Welcome to the Third Quarter 2021 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 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 Lange. Mr. Lange, you may begin.

Thank you, Shannon. Good morning, everyone. And thanks for joining us for Stanley Black & Decker’s 2021 third quarter conference call. On the call in addition to myself is Jim Loree, CEO; Don Allan, President and CFO; and Lee McChesney, Vice President of Corporate Finance and CFO of Tools & Storage. Our earnings release, which was issued earlier this morning and a supplemental presentation, which we'll 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 11:00 a.m. today. The replay number and the access code are in our press release. This morning, Jim, Don and Lee will review our 2021 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 actual results may materially differ from any forward-looking statements that we may make today. We direct you to the cautionary statements in the 8-K 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 Loree.

Thank you, Dennis, and good morning everyone. This morning, we announced a record third quarter, which was powered by 11% growth, primarily result of an impressive 10% organic growth performance. Customer demand remained at robust levels across commercial and retail end markets and strong trends continued in home building and remodeling, commercial construction, professional activity, and global economic growth. Innovation was also a positive, which is driving demand around electrification and other themes. We're continuing to prioritize meeting this heightened customer demand while operating in an unusually complex supply chain environment. I thank our 56,000 employees around the world for delivering record revenue under the circumstances. And in particular, I want to offer a special thanks to our employee makers in plants, DCs and operations organizations, as well as our sales and service people for their incredible dedication, agility, and resilience to serve our customers during this period, as they always do. Tools generated 13% organic growth in what we believe to be the strongest demand environment in our history, resulting from positive secular trends, robust professional activity and strong global markets. Our brands such as DEWALT, Craftsman, Stanley, and Black & Decker among others were fueled by a steady stream of innovation and a strong and resilient supply chain, which is putting great products in the hands of our loyal end users across the globe. Industrial grew 1% organically driven by continued double-digit growth and share gains in our general, industrial and attachment tool businesses. As these end markets remained solid. Industrial growth was tempered however, by lower auto production activity, as OEMs continue to be impacted by electronic and other component shortages. Aerospace also experienced trough conditions as the industry recovery while promising to be likely in the foreseeable future has yet to occur. Security delivered another strong…

Thank you, Jim and good morning everyone. As Jim just highlighted in his opening remarks, we continue to see a range of powerful secular business drivers that are creating a path for strong multi-year growth for our businesses. In support of that, I want to spend a moment to share a few of the many actions we have taken to position our company for significant growth in 2022 and beyond. Three areas I would like to highlight include our latest investments in expanded manufacturing capacity, strategic sourcing partnerships and the further acceleration of our factory automation initiatives. Beginning with our manufacturing footprint. We are aligning our new investments with our Make Where We Sell strategy as we expand capacity globally. For example in 2021, we are opening two new power tool plants, and one new hand tool facility in North America. These three new facilities will enable shorter lead times and once in place our North American capacity will have tripled since 2016. These new manufacturing plants will be accompanied by a parallel regional development of our local supply chain base over time, enhancing local market sourcing and speed to market. As it relates to strategic sourcing, we have acted and continue to focus on securing sufficient supply of battery cells and electronic components used in our power tools to support our long term growth plans, which include the growing tailwind from electrification. We have co-invested with key battery suppliers to secure dedicated capacity for the next several years. In addition, we are adding new qualified suppliers to diversify our sourcing and working to increase our inventories for battery cells. We made great progress in 2021 and are well positioned for significant supply increases related to battery cells. As it relates to electronic components, we are following a very similar…

Thank you, Don. Moving to Slide 11, let's review free cash flow performance. Third quarter free cash flow was a use of cash of $125 million, which brings our year-to-date results to a use of cash of $31 million. As you heard from Jim, we are focused on serving our customers and have invested in inventory to serve the robust demand environment here in 2021 and in 2022 and beyond, which is a major item that explains a year-over-year performance. There's also normal seasonality pattern to our working capital that typically results in a significant amount of our cash flow generation occurring in the fourth quarter. We expect 2021 will follow that pattern and are planning for strong fourth quarter cash performance. While ensuring that we make the appropriate investments in inventory and CapEx to support all of our exciting growth initiatives. Let's now move to Page 12 and dive into the supply chain. The environment certainly remains dynamic as we serve the robust demand across the markets. During the third quarter, we experienced accelerated input cost inflation and higher cost to serve demand. We've initiated a comprehensive set of pricing and productivity actions in response. I'll now outline our latest expectations for inflation and our game plan for price recovery. Compared to our July guidance, key commodity inputs, such as steel resins and purchase components accelerated throughout the third quarter, contributing an incremental $100 million in costs. In addition, container and transportation costs, which largely drive our cost to serve experienced a dramatic increase during the quarter. Average container spot prices are now nearly seven times what we were paying earlier this year. Average transit time from Asian suppliers to the North American manufacturing facilities and distribution centers have increased more than twofold from approximately 40 days to 85.…

