Stanley Black & Decker : UBS Global Industrials & Transportation Virtual Conference Transcript

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SWK.N - Stanley Black & Decker Inc at UBS Global Industrials and Transportation Conference (Virtual)

EVENT DATE/TIME: JUNE 09, 2021 / 2:00PM GMT

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JUNE 09, 2021 / 2:00PM, SWK.N - Stanley Black & Decker Inc at UBS Global Industrials and Transportation Conference (Virtual)

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

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

MarkusM.H.MittermaierUBSInvestmentBank,ResearchDivision-Head&USEquityResearchAnalystofAmericasElectricalEquipmentandMultiIndustryResearch

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

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

Hi. Good morning, everyone. It's Markus Mittermaier here from UBS industry team. Welcome back here to the next session with Stanley Black & Decker at the UBS Industrials and Transportation Conference. Really delighted to have Stanley back here.

We have this morning with us, Jim Loree, CEO. We have Lee McChesney with us, VP Corporate Finance and CFO of the Tools business. And we have Dennis Lange, Vice President of Investor Relations with us as well.

I'll hand it over to Jim in a second. Here are some slides, which you can also see here. If you click on slides, on that icon. Please also feel free to e-mail me any questions. You can use that little text box on your screen and I'll see the questions. I'll try to make it as interactive as possible in the Q&A.

And with that, let me hand over to Jim. Jim, thanks so much.

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

Thanks, Markus, and welcome, everybody. It's great to be here, if virtually. Nonetheless, we've got a great story in this company that is coming together beautifully during the pandemic and looks like a fantastic story post pandemic as well.

We just are coming off the best quarter in our history. 34% revenue growth, big accretion in both gross margin and operating margin and decent start to the year from a cash flow perspective. So now we're in the midst of the second quarter, and we're looking at very similar kinds of dynamics in terms of revenue growth and consistent with our guidance, leaning towards even a little better, at least on the midpoint. And so we're in a really good place here in the second quarter.

And I would also say that, as you know, we have 3 businesses, you would know if it was on the screen there, tools and storage, security and industrial. And of course, Tools business is absolutely booming. It's up 45% organically in the first quarter, and it's going to be up in the same neighborhood, maybe slightly less this quarter. And coming off, some people would say it was a fairly easy comp, especially in the early part of the second quarter.

But now we're starting to get some visibility into the back half of the year. And it looks like it's not going to be that kind of strength in terms of percentages. But the dollar volume is really holding in there really, really strong. So I think as we go into the second half, we're going to be evaluating, upgrading our previous guidance, and we'll have more to come on that as we finish up our May numbers, and we'll see going forward.

But we're in a really good place. And I said in a previous communication, I said that some people think that the second half of the year for us is going to be really challenging with these difficult comps, and they are very, very difficult with the third quarter and fourth quarter of last year were, what, 15% and 25% up. Does that sound right?

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JUNE 09, 2021 / 2:00PM, SWK.N - Stanley Black & Decker Inc at UBS Global Industrials and Transportation Conference (Virtual)

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

Yes.

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

So that's what we're up against. And if we're able to bolt those and it looks like that's a possibility now, we'll get that built into the base, and then we'll have a base to grow off of in 2022 on top of the likelihood that we'll be executing the option to acquire the remaining 80% of MTD, which would add another $2.6 plus billion of revenue annualized.

So from a revenue and growth point of view, we feel really good. And then from a margin perspective, we're operating at a higher margin level than we have historically, much higher. And that we're in the process of investing, investing as much as $200 million annualized now into growth initiatives, which we're really excited about. So it's great times for Stanley Black & Decker and for our investors as well.

So let's move to the next chart. We're just coming off this growth summit, which was a 2-hour live broadcast that we did on May 13 virtually. It's a combination of live presentations, a couple of videos and some other audio-visual techniques and very entertaining 2 hours. If you have the time to spend and you want to learn more about the company and what's ahead, where we've been, I think I highly recommend that. It's available on our website, and you can get it in the Investors section and -- for a replay. And then there's an additional 45 minutes of Q&A after that.

