Stanley Black & Decker, Inc.

Welcome to the second 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 conduct a 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 Second Quarter Conference Call. On the call, in addition to myself, is Jim Lurie, President and CEO. This morning and a supplemental presentation, which we will refer to during the call, are available on the IR section of our website. The 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 begin 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 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 one question per caller, and as we normally do, we will be making some forward-looking statements on 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 may make today. We direct you to the cautionary statements in the 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.

Okay. Thank you, Dennis. Good morning, everyone. It's great to be here with you today and Now we're about five months in since COVID-19 began to roll across the globe. And while this pandemic has created an incredibly challenging time for all of us, it has also cast a new and very positive light on our portfolio as three powerful trends have emerged which work to our significant benefit. First, there's the sudden acceleration in the shift to e-commerce, and then there's a reconnection with the home and garden and a trend towards nesting and DIY. And thirdly, a newfound societal obsession with health and safety, read security. The combination of these trends has profound and exciting implications for our future growth and strategic positioning. But more on that in just a few moments. In the meantime, we just completed what I would characterize as one of the most storied and most successful quarters we've experienced in my 21 years as a C-level executive at this company. It was successful based on the sheer magnitude of the challenges we faced and overcame. And it was also successful in that we've managed to operate effectively and maintain the strength of our enterprise throughout the crisis to date, while further strengthening the company and positioning it for even better margin performance and growth as we take stock here in the middle innings and we look forward. Let me give you a sense of some of the accomplishments our team has racked up since this crisis began. We were able to operate continuously across the globe with only minor and temporary supply disruptions while protecting our employees and maintaining the highest health and safety standards. We managed to handle with remarkable efficiency the most volatile intra-quarter demand swings we've ever experienced, beginning in the first four weeks of April. during which revenues were down approximately 40%, followed by an explosive May and June, which brought our point of sale in North American retail to stratospheric levels that we've never seen before. Security revenues also improved dramatically as the quarter progressed. We took swift and decisive cost actions early in the crisis, announcing a $1 billion annual cost reduction initiative in April, of which $175 million was realized in the second quarter. Our margin resiliency initiative now in its second year contributed to this impressive performance. We substantially raised our second quarter revenue planning assumptions twice during the quarter while maintaining our cost reductions intact. This bodes well for the remainder of the year, and we were able to upgrade our internal full-year revenue and margin scenario analyses accordingly. Now, our current base case for full-year 2020 revenue and operating margin exceeds what we thought our best case was for the year back in April. And as a consequence of the better 2Q volume, in conjunction with our cost and margin actions, we delivered $3.1 billion of revenue and $1.60 in EPS. Our operating margin rate came in at 12.8%, just 200 basis points lower than in second quarter 2019, And the tools and storage business logged an impressive 17% segment operating margin rate, flat with prior year, which means that that business achieved its previous peak margin performance in what we currently believe will be the trough quarter in the cycle for tools with revenues down 16%. As we entered July, given the uncertain economic outlook ahead, we decided to convert the run rate financial impact of our temporary salaried workforce reductions into permanent savings. We will implement this in early October by eliminating our temporary salaried actions, that is, furloughs and modified work weeks, returning 9,300 employees to a full work schedule while transferring the remaining 1,000 or so to permanent reduction status. This action will be a major step in ensuring the sustainability of the bulk of our $1 billion cost reduction actions, and we believe it paves the way for us to manage successfully through any reasonable economic scenario which may unfold in the coming months. In the back half of the quarter, with the supply chain performing and the cost reductions intact, we decided to identify a series of supercharged growth initiatives which we will pursue in addition to the ones already in place. These initiatives have become even more attractive as a result of trends catalyzed by COVID-19 and are being funded as we speak. We expect these initiatives, which include exercising our option to acquire the remaining 80% of MTD, most likely in early 2022, to contribute $3 to $4 billion of incremental annual revenue beginning in 2022. All of that execution occurred while our salaried workforce was working remotely for the most part. We accomplished so much so fast during this time frame that we gained a new appreciation for the art of the possible when the power of people is combined with the power of today's collaboration technologies. And finally, I would be remiss as I think of our second quarter accomplishments if I didn't reference the incredible resiliency and dedication of our people. It was the extraordinary people in our factories, distribution centers, service centers, call centers, as well as our field techs and the salaried people in their homes that took a leap of faith and trusted that we could operate continuously, safely, and successfully during this time when everyone is dealing with extraordinary personal and other challenges. And it is to them that we owe a debt of gratitude and thanks for a job well done under extremely difficult circumstances. Throughout the crisis, we have remained focused on our key COVID-19 era priorities, which we shared with you earlier this year. First, ensuring the health and safety of our employees and supply chain partners. Second, maintaining business continuity and financial strength