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

All right. Great. Good afternoon. Thanks for joining us. I'm Tim Wojs. I cover building products here at Bairds. We're delighted to have Stanley Black & Decker join us again at our Global Industrial Conference. Stanley is one of the world's largest tool companies, and they own several leading brands that include DEWALT, Stanley Craftsman, among others. From the company, we have President and CEO, Chris Nelson, up here with me on stage. We have Michael Wherley, who recently joined as VP of IR; and then Christina Francis, who also is Director of IR. So I thought maybe we'd start with just a quick state of the union, Chris, and then we'll kind of hop into Q&A.

Yes. So I think we talked a little bit about it in our latest earnings release, but we are on pace to hit a pretty significant milestone by the end of the year with achieving our $2 billion cost out target that we set out as a target at the beginning of our transformation. And we feel good about the progress we're making towards our margin goals at 35% plus, and we're able to see margin expansion in the quarter as well after a one quarter step back due to tariffs. So I thought that, that execution and getting back on the margin trajectory was encouraging. And then we still have on our radar screen. Obviously, the strengthening the balance sheet, and we'll -- we have a stated objective of 2.5x debt to EBITDA, and we've been pretty public about the fact that we likely to pursue a pruning action most likely with our aerospace fastening business to achieve that. And we're on pace to be able to complete that by the most likely the middle of next year, if not sooner. And that will put our balance sheet in great shape. We are looking forward to the continued margin expansion. And then I think everybody is excited to turn the page on the transformation and get towards running a business and growing organically. And really, as I've stepped into the new role a little over a month ago, it's really just focusing the organization on the 3 things we need to pay attention to. And that is we need to absolutely continue to activate our core brands with purpose. We need to drive operational excellence to provide the fuel to continue to invest in the business, and we need to continue to accelerate our innovation engine to be able to continue to build out our pull through with our end users. So I think that we've made a lot of progress, but I think what I'm most excited about is the opportunities that lay ahead as we get towards turning the page on transformation and really competing and winning and growing the business organically.

Yes. I guess, I mean, on that, I mean, those are very logical things that I think you should be concentrating on. I mean, just it's hard for me, from my seat to judge just how big of a change that is internally. So could you just maybe talk a little bit about what you're kind of structurally changing in the organization and kind of what the buy-in is?

Yes. So I guess I've been with the company about 2.5 years. And I'd say that coming in, it was obvious that we have great people, a great set of brands and an organization really poised in wanting to win. But I just felt that there were some things on the focus of the business that had detracted from our ability to really drive organic growth and perform and execute at a high level. First and foremost, and people have heard me talk about this before is that we were a very product-centric business, meaning that it was individual product line by individual product line and then we thought about what brands to put on those products and that was really based on a view of how we could continue to grow our shelf space with channel partners. What we are missing is that doing so really took us a step away from our end users and going and talking to our end users and our customers, they think about us as brands. And what they want to know is what are you going to do with DEWALT that will help me grow my business and drive productivity in the future? And why do I want to -- why do I want to partner with you, whether I'm a large contractor in a certain trade or whether I'm a channel partner. So really wanting to get closer to that end user and think about end-to-end solutions versus point product solutions was a big change for the organization. And we changed it. So we now have -- we have a GM of DEWALT, we have a GM of Craftsman, we have a GM of Stanley Black & Decker outdoor, et cetera. And that has really helped us engaging it closer to our customers and think about what we need to solve for them, and that drives our innovation as opposed to driving innovation and then trying to figure out what we can solve with that. And that's probably the first big thing. And the second thing is taking the opportunity to leverage our scale and change from what was a very fragmented and product-based engineering organization over to one that was centralized. I brought in a new Chief Engineering and Technology Officer, who previously held the position in Otis Elevator and I had worked together with a carrier a number of years ago. And think about a centralized approach where we could understand the specifications we needed for the specific end user, design the products in a platform manner to really drive our scale using common componentry. Whereas before, when we were a product line business, we were -- we had kind of individualized pockets, so a team who worried about drills and a team who worried about impact branches and the team who are worried about [indiscernible] . And it just while you can produce great products, it was difficult to leverage scale and the speed that we needed to be successful. So those are pretty large changes. We're kind of 2-plus years into it. And the buy-in is strong, and they're strong for one reason because it's all based on wanting to do the things that our end users think that we need to do. And that's kind of -- that's in the ethos of the company. And I think as we had spent more time and resources and capital on acquisition and diversification, I think we strayed from what we needed to do, which was to be able to solve problems for our customers and be connected to our customers. And that resonates with the organization and everything that we can do to help us to be more clear in that objective, there's a lot of support behind.

