Stanley Black & Decker, Inc.

Welcome to the fourth quarter and full year 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 the 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 Fourth Quarter and Full Year Earnings Conference Call. On the call, in addition to myself, is Jim Lurie, President and CEO, 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 fourth quarter and full year 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 events that may not prove to be accurate, and as such, they involve risk and uncertainty. It's therefore possible that actual results may materially differ from any forward-looking statements that we might 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. Thank you.

Thanks, Dennis, and good morning. Today we issued record fourth quarter results, marking an outstanding close to a very dynamic and successful year. As I mentioned in our 2020 shareholder letter, we expected the operating environment of the 2020s to be one of volatility, uncertainty, complexity, and ambiguity, or VUCA for short. Lest we had any thought of easing into that construct over time, like others, we were thrust into action as the pandemic roared onto the scene in March and April. And as for many companies, the early days of the pandemic brought into focus the first rung of Maslow's hierarchy of needs. We quickly established pandemic-era tactical priorities. First, protect the health and safety of our employees and supply chain partners. Secondly, ensure the continuity of our operations and financial stability. And third, do what we can or could to mitigate the impact of the virus in our communities. We undertook a myriad of actions consistent with those priorities, including the implementation of intensive company-wide safety protocols, including mandatory masks from day one, significant liquidity enhancements, cost reductions, some temporary, some permanent, as well as a substantial increase in our philanthropy, both in dollar terms and in kind. We asked our people to be guided by our purpose. For those who make the world, we emphasized our three simple leadership principles, which include creating clarity, inspiring engagement, and growing and delivering. Our people, while dealing with the personal hardships and challenges characteristic of this era, responded beautifully to our lead. Amidst four weeks of collapsing sellout revenue in April, we were hunkered down, ready to ride out the storm. And then suddenly, in the last week of April and on into the summer months, an abrupt and very positive phenomenon emerged in the tools business. Our end users, many of them homebound, with time on their hands, discovered and or rediscovered DIY projects, both indoors and outdoors. We enjoyed a surge in North American retail of a magnitude never before experienced. By June, POS was running 30 to 40% greater than the prior year. E-commerce growth exploded at levels even higher than that. And fortunately, both we and our channel partners had solid inventory positions at the onset of the demand. By May, we were ramping up our factories to extraordinary levels. By the third quarter, the demand trend had extended to Europe and other markets around the world. albeit at somewhat lower levels, but still in strong double-digit territory. The second half of 2020 proved to be an all-out test of our supply chain resiliency and ability to serve the growth. Customer inventory levels had been substantially reduced by mid-year, and our global factories were running at historic levels just to keep up with the POS demand, and they still are. We faced rolling labor shortages, supplier issues, and various arbitrary government edicts in jurisdictions all over the globe. However, we were able to prevail and operate continuously with only minor exceptions. And along the way, we've moved forward with significant capacity expansion actions for both power and hand tools, and we look forward to serving continued growth in the future. 2020 was by far the most difficult backdrop we've ever faced. but we were prepared for volatility, and our people rose to meet the challenges. Fortunately, we went into it with strength and have stayed strong for the duration. Back in 2016, we committed to a vision that embodied purpose-driven performance. We built a company that is anchored by a supportive, people-oriented culture, striving to deliver top quartile shareholder return, to become known as one of the world's great innovators, and to elevate an already strong commitment to ESG and corporate social responsibility. We demonstrated in 2020 that when corporations like ours put people first and work to have a positive impact on society at large, the result can be extraordinary resilience, which benefits our shareholders through outstanding growth, cash flow, margin expansion, and ESG. And that is the story of 2020. On the heels of an excellent third quarter, the fourth quarter was the pinnacle of our 2020 performance, and we entered 2021 stronger than ever. Now I'll take a moment and recap the 4Q numbers, which demonstrate the power of our