Q3 2021 Stanley Black & Decker, Inc. Earnings Conference Call Transcript

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Q3 2021 Stanley Black & Decker Inc Earnings Call

EVENT DATE/TIME: OCTOBER 28, 2021 / 12:00PM GMT

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OCTOBER 28, 2021 / 12:00PM GMT, Q3 2021 Stanley Black & Decker Inc Earnings Call

CORPORATE PARTICIPANTS

Dennis M. Lange Stanley Black & Decker, Inc. - VP of IR

Donald Allan Stanley Black & Decker, Inc. - President & CFO

James M. Loree Stanley Black & Decker, Inc. - CEO & Director

Lee B. McChesney Stanley Black & Decker, Inc. - VP Corporate Finance & CFO of Tools & Storage

CONFERENCE CALL PARTICIPANTS

Jeffrey Todd Sprague Vertical Research Partners, LLC - Founder & Managing Partner Joseph John O'Dea Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst Julian C.H. Mitchell Barclays Bank PLC, Research Division - Research Analyst

Kenneth Robinson Zener KeyBanc Capital Markets Inc., Research Division - Director & Equity Research Analyst

Markus M. H. Mittermaier UBS Investment Bank, Research Division - Head & US Equity Research Analyst of Americas Electrical Equipment and Multi Industry Research

Michael Jason Rehaut JPMorgan Chase & Co, Research Division - Senior Analyst Nigel Edward Coe Wolfe Research, LLC - MD & Senior Research Analyst

Robert Cameron Wertheimer Melius Research LLC - Founding Partner, Director of Research & Research Analyst Timothy Ronald Wojs Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

PRESENTATION

Operator

Welcome to the Third Quarter 2021 Stanley Black & Decker Earnings Conference Call. My name is Shannon, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Vice President of Investor Relations, Dennis Lange. Mr. Lange, you may begin.

Dennis M. Lange Stanley Black & Decker, Inc. - VP of IR

Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2021 Third Quarter Conference Call. On the call, in addition to myself, is Jim Loree, CEO; Don Allan, President and CFO; and Lee McChesney, Vice President of Corporate Finance and CFO of Tools & Storage.

Our earnings release, which was issued earlier this morning and a supplemental presentation, which we will refer to during the call, are available on the IR section of our website. A replay of this morning's call will also be available beginning at 11:00 a.m. today. The replay number and the access code are in our press release. This morning, Jim, Don and Lee will review our 2021 third quarter results and various other matters followed by a Q&A session. Consistent with prior calls, we're going to be sticking with just 1 question per caller. And as we normally do, we will be making some forward-looking statements during the call based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate and as such, they involve risk and uncertainty. It's therefore possible that actual results may materially differ from any forward-looking statements that we may make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent 34 Act filing.

I'll now turn the call over to our CEO, Jim Loree.

James M. Loree Stanley Black & Decker, Inc. - CEO & Director

Thank you, Dennis, and good morning, everyone. This morning, we announced a record third quarter, which was powered by 11% growth, primarily a result of an impressive 10% organic growth performance. Customer demand remained at robust levels across commercial and retail end markets and strong trends continued in homebuilding and remodeling, commercial construction, professional activity and global economic growth. Innovation was also a positive, which is driving demand around electrification and other themes.

We're continuing to prioritize meeting this heightened customer demand while operating in an unusually complex supply chain environment. I thank our 56,000 employees around the world for delivering record revenue under the circumstances. And in particular, I want to offer special thanks to our employee makers and plants, DCs and operations organizations as well as our sales and service people for their incredible dedication, agility and resilience to serve our customers during this period as they always do.

