Stanley Black & Decker : Q2 2021 Stanley Black & Decker, Inc. Earnings Conference Call Transcript

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EDITED TRANSCRIPT

SWK.N - Q2 2021 Stanley Black & Decker Inc Earnings Call

EVENT DATE/TIME: JULY 27, 2021 / 12:00PM GMT

OVERVIEW:

Co. reported 2Q21 revenues of $4.3b and adjusted EPS of $3.08. Expects 2021 organic revenue growth to be 16-18%, GAAP EPS to be $10.80-11.20 and adjusted EPS to be $11.35-11.65.

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JULY 27, 2021 / 12:00PM, SWK.N - Q2 2021 Stanley Black & Decker Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

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

C O N F E R E N C E C A L L P A R T I C I P A N T S

Brandon Tyler Reagan Wolfe Research, LLC - Research Analyst

Eric Bosshard Cleveland Research Company - Co-Founder, CEO, Co-Director of Research & Senior Research Analyst Michael Jason Rehaut JPMorgan Chase & Co, Research Division - Senior Analyst

Nicole Sheree DeBlase Deutsche Bank AG, Research Division - Director & Lead Analyst

Ross Paul Gilardi BofA Securities, Research Division - Director

Timothy Ronald Wojs Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

P R E S E N T A T I O N

Operator

Welcome to the Second 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 the 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 Second 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 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 second 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 the actual results may materially differ from any forward-looking statements that we might 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

Thanks, Dennis, and good morning, everyone. This morning, we announced a record second quarter, which capped off a historic performance over the last 12 months. Over this period, we have delivered $3.1 billion revenue growth now at a $17 billion LTM run rate. Adjusted operating margins

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JULY 27, 2021 / 12:00PM, SWK.N - Q2 2021 Stanley Black & Decker Inc Earnings Call

reached new heights approaching 17%, Tools operating margins are in excess of 20%, and we added $2.9 billion of sales growth in Tools, including outdoor, over the last 4 quarters. My team and I are proud of the collective effort of our 56,000 Stanley Black & Decker colleagues. We thank them for their resilience and dedication, their agility to cut through the many challenges associated with executing on this massive growth trajectory during the global pandemic. The way they have stepped up is impressive, taking care of customers, our people, our communities. It's a great story.

Turning to the second quarter. Revenues were up 37% versus prior year to $4.3 billion. We achieved an all-time organic growth record of 33% and marked the first time all 3 segments, as currently organized, achieved double-digit organic growth in the same quarter. The extraordinary organic growth of 41% in Tools demonstrated the power of the world's leading tool company with the best brands and innovation in the industry. All regions delivered robust double-digit growth and our strong commercial and supply chain execution enabled us to capitalize on the positive secular trends and strong markets. Industrial accelerated to 14% organic growth behind the second straight quarter of double-digit growth and share gains in our automotive, general industrial and Attachment Tool businesses as recoveries in these end markets are continuing.

The growth would have been even more robust if not for auto OEM production delays related to electronic component shortages and by a few continued cyclically depressed markets such as aerospace. Security had its strongest quarter in the last 10 years, delivering 14% organic growth. The Security businesses transformation to a data-enabled technology provider is accelerating, and the team successfully converted a strong backlog into revenue. Order rates were red hot in the quarter, up 36%, and the ending executable backlog was at record levels. We're excited about the full potential of these opportunities to support elevated revenue growth in the back half and beyond.

Our overall company adjusted operating margin rate remained strong at 15.5%, up 270 basis points from the prior year, with volume leverage, price, mix benefits from innovation and margin resiliency more than overcoming the cost of growth investments, commodity inflation and higher expedited transportation costs required to serve the strong demand in Tools. Adjusted EPS for the quarter was a second quarter record at $3.08, up 93% over prior year, and free cash flow for the quarter was $339 million, up 28% versus prior year and over $300 million better on a year-to-date basis than our record-setting 2020, a year in which free cash flow was $1.5 billion.

On the heels of this great performance, we entered the second half with positive momentum and a portfolio that is well positioned to capitalize on the key trends that are driving growth, the consumer reconnection with home and garden, e-commerce, electrification and health and safety. We are investing across our businesses to capture these opportunities and enable sustained above-market growth with margin expansion. And to that end, we are raising our 2021 full year adjusted EPS guidance range to $11.35 to $11.65 per share, a 27% increase versus prior year at the midpoint.

Finally, I'd also like to highlight that last week, we increased our dividend for the 54th consecutive year. The quarterly payout now stands at $0.79 a share, which represents a 13% increase. This is a reflection of the continued confidence we have in the cash generating power of the company. A strong growing dividend is a key element of our shareholder value proposition and is consistent with our capital deployment strategy to return approximately half of our excess capital to shareholders over the long term. Of course, repurchases are the other major vehicle we could employ to do that. And notably, our Board increased our repurchase authorization last quarter to 20 million shares, giving us the flexibility to do some of that as well.