Thanks, Lee. I will now outline the full year organic growth and margin rate assumptions overall and by segments. Our updated full year 2021 guidance calls for organic revenue growth of 16% to 17%, and at the midpoint adjusted EPS expansion of 22% versus the prior year and 31% versus 2019. Tools and Storage and security organic growth expectations are consistent with our prior guidance in the low 20s and the high single digits respectively. The teams will continue to leverage price and cost actions in addition to operational productivity to counteract the extremely dynamic supply chain cost pressures. We are anticipating a relatively consistent level of revenue for Tools and Storage across Q3 and Q4, which both represent total growth in the mid to high 20s versus the comparable periods in 2019. Across all the segments margin rates will be down year-over-year, largely due to the accelerated inflation impacts, which are partially mitigated by the incremental pricing actions that were or will be implemented during the third and fourth quarter. On a GAAP basis, we expect the earnings per share range to be $10.20, up to $10.45 inclusive of various one time charges related to facility moves, deal and integration costs and functional transformation initiatives. On an adjusted basis, we are moderating the EPS outlook to $10.90, up to $11.10 from the previous range of $11.35 to $11.65. The key assumption changes to the company's prior EPS outlook includes the following four items. One, an incremental $230 million in commodity, transit and labor inflation, which is approximately a $1.25 reduction into EPS. Two, recent currency movements have resulted in a $0.15 negative EPS for 2021. Three, these pressures will be partially mitigated by our incremental pricing actions and other actions, which add an incremental $0.30 EPS. And then four,…

Thank you, Don. What may not be obvious without stepping back from all this condensed information is this? When we deliver the organic growth in 2022 that Don discussed, and when we close the outdoor transactions. In combination, we will have added $6 billion of growth in the 2021, 2022 time period against a 2020 base of $14 billion that is over 40% growth. So in summary, we continue to execute on the strong demand trends and deliver exceptional organic growth, despite the temporarily challenging supply chain environment. We are enjoying positive secular trends, vibrant markets in a strong array of growth catalysts. And we expect this to continue. I am more than pleased with our team's efforts, and I'm excited about the enormous potential as we close up this year and look forward to continuing top and bottom-line growth to drive shareholder value creation in the coming months and years. And finally, I am excited about all the cultural advancements we have made in recent times to attract, inspire, and engage talent in the 2020s requires an acute awareness and commitment to deliver what that talent is looking for in their company's employee value proposition. We are a purpose driven company with an authentic commitment to diversity and inclusion. We are a company that cares about its stakeholders and is doing its share to be a force for good in society. This is an exciting place for people to thrive and live their purpose. So far it is working. Our ability to attract world class diverse talent has never been stronger and our passion for and conviction in differentiated performance, becoming known as one of the worlds’ most innovative companies and elevating our commitment to corporate social responsibility inspires us and motivates us every day. We are for those who make the world. And with that, we are now ready for Q&A. Dennis?

Great. Thanks Jim. Shannon, we can now open the call to Q&A please. Thank you.

Thank you. [Operator Instructions] Our first question is from Rob Wertheimer with Melius Research. Your line is open.

Hi, good morning. Lot of work going on there obviously. My question is on a couple on pricing. Do you feel reasonably confident on the surcharge going through? I don't know if you've had feedback from channel partners, if you've seen competition, what's been going on. So does that seem likely to go through? And then maybe just a little bit more of a structural question, you mentioned some really interesting data and analytics around the supply chain. Have you changed the analytics and internal rhythms around pricing as well? Such that I don't know if you're trying to move faster in an inflationary environment and I'll stop there. Thank you.