Tools generated 13% organic growth in what we believe to be the strongest demand environment in our history, resulting from positive

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OCTOBER 28, 2021 / 12:00PM GMT, Q3 2021 Stanley Black & Decker Inc Earnings Call

secular trends, robust professional activity and strong global markets. Our brands such as DEWALT, CRAFTSMAN, Stanley and Black & Decker, among others, were fueled by a steady stream of innovation and a strong and resilient supply chain, which is putting great products in the hands of our loyal end users across the globe. Industrial grew 1% organically, driven by continued double-digit growth and share gains in our general industrial and attachment tool businesses. as these end markets remained solid.

Industrial growth was tempered, however, by lower auto production activity as OEMs continue to be impacted by electronic and other component shortages. Aerospace also experienced trough conditions as the industry recovery while promising to be likely in the foreseeable future, has yet to occur. Security delivered another strong quarter with 8% organic growth. The security transformation to a data-enabledcloud-based technology provider is building significant momentum, and our team successfully converted this robust backlog into revenue growth. Order rates were strong and we posted a third straight record quarter and backlog.

We're excited about the full potential of these opportunities to support elevated revenue growth in the fourth quarter and beyond. The overall company adjusted operating margin rate was 12.2%, down from the prior year as growth investments and higher supply chain costs that accelerated in the quarter more than offset volume leverage, price mix benefits and margin resiliency. Adjusted earnings per share for the quarter was $2.77, down 4% year-over-year. And similar to most companies engaged in global trade, our supply chain costs were higher this quarter. We have worked tirelessly to get components and finished products to where they need to be to serve this extraordinary customer demand. Through data analytics, we now have visibility into every container on and off the water, and we utilize this visibility to prioritize and expedite the most critical items, often with premium freight. To offset the additional expenses, we have deployed price increases, surcharges and productivity measures.

To be clear, we have made a conscious decision to incur temporarily higher expediting costs to serve our customers and meet demand as effectively as possible. We have sized the pricing and productivity actions to ensure that we are well positioned to address the inflation and achieve margin accretion in 2022. This implies that our actions will be sufficient to restore our margins to normalized levels as the actions catch up to the higher costs in 2022. And further, we remain highly confident in our multiyear growth and margin expansion plans. There are several positive secular demand trends that are benefiting our businesses, and we remain bullish on the resi and nonresi construction markets as well as the industrial recovery.

We have developed an array of growth drivers to position our businesses to capture this opportunity, and we are continuing to invest in innovation, manufacturing, automation, inventory and our supply chain to meet the strong demand in the near term and fuel sustainable growth over the medium and long terms.

And now I'll take a moment to review our recently announced MTD and Excel acquisitions. The combination of these 2 high-quality complementary companies with our existing outdoor business creates a powerful growth engine with approximately $4 billion of revenue across all categories and channels in the $25 billion-plus outdoor category. Of the $4 billion, we expect approximately $3 billion of that in -- of the $4 billion to be a direct result of closing the 2 transactions in the coming weeks. Even before that, we are starting from a position of strength with strong outdoor brands in DEWALT, CRAFTSMAN and Black & Decker as well as the fastest-growing franchise in cordless electric outdoor products.

Our legacy outdoor business is benefiting from the long-term trend of electrification, primarily now in handheld products and walk-behind mowers. MTD is one of the leading players in U.S. retail with great brands such as Cub Cadet and Troy-Bilt and brings a relentless dedication to innovation. Excel focuses on zero-turn mowers and offers a range of premier commercial grade and prosumer equipment, with Tier 1 niche pro brands such as Hustler and BigDog. Excel also brings us access to a strong and extensive professional dealer network. These acquisitions are complementary to each other and fill gaps in our current presence in the outdoor space, which brings me to another major growth driver.

With these acquisitions, we have an ESG opportunity to lead large-format electrification and outdoor. The customer adoption of electrified riders and zero-turn mowers is still in the early stages but the future potential is compelling. In collaboration with MTD, we have been making great progress since 2019 in developing innovative electrified solutions that offer a compelling value proposition in terms of run time, price point, and environmental impact. Additionally, MTD has semiautonomous and autonomous mowing technology, which we will commercialize in the coming years.