The key messages from the growth summit were -- the first thing is we built this great company. It's a people-oriented culture, and we have 3 elements that we really pursue here: performance, innovation and social responsibility. It's a great mix in the 2020s. It's a great magnet for talent, and it is an inspirational combination of things to pursue, and we're making progress on all those fronts.

The second, we have a really strong track record of performance and shareholder return. You look -- some of us have been with the company now

• C-leveljobs myself for 21 years. And same for Don Allan, not all of that was a C-level job, but most of it. And during that time frame, we've returned 1,000% TSR cumulatively. And the numbers aren't too bad for 5 year, 3 year and 1 year -- I'm sorry, 5 year and 1 year. 3 year, not great, but not terrible.

Earnings growth through that entire period, strong earnings growth. So a strong track record, and it's the same people at the top of the company that have been here for a long time, and we -- I and we have never been more excited about the growth ahead. So great time to be part of this company and to be associated with it.

And part of that is that we're just extremely well positioned to benefit from the trends that accelerated during the pandemic. And there are things like the reinvigoration of the focus on the home and the garden, electrification and the increasing attention being paid to ESG and climate in particular and what that means for electrification of some of the markets that we're in and some of the industrial markets as well. So the -- both empower tool, outdoor power and industrial markets and especially in Engineered Fastening.

So -- and then e-commerce. We're the industry leader in tools in e-commerce by a factor of at least 3. That is growing incredibly, incredibly robustly. And the channel shift that's been going on during the pandemic is, I believe, sustainable, maybe not at the same percentage growth levels, but certainly as a shift -- accelerated shift into e-commerce continues in omnichannel. So very well positioned there.

And then we've got a really creative and interesting kind of edgy program here to drive margin accretion and margin expansion that we're using all sorts of technologies, such as artificial intelligence, machine learning, Industry 4.0, advanced analytics and really focusing them on the value pools of the company to support margin expansion.

Next slide, please. I talked a little bit about some of the things that we're excited about in e-commerce, almost $2 billion last year and growing at a very high rate right now and expect to double in just a few years, the e-commerce business. Black & Decker, a brand that we have not invested in over the last 10 to 20 years and a brand that is a very relevant brand. Even today around the world, it's about a $1 billion business for us, and we

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JUNE 09, 2021 / 2:00PM, SWK.N - Stanley Black & Decker Inc at UBS Global Industrials and Transportation Conference (Virtual)

have had a team now working for almost a year on revitalizing that brand, completely rethinking it, driving it more towards youthful buyers, e-commerce and lifestyle. And we expect that to be a big growth driver as we go forward.

MTD, outdoor power equipment, we are going to be the company that electrifies outdoor power equipment. There's a really great case for that. Engineered Fastening, the lightweighting of vehicles as well as electrification, where there's about 3 to 6x more content in electric or hybrid vehicle than there is in a gasoline-powered vehicle.

And then finally, security, which has been in the midst of a transformation now for 3 or 4 years is finally coming of age as it relates to that transformation at a time when the market has shifted to focus on health and safety of people in our commercial and certainly in commercial establishments and organizations. And so that all plays. It's like a trifecta of things coming together here to make this company a very exciting company for the future.

So with that, Markus, I think I'll turn it back to you for some Q&A. Thank you.

Q U E S T I O N S A N D A N S W E R S

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

Great. Thanks, Jim, for that, and there's a lot in there already that I want to unpack if I could.

So I'll come back to the first half versus second half, right, which has been a very interesting debate for the last months. But let me maybe start with the longer-term picture because you mentioned a couple of things that I think struck me during the growth summit, right? E-commerce, Black & Decker, et cetera. Maybe I'll start with e-commerce because you showed that it was up 95% in Q1. I think you said it's about 20% now of global tools and storage. You just said -- and that gives it sort of like a $2 billion roughly size. And if you want to double that, right, so I'd say another $2 billion over the next 3, 4, 5 years, if you do the math to 2025, that's 3.5% CAGR just out of online.

