kind of stuff. But there's a few assets that are less critical to our long-term growth and that we feel the right trade-off for investor value creation and balance sheet deleverage we'll be selling.

Okay. And I guess in industrial, I mean, you've made some divestitures within that business already. I mean just maybe what's left there right now? And I guess kind of overall, what's the strategic value of kind of owning the industrial business.

Yes, the industrials business, a little bit bigger than $2 billion in revenue. It's a fasteners business. So we make a whole host of fasteners for assembling, automotive, aerospace, appliance and other general industrial applications. We make the fasteners. And in some cases, we also make the tools that insert the fastener, whether that's a robot, a hand tool or a welder. And it's a bit of a razor-razor blade type model in some of the instances. The biggest part of it is automotive. It's about $1 billion of that. And not far behind that is the general industrial business. A much smaller piece is aerospace. We have a nice aerospace business, but it's about $300 million. And that's probably the one where you're a small aerospace business in a world of giants. Is that the one that maybe -- you either have to get a lot bigger or maybe it will be more valuable to somebody else other than you. There's a lot of the value of the 2 businesses together, there are some equipment that gets deployed in the fastening business that pulls from our power tools business.

Okay. So there's a little bit of that. Okay. And then I guess just lastly, competitively, competitive environment, there's been a lot of kind of cross wins the last couple of years. It seems like you're taking share in parts of the market with DEWALT. Who do you think is kind of losing out? Is it private label? Is it smaller brands? How do you kind of think about share?

Yes. I think you're referring mostly to developed world power tools. And I think, obviously, TTI has done a really strong job with their brand. And we feel like we've done a strong job with DEWALT, maybe not as strong as we could have, and we fully expect to get there. I do feel like there are some other big players on the international stage that have, along with private label, been the recipients of some of our competitive advances, both theirs and ours and TTIs.

Okay. Great. We're out of time. So please join me in thanking Stanley for being here today.