Stanley Black & Decker, Inc.

Welcome to the first quarter 2020 Stanley Black & Decker earnings conference call. My name is Shannon, and I will be your operator for today's call. At this time, all participants are in a listening mode. Later, we will continue the question and answer session. Please note that this conference is being recorded. I will now turn the call over to the Vice President of Investor Relations, Dennis Lang. Mr. Lang, you may begin.

Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2020 First Quarter Conference Call. On the call, in addition to myself, is Jim Lurie, President and CEO, and Don Allen, Executive Vice President and CFO. 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 and Don will review our 2020 first quarter results and various other matters, followed by a Q&A session. Consistent with prior calls, we're going to be sticking with just one 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 our 8K that we filed with our press release and in our most recent 34 Act filing. I'll now turn the call over to our President and CEO, Jim Lurie.

Thanks, Dennis, and good morning, everyone. I'd like to begin with a short passage from our most recent shareholder letter, and I quote, The new decade is upon us, and with it comes a host of new challenges, with the most significant one of them all being something called VUCA, a term which emanated from a military college in the U.S. in response to the onset of the post-Cold War era. VUCA stands for Volatility, Uncertainty, Complexity, and Ambiguity. And while back in that period, VUCA described the backdrop for the formation of a new world order, This time, I believe it describes what leaders of all institutions will have to consider as we devise strategies and tactics to thrive in what can now be called the new world disorder of the 2020s. It's an exciting world full of disruptive risks and opportunities with the accelerating pace of technological change always pushing the limits of what individuals and institutions can absorb. In 2019, we put much thought into what it will take to win in this environment, and we were perhaps blessed by having to deal with the unusually volatile conditions we faced in 2018 and 2019. For structural reasons, our recent external challenges may have been more pronounced than encountered by most diversified global industrials. Ironically, we feel blessed that we have experienced them and endured through them and have now emerged with a fitness and mindset to take on the challenges of the 2020s." I put the finishing touches on that shareholder letter on February 9th, several weeks before the devastating impact of COVID-19 began to unfold in real time across the globe. It struck suddenly and jarringly, and while no one could fully understand what to expect next and exactly how it would impact public health policy, consumer behavior, the global economy, our markets, et cetera, our management team truly did have the fitness and mindset to tackle the first great challenge of the 2020s, COVID-19. The VUCA world had arrived earlier and more forcefully than could ever have been imagined. We acted swiftly and decisively to establish key priorities, including, one, ensuring the health and safety of our employees and supply chain partners, two, maintaining business continuity and financial strength and stability, three, serving our customers who provide essential products and services to the world, and four, doing our part to help mitigate the impact of the virus across the globe. These priorities create clarity for our people and our stakeholders in a time of crisis. Through that framework, we empowered our leaders to take the necessary actions to protect our people, our company, our customers, and our communities. First and most important is the health and safety of our employees and our supply chain partners. As a provider of essential products and services to the world, we have been permitted to continuously manufacture products and provide services in most locations around the globe since the inception of the lockdown. It began in China with our 10 plants there operating continuously after returning from Chinese New Year in early February. We took extreme measures to protect our 8,000 workers there. including temperature screening, mandatory use of masks and other PPE, social distancing, frequent hand sanitizing, and automatic quarantining of anyone exposed to international travel or other high-risk situations. In addition, all Chinese employees who were able to work virtually were required to do so. These precautions were so effective that, to date, we have had only one known instance of an employee in China testing positive. for COVID-19, and she has recovered. That early learning in China proved critically useful to managing safety in our global operations as it enabled us to establish a standardized safety protocol based on applying our China practices as the virus worked its way around the world. Among approximately 25,000 manufacturing and distribution workers globally, we have had fewer than 50 test positive to date. We track each employee case continuously as it develops. We've had only a few locations out of our 100-plus factories and DCs with any notable spread, although we have had one where nine cases were detected within a 12-day period. We immediately and voluntarily affected a temporary shutdown of that facility for sanitizing and sent the majority of employees home for a mandatory 14-day quarantine. For the total company, comprising approximately 58,000 associates, we've had less than 100 employees test positive for COVID-19, a testament to our safety culture and the importance we place on protecting our people. And while we recognize that the situation can change quickly with respect to this virus, our safety measures are largely working. That health and safety commitment and execution has enabled us to maintain a supply chain that has functioned at a high level thus far during the crisis, providing business continuity with few and only relatively minor supply disruptions. This is a day-to-day management process, however, we can say at this point, so far, so good. And as for the company, we were in a strong financial position coming into the crisis, and we remain strong today. Not surprisingly... We are anticipating that COVID-19-driven demand disruptions will negatively impact our full-year revenue outlook and, therefore, overall financial results in 2020. And here's what we've