and stability. Third, serving our customers who provide essential products and services. And fourth, doing our part to help mitigate the impact of the virus across the globe. Our number one priority has been and continues to be the health and safety of our people and supply chain partners. We continue to take significant measures to protect our 30,000-plus employees in our plants and distribution centers and other essential facilities. On a tactical level, we established a mandatory mask policy in all locations in April, along with temperature-taking and health questionnaires for all people entering facilities. We have continuously enforced social distancing, modifying our facilities and production lines where necessary. We implemented intensive sanitization protocols in all of our operations as well. And we formed a corporate safety committee of senior execs and specialists to review and monitor compliance with our COVID-19 safety protocols and hired chief medical officers specializing in infectious disease control as part of that committee. We review every suspected case for root cause, trace it to completion where possible, and respond with appropriate actions as we continue to learn more about the virus and its transmission characteristics. And as you'd expect, with geographic hotspots in California, Texas, the Carolinas, Mexico, Brazil, and others, all areas where we have significant operations, we've seen our share of confirmed cases, which as of today number approximately 300 or about one-half of 1% of our total workforce. Notably, both Europe and Asia have been very quiet, and we've had only one confirmed case in China during the entire crisis, remarkable given that we have 10 plants and 8,000 people there. The vast majority of confirmed cases have resulted from contracting the virus while colleagues were out in their local communities or were visiting with friends and or family. or we're in a hospital for an unrelated matter. And as a result, we've been conducting a massive educational campaign for our associates through two global safety timeouts and several other approaches. We seek to ensure their fact-based understanding of risks and required safety protocols and to reinforce how our employees can stay safe at work and in the community. There's a lot of misinformation out in the public regarding this virus, and a common understanding is necessary to keep people as healthy and safe as possible. And with so many of our associates homebound, our people are operating remotely in new and efficient ways, and we are seeing many unanticipated benefits of this future of work. It has allowed us to virtually flatten the organization, incorporating more diverse perspectives into decision-making and enabling faster and more efficient collaboration. And going forward, remote and hybrid office remote work will facilitate flexible working arrangements for our salaried people, enabling the reduction of our office real estate footprint, opening up new access to talent across the globe. And as we move forward, we will continue to have offices as activity hubs. However, there will be many associates who will continue to work remotely by choice and only be in the office when necessary or convenient. As mentioned, one of our key COVID-19-era priorities is to focus on doing our part to help our communities and governments mitigate the spread and impact of the virus. Earlier this year, we announced plans to contribute $10-plus million to support pandemic response efforts around the world. In that spirit, we have already deployed millions of dollars to support nonprofits that are providing critical services, such as hospitals and other healthcare organizations, as well as those focused on basic services, such as food banks. We're also donating more than a million masks across North America in support of elder care facilities. Finally, we have initiated a $5 million employee relief fund to help our own associates and their families around the globe who've encountered severe financial hardships in connection with the pandemic. In addition to cash contributions, we have formed a task force that is focused on leveraging our people's time and talents to create innovative solutions aimed at COVID-19 relief. An example of this is our partnership with Ford and 3M to design and produce lithium-ion powered respirators. And lastly, we are teaming up with private sector organizations such as the U.S. Chamber, the Business Roundtable, and the National Association of Manufacturers, as well as with individual state and local governments in support of their efforts to battle the virus. Our philanthropic work here is never done, and we are all in, working to do our part and living our purpose. And now I would like to comment on our position regarding racial justice. On June 3rd, in the wake of the brutal slaying of George Floyd, I issued a statement on behalf of the company. I will share some brief excerpts from that statement. Quote, there is no place in society for this type of racism and brutality. We are for those who demand justice, take a stand for equality, and commit to inclusivity for all. We have seen anguish and unrest resulting from racism and implicit bias. The deep-rooted history of these truths is real. We stand to do better. We intend to listen, understand, and take action for the African-American community within Stanley Black & Decker and at large. End of quote. We are committed to doing our part to level the playing field. Since early June, our senior executives, including me, as well as our non-executive board members, have had extensive dialogues with our black associates to build a shared understanding of their experiences with racism and bias to determine concrete actions we can take to address equality, equal opportunity, career advancement, diversity, and inclusion as we committed. We have commissioned a task force which has recently made substantive recommendations, which we will move forward with in the second half and beyond. And many of these actions will have benefits that will spill over to other diverse cohorts as well. And we see an opportunity for real positive change going forward. So I hope that summary gives you a window into what we've been doing to affect positive change during the busiest, most productive, and most challenging environment we've faced during my tenure. We feel really positive about what our team has accomplished and how the company is positioned to deal with both the opportunities and the challenges ahead. And I'll now turn it over to Don Allen to provide the business details for second quarter, as well as a deep dive into our scenario planning for the back half of 2020. Don.