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OCTOBER 28, 2021 / 12:00PM GMT, Q3 2021 Stanley Black & Decker Inc Earnings Call

Outdoor will undoubtedly unleash an array of impressive innovation over the next few years. Global channel development and professional branding are significant additional revenue synergies that we think as we think about ways to grow sales through our future outdoor activities, applying MTD's strong innovation with a leading professional brand like DEWALT presents an excellent opportunity to win the pro user with a full line of gas and electric options. To fully realize this potential, we plan to build on our existing position in retail as well as expand our sales in the pro dealer network.

MTD has a strong presence in the retail channel with approximately 1,500 dealer locations. Excel exclusively distributes through its 1,400 outlet dealer channel, which is largely geographically complementary to MTD's dealers. The opportunities for brand, product and channel revenue synergies to expand sales and carry accretive margins are both meaningful and exciting.

And finally, on one more outdoor growth front, we have an opportunity in the $4 billion high-margin parts service segment as we build our presence and serve our customers. The benefits from this growth will also come with margin expansion as we apply our SBD operating model and our global scale to execute on cost synergies, launch margin-accretive innovation and develop a vibrant professional franchise. We expect these opportunities to provide a pathway to mid-teens or higher margins over the long term. Both acquisitions are currently progressing through their respective regulatory processes. And for MTD, we are happy to say that the United States HSR review is complete. Additional reviews are underway in several other smaller countries. We currently anticipate to close in late 2021 or early '22 for both transactions pending successful completion of the regulatory processes.

And as must be obvious, we're excited about the future of outdoor products at SBD. The significant ESG growth and margin opportunities have the potential for excellent value creation in 2022 and beyond. Extreme innovation is at the heart of SBD's culture. It is one of our 3 strategic pillars: performance, innovation and social responsibility. Innovation differentiates all our franchises and defines our brands. Over the last couple of years, we have brought incredible innovation to the market from FLEXVOLT to ATOMIC and XTREME and now DEWALT power stack and Black & Decker reviva, which I will cover in a few moments. It is clear that our tools innovation machine has never been stronger.

Nonetheless, we are doubling down on our investments in innovation and new product commercialization. These investments will support the largest pipeline we have ever had with new products across all our major categories and end users. Over the last 12 months, we have added approximately 1,300 new employees with deep domain expertise and technical knowledge in critical areas, including sales, engineering, product management, brand, industrial design, e-commerce and end-user insights. Our supply chain investments are also key innovation enablers moving closer to the customer, adding capacity, improves agility, customer responsiveness and speed to market as we develop and commercialize new products. We have approximately $200 million of new innovation and growth investment projects in process which are included in our second half 2021 run rate.

These projects will allow us to effectively better serve the strong global product demand for tools and position us for sustained long-term growth. Earlier this month, we announced our latest breakthrough innovation, the DEWALT POWERSTACK battery, a remarkable design and engineering achievement. POWERSTACK is the world's first power tool battery to leverage lithium-ion pouch cell technology and introduces a new era of performance for DEWALT power tools. POWERSTACK batteries will begin shipping in the fourth quarter of this year with annual growth potential measured in hundreds of millions.

This is another example of our leading-edge differentiated innovation, driving the revenue growth potential of our core business. The POWERSTACK battery is 25% smaller, 15% lighter than our comparable DEWALT 20-volt 2 amp-hour battery and it delivers 50% more power with 2x the charge cycles, making this revolutionary design the lightest and most powerful and longest-lasting compact battery from DEWALT. And it is compatible with our DEWALT 20-volt system. The combination of POWERSTACK and our proven capabilities to design and manufacture the best and most compact brushless motors in the industry, we have just unlocked a new dimension for smaller, lighter and more powerful tools with enormous runway ahead.