So how should I think about this sort of like -- is this kind of cannibalizing some of the maybe offline presence or is this incremental? Because I know that you talked about Black & Decker in Japan or in Germany where you were not active before. So how should we think about that?

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

Yes. I think it's going to be a combination. Some people like to think of it in terms of binary like it's incremental or it's not. But it really is going to be a combination because there's definitely a channel shift going on of purchase patterns with folks who have become accustomed to buying online during the pandemic and before, but especially during the acceleration. We probably accelerated the e-commerce penetration by 3 or 4 years during the pandemic, so you have that.

And so a lot of that will probably end up cannibalizing other channel aspects. But you also have a number of share gain initiatives that we are driving and e-commerce that go beyond anything that we consider cannibalization. In particular, you do have Black & Decker, as you mentioned, but also around the world in both the developed markets, certain developed markets and certain emerging markets, our e-commerce footprint in the emerging markets is really, really strong and then established over a 10-year period, and we work with all the major e-commerce players in the world in these various markets, whether you're in Latin America with Mercado Libre or in Russia with Yandex or whatever.

And so we have the traditional kind of e-commerce shift going on in these emerging markets, which is great. But then we also have some markets like China and India in the emerging markets, where we are under-indexed, underweight. And we are pursuing major initiatives, especially starting with China and working with Alibaba on a combination B2B2C and D2C e-commerce models that will, I think, provide a significant share gain over in the coming years in China, and this will degrade some of the capacity that we're going to free up, bringing production back to the U.S. and to other developed nations to be closer to our customers for our existing business. We will be able to fill some of that capacity with that China initiative.

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JUNE 09, 2021 / 2:00PM, SWK.N - Stanley Black & Decker Inc at UBS Global Industrials and Transportation Conference (Virtual)

We're also going -- in Germany, we're going direct to consumer. And kind of we're working through learning about how do you go direct consumer on the tool business. And using Germany as a test case in a developed market, so that project is underway. And ultimately, we'll be doing Japan. So those 2 large developed markets, Germany and Japan, where we are underweight today.

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

Very interesting. Thanks for that color. So basically, the question that I've been getting since the growth summit is how do you avoid those channel conflicts, if you will. But it sounds like in many of those initiatives in online, there is no channel conflict because you weren't really there or there is no other channel for you. Is that fair?

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

Absolutely. Let me reiterate, we have 0 plans or intention to do any direct-to-consumer in any of our major markets like North America, where we have wonderful channel partners and a great presence. We really are going after places where we're under-indexed.

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

Got it. Okay. And then if I follow up there on margins online, how should we think about that? Again, online sort of like where you go direct, right? And sort of like online in the concept of -- you go through your omnichannel partners, how do kind of margins compare versus the regular business?

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

Well, I'm no expert on the margins, but what I'm told is that they're at least as good and maybe better, but I'll turn it over to Lee who is deeply involved in that sort of thing.

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

Absolutely. So Markus, I think there's a couple of things here. Number one is this path, the journey we went on to $1 billion and now to $2 billion, gives us a nice advantage because there's a lot of investments you have to put into this business to do it well. And accordingly, though, to Jim's point there, this is a business that is really very much, on average, in line with our margins we have today. But I also think there's opportunities, in some cases, for it to be a bit higher and then there's probably some subsegments where it might be a bit lower. But on average, it's a good place.

And as we look forward, we're putting these investments into e-commerce. We're trying to get smarter doing this and also helping our partners get smarter to do this as well because there are some stories in the early days where you can go the wrong way, but that's not where we're on today after this now I say 12-year journey we've been on.

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

Got it. Okay. And then switching to the other item that you mentioned already, this reinvigoration of the Black & Decker brand. You mentioned it's a $1 billion brand. So actually it's interesting because it's roughly the same size as Craftsman, right, which you kind of built over 2, 3 years. So my question is how big can this be given that it's such an old brand? And what's the plan here? Because it looked like it could go beyond tools. If I think about lifestyle brand and how should we think about that? What are the categories? And what's the goal? Is this a $2 billion size? What's the goal?

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