So there are a lot of different kind of silos in the business that -- so you would go out from a cost perspective and you take cost out and you take cost out in drills and miter saws and all those things, but you still wouldn't leverage the total kind of buying power of what Stanley. What have...

I mean pretty simply is that if you had as an engineer, you had the autonomy if you're working on a new drill to create your bottoms-up ground-up motor and module controller and transmission for that drill. And someone next door might be doing the same thing for an impact wrench. And we weren't thinking about how we could leverage that. And that drives increased development time, increased qualification time. And then certainly, it makes it more difficult to leverage your scale as you go out to market and source these components. As importantly or maybe even more importantly, when we think about supporting our end users, that complexity of componentry and sourcing also is -- runs counter to better service for your customers. So the more common componentry, the easier it is to plan the fewer variables you're having to source and actually, it helps you bring down your working capital and increase your -- in the form of inventory and increase our service levels, which we're now running at as high as they've been -- as I've been able to look across the history as far back as I can take a look.

Yes. I guess with platforming, just -- it's kind of a broad concept for investors to just kind of think about like what it sounds like you're almost giving people like almost prequalified kind of here's a parts list for a lot of the commonality between these types of tools. And that obviously gives you some buying power, but then also they're prequalified. It should speed up the development time too. So can you just talk about the platforming concept? And then how we should start to see the financial benefits of that kind of roll through the P&L over the next couple of years?

Yes. I mean it really -- it hits the mark around all, whether it's working capital speed and productivity. It helps along the way. And I would simply describe it as saying a platform product in our definition is one that in excess of 70% of the content is made out of the library of common components. So when we look at a drawing or when an engineer is thinking about creating a new tool, they have a drawing and part of it's in red, part of it is in yellow and part of it's in green. And the red is you can only choose from these 3 motors choices. Yellow means you can take a look at these library and maybe you can change a shaft length by a millimeter or two. So you have a very moderate amount of change the specification available. And then green is knock yourself out, differentiate a way. And what it does is it allows us to have our engineers and our designers worrying about 100% of their time worrying about the 20% of the product that actually makes a difference to differentiate. So counterintuitively, somewhat, we're actually improving our focus on how we can differentiate performance and brand identity with common componentry. So I would say that when will you start seeing benefits. We're seeing them now as when we were as a part of the transformation program to take cost out. What we did out of the gate was we spent a lot of time and effort just on negotiating savings with vendors for sourcing. That gets to a law of diminishing returns. You can only take the same bundle of commodity out to bid so many times. But now what we're seeing is we bring scale together and we're doing more engineered cost savings and kind of aligning on optimally cost of components is that our proportion of material productivity has gone up from round about 5% or 10% engineered cost savings to 30-ish percent, and it will continue to climb from there, which offsets some of the diminishing returns from what we've seen on sourcing. Secondarily, we've seen -- quantitatively, we can take a look and say, this year, as we think about from inception of a program to launch of a product, we're 20% faster than we were. And we know that we have plans in place to take that another 20% down by 2027, end of 2027 and that in an industry that rewards innovation and new product with accretive margins is an important speed mechanism for us to continue to drive margin expansion.

And how does that work kind of across the brands? Because obviously, DEWALT is a pro and there's a very different performance level that's being driven at DEWALT and maybe like Craftsman. So how do you make sure that it doesn't become like too common that the brands kind of bleed together.

