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

Thank you. Good morning, everyone. Welcome to day 3 of the Morgan Stanley 14th Annual Laguna Conference. It's my pleasure to have with me up here this morning, Chris Nelson, CEO of Stanley Black & Decker. Before we kick things off, I just need to read some quick disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at www.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative.

So Chris, maybe if you have any prepared remarks, anything you want to level set for us before we dive in to take it away.

Well, thanks. Thanks for having me. It's great to be here. I just -- it's about coming up on a year in to me in this role and just a little bit of an update when you -- at the beginning, as I was stepping in, laid out 3 key priorities for our organization. First was to make sure that we really activated our brands with purpose. And we, last quarter, reported growth in our 3 core brands of focus. So we feel like we're making nice progress there with the investments and the focus that we've made in the brands. The second one was to drive improved operational excellence. And we continue to march upon in what is not the most robust volume environment, march towards our margin objectives. And this year, we're feeling good about where we're -- where we've guided on our margins and progressing towards the 35% gross margin area that we have laid out. And then the third one was to really for the long-term lifeblood of the organization to accelerate our pace of innovation. And not only have we -- by the end of this year, we'll have improved our cycle time of our innovation cycle by 30%. But with -- it's really showing up in a robust pipeline of new products we've got coming out in DEWALT, Stanley and Craftsman. So I really feel like the team is organized and rallied around those objectives, and we're making nice progress and it's showing up in the financial results as well.

Great. Well, let's unpack some of that, Chris. As you said, it's been now almost a year that you've been in the seat. I guess, how would you say the company has performed versus your original expectations? Any major surprises or challenges over that time?

No, I feel like we're kind of on pace for where I would have expected to be. We have our say-do ratio has been high, which is really what I needed to make sure we saw happen organizationally coming out of the gates. And so I'd say that kind of on pace for what we've laid out, we still feel really good about the 3-year plan that we laid out at our Investor Day a couple of years ago. Probably the environment has been -- the market has not been as robust as we would have liked. And I'd say that certainly, the volatility that we've seen has been higher than I would have anticipated from everything, from geopolitical trade policy, et cetera. But where I feel like we're ahead of the game is that I think that we have -- do a lot to the volatility and the market environment. We've built a team and a resiliency and flexibility to be able to adjust and continue on towards our objectives regardless of the environment, which I think is really the most important thing to build in an organization.

Got you. You touched on the volatility in the market, and yet many people would take a step back and argue that the macro has been fairly static over the past year. But are you thinking about demand across your various end markets? And is there any material improvement from a year ago in either Pro or DIY.

Yes. So I'd say we did -- we expected our overall market to be in the flattish range when we've laid out our 3-year plan. And maybe up a tick or so, but kind of we're still in that same world. What I would say is that probably the construct there in has been a little different. The commercial and industrial professional, I'm sure that's not a new theme from what people have been hearing has been very strong for us. And our presence and progress in that marketplace has been solid. So I think that, that side of the professional has been strong. We haven't seen any real appreciable inflection in no surprise to anybody in the housing market. And I'd say that the consumer in the DIY world, remains surprisingly resilient in today's world. Now it's not anything that is driving a significant amount of growth, but it's also -- it's kind of its stabilized and allowing those other -- certainly on what we see in commercial and industrial to be more reading through.

Interesting. I guess as you think about that dynamic right now between the commercial professional and the consumer is still being relatively resilient, can you talk a little bit maybe about the progress on the core brand strategies across DEWALT, Stanley and Craftsman? And which of these 3 do you feel most confident about or which do you still see most at risk in today's market?