momentum as we enter 2021. Revenues were up 19% to $4.4 billion, with organic growth of 16%. This was led once again by tools and storage, which had organic revenue up an impressive 25%. Our total company operating margin rate, excluding charges, was a fourth-quarter record, at 16.5%, up 290 basis points from prior year, with volume leverage, productivity, cost actions, price, and margin resiliency initiatives all contributing. Adjusted EPS for the quarter was $3.29, up 51%, 51% versus prior year. And now let's turn to the full year. Revenues were $14.5 billion, up 1%, with 10% organic growth in the second half, more than offsetting the first half pandemic-related issues. Our full year operating margin rate expanded 110 basis points to 14.6%, attributable to strong cost control, productivity, our margin resiliency initiatives, and price. Adjusted EPS for the year was $9.04, an 8% increase versus 2019. Especially remarkable when considering our original pre-pandemic guidance midpoint last January was $8.90 a share. We converted the strong sales and margin results, along with just over a half turn of working capital improvement, into record cash flow. Free cash flow was $1.7 billion for the year, $1.7 billion for the year, an all-time record for the company. up 55% versus 2019, with a conversion rate of 136%. And lastly, I'm happy to report that we successfully exceeded all of our five-year medium-term environmental health and safety goals established in 2015. We targeted a 20% reduction of our energy consumption, our carbon emissions, our water use, and our waste generated in our facilities, and more than attained each one of those goals. In addition, we significantly improved our recycling and use of renewable energy and achieved our safety goals. When I became CEO in 2016, we updated our vision to elevate our commitment to social responsibility. Achievement of these goals is an important milestone in our journey to execute on our 2030 sustainability strategy. More goals and more milestones ahead as we continue on this march. So where do we go from here? In a world of elevated uncertainty, here are a few observations to simplify and clarify our point of view on that for 21 and 22. Without question, tools and outdoor demand is on a roll, and we think it will be for some time to come, benefiting from a series of exogenous factors, including, first, a secular surge in global DIY driven by the consumer's rediscovery of home and garden. Secondly, a massive acceleration of the global shift to e-commerce within our channels, which plays to our strength as the global tools leader in e-commerce. And third, a cyclical boom in North America home improvement driven by increasing new and pre-owned home sales associated largely with household formation and the urban exodus. And then there is the need to rebuild channel inventory levels, which we believe are at least four weeks lower than desirable. Our tools business has never been stronger or better positioned to gain share, and we have consistently grown organically and gained share every year since the merger of Stanley and Black & Decker 11 years ago. Our unmatched array of iconic brands, market-leading innovation, combined with our scale and organizational agility continues to support that investment thesis. Total company operating margin reached new heights in the second half of 2020, breaking through the 15% threshold at 17.7% and 16.5% in 3Q and 4Q, respectively. This is a significant increase of about 300 basis points over prior year, and it is not a coincidence. It derives from an intentional confluence of tight cost management, volume leverage, price mix management, and our margin resiliency initiative. The latter applies cutting-edge digital technologies to optimize margin performance across multiple value pools. Skeptics point out that the third quarter benefited from cost reductions, some of which were admittedly temporary in nature. These skeptics now have to deal with a fourth quarter in which the 16.5% includes the vast majority of temporary costs such as furloughs, four-day work weeks, executive salary reductions, and benefit deferrals back in the run rate. This was accomplished as we began to fund significant new investments and growth initiatives, including major thrusts into e-commerce, revitalizing the Black & Decker brand, security, health, and safety, and outdoor products. And although the second half 21 tools growth comp is difficult, we believe it is manageable, and we are predicting full-year total company organic growth of approximately 6% at the midpoint. with a super strong first half and a modest negative in the back half, yielding the 6% midpoint, which is the high end of our long-term growth objective for that measure. Our strong share momentum, aided by numerous growth catalysts such as FlexVolt, Craftsman, Atomic Extreme, PowerDetect, and e-commerce, should not be underestimated. On top of this, there is an industrial-related portion of tools that is in the midst of a cyclical rebound as we enter 2021, along with about $4 billion of