That's a great question. What -- the key is that we -- as we've gone to more of a centralized approach to design, what we have asked our product managers to do is to be able to -- and I'll get back to how we're doing this a little bit different. Quantify what we need from an output of the product, not the product we need. So it says, if I'm designing x product for this pro I need to have quantitative performance on power, speed, torque, et cetera, that meets these requirements. So that's really what a customer cares about. They care about how it performs, how it feels and how it how it measures up to that brand promise. Now what's inside of it driving that? You could pick a common motor that's a lower power motor for a Craftsman product that accomplishes what it means to at a lower cost. Whereas maybe you're going with a high power motor on DEWALT. But at the end of the day, what matters is the performance out of it all. And when I talk about the quantitative requirements that we're having people be able to specify out in product development, we've also launched this is more than a year ago. We have no -- let's just say we have no shortage of feedback as to what people think about our products. It's a high-involvement category, and we get pieces of feedback all the time, star reviews, all that and we've actually now developed an AI tool that allows us to take a look at all of that data coming and parse it out, understand what -- how we stack up kind of specification for specification versus competitors, where people like us, where we're over designed, what people aren't valuing what they aren't paying for, and then we can decide how to spec that new product based on that analysis that we're getting out of the AI tool. So I think it's -- whereas before, there was a lot more of a feel of going out to a job site, working with an end user and saying, "What do you think you want out of this and trying to then say, how you wanted that to work? We've taken a much more scientific approach and saying, this is what it actually quantitatively is saying that we have to be able to do and driving the specs that way. That gets you to less of a conversation about kind of emotional trade-offs and more about, one, how you can think about choosing the right component for right performance.

Yes. I mean we've been asking a lot of people about AI. I mean, that's 1 example. I mean, what other things are you kind of doing internally to kind of leverage AI and...

So we've spent a lot of time and effort making sure we first and foremost, set up our own AI infrastructure. And making sure that we have our own environment that it's safe, that it's trusted and it gives the right answers because there are implications in our line of business of telling a person to use the wrong nail and the wrong nailer. We need to make sure that we're -- we have that logic being checked. And we have -- so we have that infrastructure that we've invested in -- and we have had looked at third party, et cetera, and it's, I'd say, above the mean for what people are doing in industrial world. Now we're starting to then roll out our different agents. There's the one I talked about for voice of the customer. We call that one. We've got 1 that's a customer service agent that is that basically is able to bring in all the different data points to our customer service agents and make them much more effective, cutting down their time to answer significantly in order to serve our customers better. We have an agent that we've built that allows us to have our -- a big part of our push is to have our people or end user specialists out with customers more, spending more time understanding what they need, how we can meet their needs. It's actually very labor intensive for someone to then go in and say, "Let me take a look at your array and come with a proposal for what you should buy from us. As simple as that sounds, that can take -- you're talking about thousands of SKUs. What does it match up, what price point, how do you need to have the right accessories, et cetera. We now have an AI agent that we can just feed in the information and we get out the array, the marketing materials, the proposal with the pricing out the other end in a matter of minutes versus days. Now what does that mean? Is it means that I've got people spending more time selling than doing the administrative stuff in the back office. Where we need to take it now is making sure that we continue to deploy at scale and get from pilot to more scale implementation of the things that are going to drive the business. But it's a big focus. I think we're all learning as a management team. It's -- and the -- I would say that the people who excel in the AI world and deploy it at scale, it's not differentiated by technical capabilities. Is differentiated by a management team's commitment and understanding of what it means, what it could do in learning and leaning on that as a necessity of how we do business. That's where we are.

We talked a lot about the kind of platforming and some of the internal changes you had to make on the back end. What about the front end? How are you thinking about kind of field resources, kind of maybe where we're at today, maybe where you ultimately see that going? Because I think just if you're able to kind of fix and become more brand led on the back end, it just seems like there's a big opportunity for you to get more people in the field and just promote and kind of talk about...