During our May Growth Summit broadcast, we showcased several significant catalysts that represent opportunities for a long and rewarding growth runway for Stanley Black & Decker. These catalysts capitalize on key 2020's trends, many of which are expected to continue into the foreseeable future. We are expecting that the key market drivers across our global tools markets will continue to be strong demand drivers and support tools growth for some time, including the secular surge in consumers' reconnection with the home and garden as well as the cyclical expansion in North America home improvement driven by new and existing home sales associated with household formation and the urban exodus.

We are investing more than $200 million in innovation, e-commerce, sales and marketing and others, and we've never been better positioned to capitalize on market trends. Across the board, we have strategic differentiators that make us the world's leading tool company. Our iconic brands, DEWALT, Craftsman, Stanley, Stanley FatMax and Black & Decker; our category depth; channel development and operations excellence and a track record and commitment to market-leading innovation, our pipeline has never been stronger. We are expanding our cordless product offerings up and down the power spectrum to new users and product categories.

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JULY 27, 2021 / 12:00PM, SWK.N - Q2 2021 Stanley Black & Decker Inc Earnings Call

With our FLEXVOLT, FLEXVOLT ADVANTAGE and DEWALT POWER DETECT platforms we are the industry leader in maximizing power output with plans to nearly double the number of products on these platforms over the next 3 years. Our ATOMIC and XTREME platforms leverage the smallest, most power dense, brushless motor technology in the industry, to deliver the highest power-to-weight ratio available in compact 20-volt and 12-volt platforms and will expand the product offering across these platforms roughly 4x over the coming years. These breakthrough products have already delivered significant share gains, and they're just getting started.

The massive acceleration in the shift of demand to e-commerce was amplified during the pandemic, which was an enormous positive for us. We have approximately 3x the share in e-commerce as our next closest competitor, and we grew our global e-commerce business from 13% of Tools sales to 18% in a matter of 12 months, now about a $2 billion channel. This shift to e-commerce is going to continue, and we are doubling down our investments in talent, digital capabilities and our brands, including the revitalization of Black & Decker, which is an iconic brand that has a license to play in the largest breadth of categories within our portfolio.

We see a significant opportunity over the coming years as the team reimagines Black & Decker to drive it towards more youthful buyers as an e-commerce lifestyle brand. The increased focus on ESG and climate and what that means for electrification presents a very compelling multiyear opportunity for us as well. Our existing cordless outdoor power equipment business has grown over 70% in the first half of the year. And in Engineered Fastening, the move from internal combustion engines to hybrid and EV platforms ultimately results in a 3x increase in content per vehicle.

And lastly, the transformation of our Security business to become a technology-driven data solutions provider is gaining significant momentum, and the timing is excellent. The team has done a great job creating various solutions and products that are focused on health and safety, which has never been more relevant as the world continues to battle the pandemic. In addition to these growth opportunities, we are gaining momentum with our margin resiliency program. We continue to find new applications and use cases to apply our technology-enabled approach that will deliver a runway for sustainable margin expansion in the coming years.

And now a brief update on MTD. As many of you know, our option to acquire the remaining 80% of MTD opened up at the beginning of this month. This opportunity is exciting as we bring leading brands and capabilities in the electric outdoor category as well as the ability to deploy the SBD operating model and apply our global scale. MTD brings superb product engineering and manufacturing expertise in outdoor power equipment, capabilities in robotics technology as well as access to the independent dealer channel in outdoor.

We were just at MTD's facilities in Valley City, Ohio, last week and came away even more energized by the pipeline for innovation and the runway for growth in 2022 and beyond. The strategic fit is hand in glove and the revenue and cost synergy opportunities are compelling. We are currently in negotiations with MTD on the option execution. And should they come to a successful conclusion and subject to all regulatory approvals, we will begin work on tackling this multiyear opportunity for growth and margin expansion upon closing.

And now, I'll hand it over to Don Allan to cover a few financial details on MTD, a more detailed discussion on second quarter results and offer up some 2021 guidance. Don?

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

Thank you, Jim, and good morning, everyone. Before we leave Slide 5, as Jim mentioned, I want to make a few remarks about some significant financial attributes related to this exciting potential transaction. First, over the last 12 months ending June 30, MTD achieved revenue of approximately $2.5 billion. They have seen great traction on their Spotlight10 initiative and have improved their EBITDA rate from approximately 4.5% in 2018 to high single digits over this LTM period.