seen relative to demand. Overall demand in January and February was consistent with our now-withdrawn guidance that was issued in January. Into March, as the lockdown unfolded in Asia, Europe, and then the U.S., Sell-in volume fell into deep negative territory at levels in the aggregate even deeper than 08-09. The automotive industry in Europe and North America essentially shut down. Commercial aerospace experienced similar dynamics. General industrial orders dried up as plants not providing essential products and services were closed around the globe. And major European countries such as Italy, France, and Spain, as well as many in emerging markets, basically shut down their discretionary and non-essential economies. Most states in the U.S. followed suit after California's March 19th stay-at-home order. In North America, American retail was a bright spot as homebound DIYers flocked to home centers and e-commerce to stock up on tools and other project supplies, driving positive POS. Retailers generally took that opportunity to trim inventories, however, creating a large gap between sell-out and sell-in, which has continued into April. As a result, we recently withdrew our previously announced guidance for the year, and today we'll be detailing a comprehensive cost reduction and efficiency program that will deliver $500 million of savings in 2020 above and beyond variable cost reductions and $1 billion over the next 12 months. The primary focus is to, one, adjust our supply chain and manufacturing labor base to match the current demand environment. Secondly, substantially reduce indirect spending and Third, reduce staffing in a manner that ensures we're prepared for a demand recovery at the appropriate time. And fourth, capture the significant raw material deflation opportunity that has emerged as the economy has weakened. I recognize that this is a difficult time to make reduced work decisions that impact employees, but these actions are necessary given the decline in demand we are seeing. And with that said, we are being thoughtful and executing these actions with compassion, as well as consideration to position the company to capitalize on a recovery as the crisis subsides. And subside it will. We are already seeing green shoots, suggesting that economies and industries around the world are either rebooting or preparing to reboot in the coming weeks. Home center POS in North America is remarkably positive as we speak. E-commerce volumes are up in double digits. European and U.S. auto is preparing to resume production. Governments are beginning to permit non-essential manufacturing to resume, etc. All of this suggests that, as we see it today, second quarter will likely be the trough in 2020, albeit a deep one at that. We believe we have sufficient flexibility to navigate through this volatile period and emerge even stronger on the other side. We have stress-tested our business for a wide variety of demand scenarios and have initiated the necessary actions and contingency plans to maintain a solid financial and operational foundation during this unpredictable period. Don will provide more color and detail on these in a few minutes. Also important in this crisis is our mission to assist our governments and communities in mitigating the spread and impact of the virus around the globe. In the face of today's challenges, we are seeing the best of humankind. People, businesses, governments, NGOs are coming together, and as an organization, we are taking steps around the globe to do our part. Now is the time for corporations like ours to demonstrate how we can align our resources to help deliver the innovative solutions and positive societal impact the world needs right now. We are participating in a number of ways, using our expertise and innovation and our financial and operational resources to be a force for good and make a difference in our communities To start, we are contributing to COVID-19 relief funds in the U.S. and globally in support of those who have been catastrophically impacted by the virus. As part of this program, we are matching all employee donations globally, two for one, to help our colleagues make an impact in their local communities. In addition, we are setting up a relief fund for our own employees and their families to help those who have been severely impacted by the virus and are in need of temporary financial assistance. We are looking at ways to use our supply chain scale to help acquire critical PPE and other medical equipment that is needed. For instance, we purchased 3 million face masks for philanthropic distribution to vulnerable adult living facility, frontline workers, and residents who desperately need protection. And we have created a COVID-19 response task force comprised of cross-functional leaders throughout our organization that are focused on leveraging their expertise to develop solutions to help combat the virus. Our teams are working on 3D printing face shields for healthcare workers and have partnered with other companies to develop emergency hand sanitizer supplies, as well as a DeWalt-powered portable battery respirator. Our teams are supporting those who make the world, especially the frontline caregivers and first responders, the workers in our customers' factories, construction workers, and many others. They are each giving it their all to help keep us safe, healthy, and functioning well. Their work contributes to society in so many ways, and our products and services are helping them to do their jobs every day, the people that make the world. Now I'll turn briefly to first quarter results. Revenues were $3.1 billion, down 6% versus prior year, driven by a 7% organic decline, primarily related to the impacts we experienced due to the COVID-19 pandemic. Adjusted EPS for the quarter was $1.20, which was better than otherwise could be expected considering the demand headwinds that emerged in March. And our business teams are focused on cost control and supply-demand balancing and are realizing the benefits we anticipated with the margin resiliency program. This strong execution, however, was not enough to overcome the impact from the coronavirus-related volume declines and approximately $60 million of carryover headwinds related to tariffs and currency. And I will now turn it over to Don Allen to provide the business details for OneQ and a deeper dive into our scenario planning, cost response, capital allocation posture, and liquidity picture. Don?