Yes, that's been an emphasis for us. It was as we started this journey, I'd say that when I came in on and said, we got to get closer to the end user, we have to become simpler and then that was the concept. It was like, okay, how are we going to put some meat on this bone. And the -- one of the first things out of the gate was just understanding and recognizing, as I talked to customers that we did not have the level of representation that we needed to support our folks in being able to understand what we had to offer. How it worked with the new innovations were and how they could grow with us. So we took -- we have made big investments more than 600 field resources over the past couple of years in areas that we think geographically, we're underpenetrated or where we knew there was going to be construction hotspots or internationally, where we knew we had high-growth countries that we thought we like the market structure. So we see an ROI on those investments in kind of like a 12-month time frame. And this year, if we look at our conversion pipeline versus where it was this time last year, it's 2x the velocity coming through. And I think that, that is the momentum you're seeing with our continued growth in DEWALT. And we will continue to grow that out in a -- over a series of years as we continue to see the opportunities of where we want to very, very kind of tactically invest in the markets where we think we can drive the outsized growth.

And in terms of pace, the -- would your point be we can't just throw Brazilian people at the market because there's just not going to be a return on them. So we're going to kind of meter this out or measure it out and kind of kind of be returns focused as opposed to just kind of blanketing everything with just more field people.

Yes, actually, that was probably one of the biggest challenges for me is that I'm not a patient person at all. And I -- if there's 1 thing that's been my mantra as I've gotten the seat, we're going to move at pace, we're going to make decisions, and we're going to grow and we're going to execute. That's what we do. We are not a holding company. We are successful based on how we win or lose with the customer, and we don't have time to doll, we've got to make decisions and move. I would say that the we knew what needed to be done, but in order to build the infrastructure, the technology support and the training to make sure that we took. It's a big investment to make with 600 people and continuing on top of it. We needed to make sure that they are going to ramp up and be as effective as possible as quickly as possible. So we've metered it out. And I think we've got a machine that's working well right now, and we're seeing the ramp-up periods decrease as we go along. And as we see opportunities for outside is growth, I feel confident that we can continue to invest in that area and see the returns that we want.

Okay. Any questions from the audience? I guess maybe just kind of on that point, kind of tactical with SG&A. I think Pat talked about SG&A being down in kind of the fourth quarter. Is there any specific action kind of driving that? Or is that just kind of a timing consideration just given the environment?

It's more kind of programmatic than that is that we've been very public about talking about how much incrementally we're going to invest in SG&A. And a lot of that has gone to the front end of the business. What we haven't talked a lot about is that while we've been doing that, we have been equally aggressively taking the G&A out of the back office. So what we say is a $75 million to $100 million investment in the front end is actually much more than that because we're actually taking out resources that are noncustomer facing. I would say that One of the byproducts of the fact that the company over the years became more of a multi-industrial type of play that had different legs in more of a holding company is that there was a lot more back office and bureaucracy and support than we needed, and we've been very -- I've been -- all SG&A isn't created equal, and I'd rather have less G&A and more S. So we're constantly moving to have fewer people counting things and more people selling things.

How do you kind of think about battery systems? Because I think what's interesting is like the evolution of this industry has kind of gone from you plug the best product into a wall and it could be whoever to now contractors have 30, 40, 50 of these batteries line around. And there's a real kind of barrier and to the systems and the 20-volt DEWALT system is still one of the leading systems in the world really in terms of batteries. So I guess how do you kind of leverage that and kind of what's your approach there? Because it does seem like if you have those top 2 or 3 systems like you could start to really create a moat around a business where there really wasn't kind of won before.

