Stanley Black & Decker, Inc.

Welcome to the first quarter 2022 Stanley Black & Decker, Inc. 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 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 2022 First Quarter Conference Call. On the call, in addition to myself, is Jim Lurie, CEO, and Don Allen, 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 2022 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'll be making some forward-looking statements during the call based on our current views. As 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 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 CEO, Jim Lurie.

Thanks, Dennis, and good morning, everyone. As you saw from this morning's results, we achieved 20% revenue growth and over 200 basis points of sequential gross margin improvement in the first quarter. We benefited from a sustained, strong demand environment, significant and growing price realization, and our new strategic outdoor acquisitions. The first quarter results illustrate the operational focus and agility of our teams in managing through a choppy external environment characterized by supportive demand. We are executing pricing to offset inflation and restore margins and beginning a very successful integration process with the new outdoor acquisitions. We will benefit from recent portfolio moves, which render a more focused company anchored by our core tools, outdoor and industrial franchises. In this regard, we announced last Friday the sale of our access technologies business for $900 million in an all-cash transaction and at compelling valuation. It represents the final step. in our security divestiture initiative and was preceded by the announced sale of our electronic security business to Securitas in the fourth quarter for $3.2 billion. These transactions, along with the outdoor acquisitions, will further strengthen our position as the number one tools and outdoor company in the world. With these acquisitions and the security divestitures, we have created a business portfolio that is extremely well positioned for sustained long-term growth and margin expansion, as well as one that benefits from several positive secular trends and competitive advantages. During the quarter, we also initiated $2.3 billion in share repurchases through an accelerated share repurchase, as well as open market buyback activity. These actions represent significant progress towards achieving our goal of returning $4 billion in capital to our shareholders through repurchases, which we expect to complete in 2023. Taking into account the approximately half a billion dollars in dividends we expect to pay in 2022, we will have returned $2.8 billion to shareholders by the end of the year, a record for Stanley Black & Decker. These important capital allocation actions represent along with, one, our now demonstrated and continuing ability to achieve substantial price inflation recovery, and, two, progress in reducing supply chain constraints, will result in higher growth and margin accretion, and thus significant value creation in both the short and long term. To summarize our first quarter, revenues were $4.4 billion, up 20% driven by our outdoor equipment acquisitions. Organic revenue was down 1%, and customer demand remained strong across many of our global markets, and price realization accelerated sequentially from the fourth quarter. The volume could have been higher, but for the supply-constrained environment that we continue to make progress on resolving. With added supply of semiconductors and electronic components during this quarter, we expect to be able to alleviate all major electronics-related constraints by the end of the quarter. Our total company operating margin was 11.5%, up 250 basis points sequentially, reflecting the implementation of new pricing actions, but down versus prior year due to cost inflation and supply chain challenges. This resulted in first-quarter adjusted EPS of $2.10, which was ahead of our plan. As we look forward, I'd like to share a few comments on what we're seeing in the demand environment. In tools and outdoor, end-user demand across most markets and channels has remained stable, led by pro-construction. Absolute dollar sell-through in North America retail continues at high levels, especially when measured sequentially and or compared with the 2019 baseline. Additionally, we believe that we are gaining market share in North America and other geographies. For instance, based on publicly available disclosures by our top two home center customers, our 2021 point of sale growth was above category line average for each of them. In our end markets today, while the boom global conditions of 2020 and 2021 have leveled off, The fundamentals in secular drivers remain healthy and are still very much intact. As we look out over the balance of the year, the combination of repair, remodel, new residential construction, and commercial construction have plenty of runway to continue to drive enduring demand in many of our markets around the world. Despite the specter of slowing global growth and increasing U.S. interest rates, repair remodel activity is expected to grow at mid- to high-single-digit rates over the next two years due to multiple factors, including an aging housing stock, record levels of home equity and strong price appreciation driving big-ticket remodeling, and tight existing housing supply leading consumers to invest in existing homes as well as spurring demand for new homes. In terms of new residential construction, the years of undersupply of new homes post the 2008 economic crisis has created a significant housing stock supply issue, just as millennials reach the age