The importance of this innovation cannot be overstated. More power, more compact, lighter, lasts longer, guaranteed tough. We love it and so will the market. DEWALT is again asserting itself as the industry leader in professional power tools. And now for something also very exciting, but quite different. It's never been more important for companies to turn their attention to building a sustainable future for

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OCTOBER 28, 2021 / 12:00PM GMT, Q3 2021 Stanley Black & Decker Inc Earnings Call

our global community. The Black & Decker reviva line is our latest customer offering and creating more sustainable products and driving innovation with purpose. This line of consumer's DIY tools features 50% post-consumer recycled content in the enclosures, which reduces virgin plastic use and supports closing the loop in a circular economy.

Partnering with Eastman to apply their Tritan Renew material to our products has created the opportunity to reduce environmental impact, while continuing to develop the performance, durability and quality that our customers require. We are delighted to have found a long-term partner in Eastman, a company that will support and accelerate our wider, broader commitment to becoming a force for good in society. This product is a great example of how corporations can embrace ESG in a way that provides meaningful innovation to the consumer, reduces our impact on the environment and drives business performance. The Black & Decker revitalization is a major growth opportunity for the company, and reviva is just one great example of how we're making that happen.

And now I will turn it over to Don to talk about our supply chain investments, our business segment results and how we are positioning the company for sustained long-term growth. Don?

Donald Allan Stanley Black & Decker, Inc. - President & CFO

Thank you, Jim, and good morning, everyone. As Jim just highlighted in his opening remarks, we continue to see a range of powerful secular business drivers that are creating a path for strong multiyear growth for our businesses. In support of that, I want to spend a moment to share a few of the many actions we have taken to position our company for significant growth in 2022 and beyond. Three areas I would like to highlight include our latest investments in expanded manufacturing capacity, strategic sourcing partnerships and the further acceleration of our factory automation initiatives.

Beginning with our manufacturing footprint. We are aligning our new investments with our Make Where We Sell strategy as we expand capacity globally. For example, in 2021, we are opening 2 new power tool plants and 1 new hand tool facility in North America. These 3 new facilities will enable shorter lead times. And once in place, our North American capacity will have tripled since 2016. These new manufacturing plants will be accompanied by a parallel regional development of our local supply chain base over time, enhancing local market sourcing and speed to market.

As it relates to strategic sourcing, we have acted and continued to focus on securing sufficient supply of battery cells and electronic components using our power tools to support our long-term growth plans, which include the growing tailwind from electrification. We have co-invested with key battery suppliers to secure dedicated capacity for the next several years. In addition, we are adding new qualified suppliers to diversify our sourcing and working to increase our inventories for battery cells. We made great progress in 2021 and are well positioned for significant supply increases related to battery cells.

As it relates to electronic components, we are following a very similar plan. We have made progress in 2021 and are on our way to securing the chips and the throughput to support at least 25% growth in our electronic component supply for 2022. This area is currently an intense pain point. However, we see a road map for significant improvement by early spring of 2022.

Finally, we are leveraging our Industry 4.0 capabilities to drive manufacturing automation throughout many of our factories. We are deploying multiple projects in our Charlotte manufacturing facility that have a payback of less than 1 year. These flexible automation projects enable the labor efficiency and increased throughput required to deliver outsized productivity and enable our Make Where We Sell strategy.

In summary, we have positioned our business to have the capacity, supply and throughput to deliver significant growth in 2022 and beyond. I will now take a deeper dive into our business segment results for the third quarter.

Tools & Storage delivered record revenues as we maintained our focus on ensuring we keep up with the existing market demands. This resulted in 14% revenue growth with volume up 11%, price up 2% and currency contributing an additional point. The operating margin rate for the segment was 15.7%, down from 21.5% in the third quarter of last year as volume, price, productivity and benefits from innovation were more than offset by accelerating transit costs incurred to meet the strong market demand. Additionally, rising commodity inflation and new growth investments related to digital marketing and feet on the street offset those positive items I

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