Yes. So -- well, I'll start with DEWALT. And when I -- I've been with -- for those of you who are just new to the store, I've been with Stanley Black & Decker for call it, a little over 3 years, been in the seat for about a year. But when I came in and was asked as COO to lay out what was going to be our growth in kind of transformation strategy from the go-to-market brands as well as operationally. No surprise to anyone, we started with DEWALT. DEWALT, it's the largest franchise is about half the revenue of the company. It's very strong in the professional ranks and in the end markets that we saw being the most attractive from a growth perspective in the short to medium term. So really what that came down to was like redoubling our efforts to not only win with the professional but expand from what has been our traditional strength in the residential or carpentry trades into increasingly investing in from both a product perspective as well as a go-to-market channel perspective in more of the commercial industrial mechanical, electrical, plumbing, concrete so that has been an ongoing multiyear effort to which we've been growing consistently above market. We've been taking share, and we really, really like not only the progress we've been making in that market, but certainly, when you look at the buildout that's happening in data centers or with energy, we like the longevity of that story as well. So feel really good about where we are from DEWALT. And then we also, at that point, laid out what our 3 core brands that we're going to really focus our efforts from a capital and resource perspective on and it was going to be DEWALT, Craftsman and Stanley. If I go to Stanley next, we really wanted to define what Stanley was going to be as a brand and it kind of -- let's just say it hadn't -- people hadn't paid a bunch of attention to it. And therefore, it had kind of lost its way as kind of like more of a retail kind of DIY-ish brand, certainly in North America and was still strong in Europe, but I'd say under resource. So we, several years ago, started down the path of defining that as that's going to go target the smaller residential contractor as well as some of the DIY or in the workflows being layout measurement, cutting more hand tools. And put a lot of time, effort and resources into a full product refresh, which is just launching this year into next year as well as changing our channel structure in North America to give us more access to different markets other than just the DIY and to certainly have positioned the product line accordingly. And then in Europe, where it's actually the majority, over 60% of the business is Stanley is a European. And as a hand tool brand, that goes through wholesalers there, we didn't have a sales force as strange as that may sound. We didn't have a sales force that was really dedicated to growing that Stanley brand. And it's just a different sales motion than DEWALT and power tools. You got to be with those wholesalers. You got to be helping them merchandise their walls. And so we have, over the past couple of years, been adding those dedicated resources and as a result, now we're seeing good growth. And I think going into next year, we're going to be -- I would be assuming Europe stays relatively stable, we'll be seeing consistent growth out of that brand. We feel good where we are there. The third is Craftsman. And Craftsman, we acquired the brand back in 2017. It was acquired as a brand without a product line. So the first course of action was to give it a product line and which we did. But what we didn't do at the time was to really say what that brand was. And we defined it is a DIY brand. And it's a well-known, well respected. It has the best reputation out of any DIY brand in the world, but it didn't have the right product line for that for that mission. So when we took Craftsman after we acquired it and turned it gave it the products, it was really donor product. So what we had was a DIY brand selling at DIY price points with professionally specified products. So we have, over the past 2 years, really in defining that we wanted to go after the mechanic in the garage. We wanted to go after lawn and garden as well as the home renovation market for the DIYer gone and recrafted that product line so that it is properly specified and costed for selling into that DIY market. This year, we will see the largest product launch cycle that we've had since we acquired the brand. And that's going to continue into next year. So I think as we go into next year, middle of next year, we'll be seeing that consistent growth as well. So starting with DEWALT and then kind of building on the other legs, I feel like by the time we're kind of middle of next year, we'll have kind of that -- those -- that consistent, repeatable and really the growth we can count on, which is a key part of the strategy.

Got you. Interesting. I'll come back to that point because I think that momentum in both Stanley and Craftsman into next year is something that I think it warrants a little bit more time but you mentioned something there on DEWALT kind of caught my attention that you have been growing above market, you have been taking share. But what gives you confidence you can continue to outgrow the market consistently here? Is it product refreshes? Is it the go-to-market strategy? How are you kind of thinking about the confidence you have there to continue to grow share?

Well, I think that the beauty of what we're doing in DEWALT is that we have a lot of opportunity to really continue to not only grow in our -- what I'd say is our core verticals, but gain share in some of the ones in the -- whether it be mechanical, plumbing, concrete. And the consistency approach is what is the most important with that brand in those markets. And that is -- by that, I mean, we need to continually make sure that we're building out the product portfolio that our professionals need for their entire workflow and then redefining what innovation looks like in that work. So with the large professional enterprise user, there is a relatively -- there's relative price insensitivity because what you are selling is you're not selling a tool, you're selling labor arbitrage. If you can innovate in turn of one person -- or a 2-person job into 1 person job or drive your power of your tool that it gets done quicker, that is -- you just think about it in the context of a data center. They're looking for hours and days. If you can do that with your tools, you have a willing audience. So consistency in that targeted product development approach. And then we know that in order to be successful in those -- specifically those enterprise commercial markets, you need to make sure that you have the support on the ground for the training, the product swap outs, the availability, all the above. And we know that there are continued -- that we have a continued investment list of where the next markets are that we can continue to invest and grow above market. So the combination of that from a consistency perspective, it's continuing to do what we have seen and what we have seen work well and that we know that we -- where we go next with the innovation and the investments in the go-to market.