when they're most likely to purchase a home. We expect that this will continue to support new residential construction activity, even with the interest rate increases currently being contemplated by the Fed. Commercial construction is still in the early stages of a post-COVID recovery, and the secular drivers for SAITH healthy, professional working spaces, and more efficient buildings will contribute to positive activity levels in 2022 and the coming years. And lastly, we have strong backlogs in our industrial businesses, and we remain optimistic that cyclical recoveries in the auto and the aerospace sectors are beginning to emerge. This is very meaningful to both revenue growth and profitability for the segment. To size it, we think it is a $300 million to $400 million investment multi-year growth opportunity with accompanying margins returning to the mid to high teens over time. And while we see continued momentum within our core markets, we will monitor and respond accordingly if and when we observe any adverse impact from a higher interest rate environment and or significant elasticity of demand effects following our pricing actions. On top of the market, we continue to reinvest in growth, including leading-edge product innovation, e-commerce, and electrification that will position us for sustained share gains. In fact, since the start of the pandemic, we have invested in over 1,500 human resource additions in R&D, commercial, and e-commerce functions in tools and outdoor, and that is before the impact of any acquisitions. On that note, I'll now address our recent capital allocation and portfolio actions. A key aspect of the Stanley Black & Decker value creation model is our active approach to portfolio management and commitment to an investor-friendly capital allocation strategy. Over the long term, we look to invest 50% of our excess capital into strategic M&A. and returned the other 50% to shareholders through a consistent growing dividend and opportunistic share repurchases. The two security divestitures were at a trailing EBITDA multiples of mid to high teens and have a headline price of $4.1 billion in the aggregate, resulting in approximately $3.5 billion of after-tax proceeds. These impressive results validate the investments we made in transforming our security business over the last several years and have enabled significant return of capital to shareholders as well as reinvestment in our highly focused core businesses. Deploying capital into outdoor. enabled us to acquire approximately $3 billion of revenue at 8.5 times EBITDA and a material opportunity for margin enhancement over time as we fully integrate these businesses and leverage our combined scale, brands, manufacturing expertise, R&D, and access to both the retail and the pro channels. Now, there has been some noise and misinformation out there about our recent outdoor acquisitions, and I'm now going to present you with the facts. We have a sound strategy for outdoor, anchored on four pillars, electrification, brand and channel strength, cutting-edge innovation, and large-format manufacturing capacity and experience. Overnight, we have assembled a formidable leading player in the $25 billion outdoor power equipment market that is capable of growing 10% to 15% organically at mid-teens operating margin for many years to come. This business will lead the charge in the electrification of both large format and handheld professional outdoor power equipment. We will also bring our outstanding differentiated line of autonomous electrified products under the DeWalt brand to the professional landscaping channel. With the acquisitions comes a network of independent dealers with 2,500 unique outlets, skewing towards the pro market and representing half of the $25 billion addressable market. Such channel access represents a compelling competitive advantage, and it is critical to above-average growth and profitability. I'm also excited about the breakthrough innovations resulting from the integration of the outdoor acquisitions. And even though the new team just completed its first quarter together, they've been working together for several years and will bring to market a strong set of new innovations at attractive margins just ahead of the 2023 outdoor season. We're off to a great start, and I have strong conviction in our ability to deliver outstanding cordless and autonomous new products to the market that will result in growth and margin expansion. And the 13.7% operating margin delivered in our first quarter together is just a taste of the profitability potential ahead in the coming years. And lastly, we have added eight manufacturing locations through our outdoor acquisitions. In addition to the instant capacity to support growing demand, The resulting extensive manufacturing footprint gives us an enormous competitive advantage over our small-format, electric-only competitors. In short, despite what you may have heard, our outdoor acquisitions have enabled us to become the outdoor power equipment leader best positioned to electrify the industry, given our multiple competitive advantages. Our outdoor business is now a powerful growth engine with approximately $4-plus billion in annual revenue with anticipated organic growth of 10% to 15% a year. This is an exciting period for our company with a portfolio focused on core businesses in tools, outdoor, and industrial, and attractive markets in construction, DIY, automotive, and industrial. And I'd now like to turn the call over to Don Allen, who will provide an update on how we're positioning our supply chain for growth as well as more detailed commentary on first quarter actuals and our full year outlook. Don.