As I referenced at Investor Day, MTD has worked tirelessly to meet the supply chain challenges brought about by the pandemic, including limited throughput on larger products as well as component and input shortages. However, this has muted their output in revenue over the last 12 months. We believe these are temporary and manageable disruptions that can improve with our application of the SBD operating model. Consistent with Investor Day and taking into account our recent diligence, we believe that a combined MTD and SBD outdoor platform can become a growth catalyst to deliver $200 million in organic growth per year over the medium term.

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JULY 27, 2021 / 12:00PM, SWK.N - Q2 2021 Stanley Black & Decker Inc Earnings Call

Our planning assumption for 2022 continues to call for the addition of MTD. Assuming $2.6 billion in revenue and continued progress on OM expansion, we believe this could contribute approximately 9% adjusted EBITDA margin or just over $230 million in consolidated adjusted EBITDA in 2022. Considering the benefits of our 20% stake currently in our P&L and applying interest and intangible amortization assumptions, this would result in approximately $0.50 of incremental adjusted EPS accretion in 2022. With our pathway for growth and margin expansion, this EPS accretion increases to over $1 by 2025, a strong P&L result that also carries a robust year for cash flow return on investment in the high teens.

I will now take a deeper dive into our business segment results for the second quarter. Tools & Storage delivered 46% revenue growth with volume up 38%, currency up 5% and price contributing an additional 3 points. The operating margin rate for the segment was 20.2%, up 320 basis points versus prior year. Volume, price and benefits from innovation and productivity were partially offset by commodity inflation, higher expedited transit costs to serve stronger demand and new growth investments. The extraordinary Tools & Storage growth was realized across the globe again in Q2, with organic growth of 30% in North America, 63% in Europe and 85% in emerging markets.

This performance was driven by the ongoing strong professional demand and robust levels of innovation across our brands, in addition to the continuation of the global penetration of e-commerce, outdoor product electrification and the consumers' reconnection with home and garden. We continue to see growth and share gain across our brick-and-mortar and e-commerce platforms in U.S. retail, with the channel up 22% organically in the second quarter. POS remained robust, and retailer inventories ended the quarter still below normalized levels.

Professional products are leading the growth across the front half and the share gains are consolidating. The first half 2021 POS is up approximately 40% compared to 2019. The North American commercial and industrial tool channels once again experienced positive sequential trends accelerating to 68% organic growth. The growth was supported by strong professional-driven demand and positive trends in manufacturing and industrial production, while our company-specific marketing and digital efforts drove share gains with our Industrial customers.

The European Tools business realized 63% organic growth, driven by an expansion in commercial, retail brick-and-mortar and e-commerce channels due to the strength of the industrial rebound, coupled with professional construction demand. All regions contributed to double-digit growth and share gains were led by the U.K., France and Greece, which were up 130%, 73% and 67%, respectively. Finally, emerging markets was up over 85%, driven by higher construction-related demand.

All markets contributed to share gains. Latin America was up 130% -- I'm sorry, 136% organically, with all countries at least doubling and Asia delivered 36% organic growth with at least double-digit growth across the region and India up nearly 3x. Russia and Turkey delivered another solid performance with organic growth of 78% and 114%, respectively. As highlighted at our May Growth Summit, our e-commerce initiative is a strategic growth driver for the business, and we are continuing to invest for further expansion. Second quarter global e-commerce revenue was up nearly 40% versus 2020, with a double-digit growth result from each region.

Turning our attention to the Tools & Storage SBUs, all 3 SBUs had excellent contributions to the overall performance. Power Tools delivered 39% organic growth, benefiting from supportive markets and our growth catalysts. This was enabled by the relentless supply chain execution, combined with new and innovative product launches across CRAFTSMAN, Stanley FatMax and DEWALT. This includes an industry-leading breakthrough innovations such as DEWALT POWER DETECT, FLEXVOLT ADVANTAGE, ATOMIC and XTREME.

DEWALT FLEXVOLT was our first breakthrough as many of you know, and was once again a leader in 2021. Under this brand, we are introducing a 15 amp-hour battery and the 60-volt SDS MAX 2-inch hammer, both of which will be world's first innovations. Our FLEXVOLT system is now up to 45 products and is forecasted to represent over $600 million in 2021 revenue. It remains a key growth driver and is a unique and advantaged platform that we continue to leverage. We are passionate about innovation, and the pipeline continues to be robust. Stay tuned as more breakthroughs are on the horizon for our power tool products.

The outdoor products business grew 40% organically, with all regions contributing. This performance was driven by new listings and cordless innovations under the Black & Decker CRAFTSMAN and DEWALT brands. This also includes expanding our offering in walk behind mowers and pressure washers, leveraging our FLEXVOLT technology and the Black & Decker Robotic Mower launch in Europe. We continue to expand our cordless technology and other innovations to the outdoor electric category to drive growth and are very encouraged about the future product pipeline.

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