industrial, which includes engineered fastening automotive, and the security segment revenue, which was negative in 2020, and all those are expected to be positive in the aggregate in 2021. So for all these reasons and more, as Don will cover in his remarks, our 2021 adjusted EPS guidance is is introduced at $9.70 to $10.30 a share. At the midpoint, this is $10, up 11%, which is a very good place to start our journey into 2021. And while it is too early, way too early to guess at what market conditions might be in 2022, we stand to benefit from our multi-year relationship with MTD and and our optionality to acquire the remaining 80% at a very attractive multiple with a window that begins to open in July of this year, which brings me to a brief update on MTD. Our current planning assumption calls for the exercise of our MTD option and the potential addition of up to $3 billion of revenue from the MTD transaction in 2022. And just to clarify we expect to implement or exercise the option in late 21 and begin to recognize revenue subsequent to regulatory approvals and hopefully beginning in 2022. the lawn and garden category is experiencing similar benefits to tools from the consumer's reconnection with the home and mtd ltm revenues now approximate 2.6 billion dollars with a very strong second half revenue performance in the books comparable to our tools business Additionally, MTD continues to make progress on multiple opportunities to generate operational efficiency and margin improvement, delivering a 6% operating margin in 2020, with momentum coming into the 2021 season and plenty of runway ahead for further improvement. The transaction was structured in a financially prudent way, whereby we purchased 20% of the company at an 11 times multiple with the option to purchase the remaining 80% any time next during a 10-year window beginning this July. MTD's incremental EBITDA improvement since our initial purchase is shared 50-50 and is thus valued at 5.5 times, which provides us the ability to acquire a market leader in outdoor power equipment at an all-in multiple at the time of option execution, likely to approximate 7-8 times. We are excited by the multiple levers to accelerate growth and margin expansion with this acquisition. In addition to the initial revenue contribution upon consolidation, we see additional organic growth opportunities in the pro outdoor equipment market as well as to drive electric powered and autonomous mower offerings while employing our successful commercial model to fully leverage our portfolio of brands and channels. We're also working on a multi-year roadmap to achieve 15% operating margin in the category. Not likely, some say. However, we believe we're up to the challenge. I remind the naysayers that Black & Decker's operating margin was below 6% in the year before acquisition, and the very same team that addressed that opportunity is still on the field today. We continue to be encouraged by MTD's innovation and product development pipeline, as well as their progress on improving profitability, and we're excited about this future combination. Even before exercising our option, we are bringing this vision to life in 2021 with SPD and MTD, each independently launching a series of new products under the DeWalt, Craftsman, and Black & Decker brands that are hitting the market now across the gas and electric power spectrum. A few notable examples. MTD brings world-class innovation in riding and zero-turn mowers and through a licensing arrangement will launch a new lineup of of DeWalt-branded gas-powered professional mowers that are now beginning to roll out at one of our major U.S. retailers. In addition, we have designed, developed, and are launching new cordless 20-volt DeWalt walk-behind mowers, also with strong listings, that will be made in the USA with global materials in MTD's Tupelo, Mississippi facility. MTD continues to expand its outdoor offering into new categories with craftsmen under license. New to market this year will be an impressive lineup of zero-turn gas mowers as well as gas-powered solutions in riding and walk-behind mowers. Concurrently, SBD will expand our battery and electric-powered offerings in push mowers, power washers, and handheld products such as chainsaws, trimmers, and blowers. lastly as a part of our e-commerce focused brand refresh with black and decker of black and decker mtd will launch a new lineup of gas handheld products under license and we will launch new electric offerings including an autonomous robotic mower in europe as you can see we've been busy working our partnership with ntd and there is a lot to be excited about that and for 2021 these opportunities are planned to deliver more than $100 million of organic growth for SPD, as well as support additional growth for MTD. With broad coverage across gas-powered products for MTD and electric and battery-powered categories for SPD, we are just starting to tap into the significant potential ahead of us. And now I'll turn it over to Don Allen to cover the fourth quarter and our 2021 guidance. Don.