Stanley Black & Decker, Inc.

Welcome to the third 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 listen-only mode. Later, we will come to the 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 third 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 in 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 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 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 result may materially differ from any forward-looking statements we might make today. We direct you to the cautionary statements in the 8K that we filed with our press release and our most recent 34 Act filing. I'll now turn the call over to our President and CEO, Jim Lurie.

Thank you, Dennis. Good morning, everyone. What an eventful year it has been thus far. Going into 2020, we expected some volatility and uncertainty. However, no one could have anticipated the ups and downs and the twists and turns this year would take, and there's still two months to go. As you saw from this morning's press release, our team is doing an impressive job managing through the trials and tribulations of this era, and I want to thank every one of our 54,000-plus associates who who contributed to those results. I'm happy to say that we nailed what was perhaps one of the best quarters in our history. Pick your metric. Gross margin, operating margin, free cash flow, the list goes on. For me, the most gratifying is the operating margin rate of 17.7%. We've proven over the decades since the Black & Decker merger that we can produce organic growth at a reasonably consistent 4% to 6%. However, our goal has always been to marry that up with relatively consistent operating margin rate accretion, with a goal of breaking through that 15% ceiling at some point. That has been elusive until now. In late 2017, we entered what turned out to be a three-year period of significant external headwinds caused by tariffs, cost inflation, and FX pressures, all totaling approximately $1 billion of unfavorable margin impact. With a lot of work and a strong constitution, we were able to offset those headwinds and generate a 6% EPS CAGR during that era. We also bought Erwin, Lenox, and Craftsman, among others, and utilized those acquisitions to cement incredibly strong strategic partnerships with our two major home center partners in the U.S., as well as building a thriving e-commerce business, including a partnership with North America's largest e-commerce player, And when the pandemic hit by April, we faced into four weeks of revenues down 40% as the world went into lockdown, and most retail channel partners dramatically cut their ordering. In response, we beefed up our already strong liquidity position and took out a billion dollars of cost, including a half billion of indirect or non-people-related costs. We managed to keep our supply chain running with only minor disruption, including operating over 100 plants around the globe and have done so successfully throughout the pandemic. Then a strange thing happened in North America. People stuck in their homes began to do projects, some DIY, some through tradespeople and contractors, and POS at our retail partners began to skyrocket in May and has been at unprecedented levels ever since. By May, retailer inventories were plummeting, and recognizing that our supply chain lead times would preclude us from serving the demand if it sustained, we took a decision to invest $600 million in fast-moving inventory in advance of orders from retailers, beginning in the May timeframe. That turned out to be an excellent call. In the third quarter, construction and DIY tool revenues in Europe and the emerging markets began to recover. while North American retail stayed strong. This caused positive revisions to our revenue estimates and ultimately drove double-digit growth in tools in the third quarter, even while some of our revenue shifted into October in the final days of September. So with that as backdrop, why am I so excited about our record 17.7% operating margin rate? The reason is that we believe we've achieved a new range of profitability to couple with our continued organic growth. Yes, continued organic growth. We believe if 2021 is a reasonably stable economic year, that the 40% of our portfolio that in 2020 will be significantly down organically, that is industrial and the security segments, as well as industrial tools, will bounce back and become a positive. We also believe that tools and outdoor will be very strong in 2021 with channel inventory rebuilds and continued pandemic and demand at least into the first half. Our e-commerce position, which will approach $2 billion in 2020, should also continue to be a robust growth driver as we capitalize on our strength and make continued investments to make it even stronger. We also believe that approximately $625 million of our $1 billion cost takeout will stick resulting in some carryover benefits next year, and that the Margin Resiliency Initiative will continue to bear fruit in 2021, yielding $100 to $150 million of additional margin tailwind. Perhaps most refreshing of all is the absence of sizable new headwinds in the area of FX inflation and tariffs. For all those reasons, as we sit here today amidst all the market uncertainty, We believe the growth and margin story is sustainable in the stop-start kind of pandemic economy that we're in. My comments do not contemplate a severely pressured 2021 global economy, and we do not believe that scenario to be the likely case. Our people have worked tirelessly to produce these results. Our third quarter financial performance reflects the agility, courage, and common sense of our leaders and their teams under the circumstances, and we thank them for that. Now for a few financial highlights. Total company third quarter revenues were $3.9 billion, up 6% versus prior year. This included 4% organic growth and a two-point contribution from the CAM acquisition. And turning to profitability, we executed to deliver a gross margin rate of 35.9% or 160 basis points above that of prior year. And as mentioned, we Our operating margin rate was a record 17.7%, up 320 basis points. This achievement was a result of strong cost control, our margin resiliency initiative, volume leverage, and price. And leading this performance was tools and storage, delivering 11% organic growth and a record 21.5% operating margin rate. Industrial achieved sequential improvement in both revenue and margins despite a steep year-over-year market-driven organic decline, and effective cost management to protect margins helped position the business for outstanding volume leverage during an eventual market recovery. And lastly, security delivered stable results even in this climate with just a modest decline in organic growth and relatively flat operating margin. We continue to transform this business in our investing to capture the emerging health and safety opportunity related to the pandemic. We're excited to realize the benefits from this multi-year transformation with the potential for organic growth with margin expansion in 2021 and beyond. And finally, all of this was punctuated by record adjusted EPS of $2.89, which was up 36% versus last year, as well as $615 million of free cash flow in the quarter bringing our year-to-date free cash flow to $391 million, up over $400 million year over year. And as we look ahead, our well-established pandemic priorities remain consistent. First, ensuring the health and safety of our employees and our supply chain partners. Second, maintaining business continuity and financial strength and stability. Third, serving our customers as they provide essential products and services to the world. And fourth, doing our part to mitigate the impact of the virus across the globe. The pandemic is not over yet. We are maintaining our focus and not letting our guard down as we enter the next phase and continue to manage with agility and resiliency. These priorities have helped us keep our employees as safe and secure as possible, operate continuously to serve our customers and to support our communities during this challenging period. We will continue to exercise discipline on expenses and reap the benefits of the cost savings program put in place earlier this year. We are concurrently making investments in key growth areas associated with reconnecting with the home and outdoors, e-commerce, and health and safety, even as we work to ensure that our operating margins stay in the 15% plus zip code. In summary, it was a truly notable quarter, and there's a lot to be excited about for the future. including MTD, which brings between $2 and $3 billion of revenue and becomes executable beginning in July 2021. Thank you, and I'll now turn it over to Don Allen to provide you more color on the third quarter as well as our scenario planning as we look to the fourth quarter and beyond.