I'd say it's a great way to think about it, and that's exactly how we do think about it internally. And I'll share is part of the beauty of the way that this industry is structured is that in excess of 80% of the time when a person goes into the purchase cycle with a battery platform, they're going to purchase a tool that's in the battery platform. And that's a staggering number. More than 50% of the time when someone goes into the purchase cycle, it is not because they've lost or lost a tool or stopped working. It's a discretionary purchase because they want to drive more productivity, they like the features or they have a new regulatory safety requirement they have. So it's a discretionary high moat purchase. And if you look at in the professional world, the buying criteria, and this is something that I haven't really seen in my career before, is that price comes way down the list for that customer. Because if you think about it, we actually -- our solutions produce labor arbitrage. We want to be producing power tools that take labor out of a job site, labor is very expensive on a job site. And by the way, it's a bottleneck. So when people see that innovation they can do so, they're willing to pay. So it's that structure is incredible. So what does that mean is that we -- and this is a part of the brand, the kind of market-backed brand ladders. We needed to be more and are more purposeful about saying, okay, around that battery platform, whether it's our 20-volt or our FLEXVOLT or our new power shift higher-capacity batteries. What are the things by trade? What are the tools by trade we need to wrap around that. So a Carpenter can go through their entire workflow and use all the wall tools. So a plumber can. So a concrete worker can -- and that's how you build that moat around the business around -- and you have that annuity from the battery sale, but then you also -- you can build a moat and keep on it. It's a relatively lower threshold to purchase around that platform. And that's kind of in a nutshell, that's how we've centered our professional strategy is saying we want to continue to round out that workflow and continue to define that workflow by high priority trade to put a high moat around that.

Okay. Okay. I mean with the wall, I mean, that's gotten back to growth over the last couple of years. What's been the driver of that? Is it just kind of the pro mix has been better than kind of DIY? Or is it really things like the investments in field resources and new tools and things like that?

Well, we -- listen, DEWALT 7 billion of our -- it's a $7 billion franchise. So it didn't take a rocket scientist to say, "Hey, that would be a good place to start. And if you looked at it plays in a pro market, it's relatively stronger. It has great brand positioning and had great opportunities. So the market has been relatively strong, but then really our focus on making sure that we went with the key priority trades and that we were driving the field resources to drive growth. I think that we have been seeing above-market growth from the actions that we've been taking in what's already a relatively stronger market than the DIY market.

And then you've kind of outlined kind of 3 core brands. I mean, like you said, DEWALT probably makes the most sense. Stanley probably makes the most sense. Craftsman make the most sense. Just -- maybe talk about kind of where you are on kind of reinvigorating both kind of Stanley and kind of what you need to do on the Craftsman side?

Yes. So I'll start with Stanley, for those of you who aren't familiar with it, is it's largely an international brand. 70% of the revenue comes from overseas. And it was a brand that had not really been touched for a number of years. And when I say touched, it wasn't just from a product lineup, but from the brand language, the design language and the packaging and how we can merchandise it. So we -- more than a year ago, we set out and are doing a Stanley product revitalization program that's going to start launching early next year and go throughout the next 1.5 years or so. So it's getting the product right, getting it updated establishing the right target end user and the right target end user for Stanley is the small res construction or handyman as opposed to the DEWALT enterprise and making sure that specifically in a very hand tool intensive business, the European hand tool business is much different than North America. It's a fragmented wholesaler it goes through. And you basically -- it's you have branded walls in those wholesalers, and that's where those small residential contractors buy. You need to be with those wholesalers not only to help them drive demand, but so that you own that wall and you turn it into a vending machine. We had throughout the years, either removed or attrited all of our Stanley brand-specific resources that had the responsibility to call on that wholesaler and make sure that they continue to win and defend that wall to keep that vending machine going. So we've put Stanley-specific resources in Europe that are actually -- they're having a lot of progress getting that up and running. And then as a third element of the strategy, there is a big opportunity in that kind of advanced DIY power tool brand in Europe and rest of the world for a brand, and that's -- we're going to have Stanley we do have and we'll continue to grow Stanley power tools and we'll do that off of the Craftsman platform in the V20. So we'll be able to basically take a red Craftsman DIY product in North America, turn it yellow for Europe and use the same technology to further penetrate that. I would say that we're in a stabilized form right now. And then next year, I would expect to go to growth in the back half. Craftsman was a little bit more of a reclamation project, and we're running out of time, so we'll make this quick. We bought a brand without product. We took a bunch of Pro product and made it red to fit the marketplace, and it was trying to sell a Pro product at a DIY price. Not a great margin solution. We've taken a lot of time to get that properly specified take the cost out of the product and then make sure that we continue to round out that product line for what the DIYer needs. And that is, I'd say, probably late '26, early '27, I would expect to see that kick in to growth.