Got you. Maybe let's switch gears a bit, obviously. This has been coming up a fair amount at this conference and arguably, it was coming up even last year's conference. But for good or bad, you guys have been in a position to need to proactively navigate the fluid tariff policy and the changes over the last 18 months. Do you feel right now that you have the right manufacturing footprint to adjust for future tariff policy changes? And are there changes that still need to be made to be more flexible and/or resilient as you kind of navigate this environment?

Yes, you're right, it has been good and bad. And the good has been that it is -- it has been a crucible that has helped our organization evolve and be flexible very quickly. I think what we've accomplished over the past couple of years of really optimizing our production footprint in a challenging environment as well as taking the right steps to secure our supply chain and our pricing to continue the margin journey has been, I think, really a proof point for what this company can accomplish. Now as far as where we are in that journey, I do feel like we have -- we're close to being at equilibrium of where we need to produce. I had said that -- by the end of this year, we would be at or about 5% from China consumed in the U.S. We're on pace for that. Additionally, we had talked about being at or above industry norm levels for USMCA qualified product, which are obviously currently tariff exempt. We're on pace or ahead of that. So we feel good about that. Now what is the next step is that we moved production into facilities, existing facilities in the right location to maximize or, I guess, minimize the tariff exposure. A lot of that meant moving what was consumed in the U.S. back to North America. What the next step is now that we've gotten to the locational equilibrium will be to make sure that we consolidate and scale and reduce the number of rooftops that are producing those in the individual markets because that, by nature, makes us more flexible. If we have fewer components, fewer rooftops and more -- any changes that come in the future, we will be increasingly flexible to move quickly. But I feel like our general geographic footprint is where it needs to be for the current environment. And our capabilities and skills that we've built over the past couple of years lends itself well to be being successful in whatever environment comes down the road.

Got you. Let's maybe move over to margins. You've made strong progress on your adjusted gross margin targets to date. But what do you see as the main drivers to go from 32% to 35% for a full year?

Yes. So First of all, when we laid out that plan in that objective, we -- just for everybody in the background, we laid it out with the assumption that it was going to be in a fairly flattish market environment. So we're not counting on a big market recovery or a lot of volume tailwinds. So it's all volume -- flat volume productivity. If you look at what has taken us to where we are thus far, we had the $2 billion cost out program. A lot of that was essentially driven by more centralization and scaling of our sourcing capabilities. And then really reinvigorating or restarting what had been fairly dormant engineered cost reduction, material cost reduction program. So that was, by and large, what the majority of the $2 billion out was for that time frame. Going forward to get us from the 32% to the 35%, there's really 3 key levers. One is we have been working very aggressively in the background to increasingly platform our product designs, meaning that we have reduced the number of components in our library for motors, controllers, transmissions, everything that goes into our products. And we're building our products and designing our products off of those splits for the sake of argument we call them LEGO blocks. Now what we see going forward is that our opportunity to drive further engineered material cost reduction based on that platforming program, is pretty significant. And this year, call it, roughly 50% of the savings that we're driving from material productivity are enabled by that platforming program. I expect it to continue to accelerate. The second thing is we, over the past couple of years and as part of the transformation, we laid out much more of a rigorous lean operating system in our facilities. That is allowing us now to benefit from taking labor content out of the production process, not only through continuous improvement, but we are increasingly, as we've kind of commonize some of what we're doing, we have room to do point type of automation that will continue to take that labor content down. That's another big thing. And then the third is what I referenced earlier is that we still have a pretty big opportunity to rationalize our footprint and therefore, be able to flex better with volume with a smaller, more concentrated footprint from a rooftop perspective. It's not a question that I haven't fielded before, as you might imagine. And what I always wrap up by saying is like of all the things that keep me up at night, having the levers and the opportunities from a productivity standpoint to be able to drive to that 35% margin is not one of them. We have clear road maps or activities that are within our control, and we've built the team and the capabilities to get there as well.

Got you. Maybe let's just double click on that for a moment, right? As you think about those kind of 3 constituents there of what could drive margin upside what inning would you say you are in across those 3 right now? Is it -- are they all kind of running in parallel to one another? Or are you further ahead in one than the other.