Thanks Rob. Those are great questions. And the first one, the surcharge, we have really tied it to these cost to serve costs, additional costs to serve items that we believe obviously are transient in some level. It's just a question of how long they linger in the system. And we believe, we have a very solid basis to make that price increase through a surcharge. We've received a lot of initial feedback from our customers and feel like we're in a very good place to ensure that gets in place in the fourth quarter. So feeling good about that at this stage. On the second around data analytics, I mean, I believe that actually on the pricing side, we got ahead of that a little earlier than we did on the supply chain side. And so we have fairly robust analytics in place around pricing. We don't – we look at pricing in a much broader way. So pricing is not just about list pricing increases or in this case, a surcharge it's about how do you really manage the mix in the business appropriately? How do you manage the pricing of new products when you put them in the market to ensure that you're pricing them at the right premium, giving the innovations that they are bringing to the end user? All those things have to be factored in. And our Tools team actually has the small organization that works on that full time. And their focus is really how do they drive margin improvement with all those different levers, which can be price – direct price increases can be surcharges, can be mixed management, new product introductions, as I mentioned. So all those things have to be looked at and we've been doing that for about two years now. And so that's a little bit ahead of the supply chain data analytics that Jim described, which really that was driven by necessity in the summer and fall of last year, just given the complexity of supply chain.

Thank you. Our next question comes from Jeff Sprague with Vertical Research. Your line is open.

Thank you. Good morning.

Good morning

Good morning.

Just to explore price a little bit more, just correct me if I'm wrong on these kind of rough assumptions, but it seems like you're kind of modeling $700 million of price next year and I don't know, $400 million or so of it in North America. I just wonder if you could kind of address specifically North America price kind of the surcharge dynamic versus what you might be trying to do on base pricing. Just thinking about the mechanism here when you have to kind of give the surcharges back so to speak. So I'll leave it there.

Okay. Hey Jeff, good question. Your numbers are definitely in the right zone. I would do a couple catalysts, keep in mind that in the third quarter, we did execute our, I'll say 4.5% to 5% price increase. So we're delighted with that global execution. And as you look forward here with a surcharge it's in this 5% zone. And then across the globe, the different price increases are in that same range. So that's what we we're doing now. As Don noted earlier, the surcharges linked to these costs to serve increases certainly it's a dynamic environment as we go through the quarter here, if other things come to bear will look at doing other price actions in the first quarter as well, where there could be a bit of a plus and a minus to your point. If the cost to serve environment improves right now, our mindset is that's not going to happen.

Yes. I would just add to what Lee said at the end there. The cost to serve dynamic is interesting. It will improve eventually. The question is when will it approve? And so that's why, we took this approach around pricing fairly swiftly in the fourth quarter to respond to it. But we may be dealing with some of these supply chain challenges for another six to 12 months. Hopefully in the back half of 2022, we start to see them ease a little bit, but we're prepared for them to continue to remain for the full year of 2022.

Thank you. Our next question comes from Tim Wojs with Baird. Your line is open.

Yes. Hey everybody, good morning. Maybe just on the volume growth for 2022, the mid single digits that you're kind of highlighting, just curious kind of your confidence behind that and maybe how much of that is driven by just end market sellout growth. Any potential restocking and some of the kind of new product introductions and when you think about POWERSTACK and reviva, how would you kind of think about framing those growth opportunities over the next few years?

Tim, we have made enormous investments in growth. As you can see by some of the output that we talked about here, and you just mentioned. 1300 new employees, $200 million of run rate investment in the run rate and just a massive commitment to increasing the intensity of sales, product development and e-commerce and all sorts of other growth oriented resources. And also as Don mentioned, adding capacity and so forth, the demand is strong. The conditions are supportive. So serving the demand, I think is the challenge. And I think we're confident we've created the demand and the environment is supportive and we need to serve the demand that is challenging, but you can see we delivered on our third quarter organic growth commitment, 10%, despite the challenges that we faced. And so we have a resilient organization and we have all the growth programs in place. And we have a high level of confidence that we can deliver that sort of growth. There's not a whole lot of restocking in that number, a couple of $100 million maybe a tad more, but I think it is important to point out that there's enough stock in the stores to support a POS growth environment, and that we're starting to see that in recent weeks. So we have gotten the inventories in retail up to where they were a year ago. And we still feel like there's a – maybe a two week to three week kind of additional opportunity for restocking and the retailers will enjoy higher fill rates, when that happens. But right now, the fill rates are sufficient to generate modest POS growth. And that's even before a lot of these new initiatives come to market.

I just add one thing to what Jim said. There is the cyclical recovery of industrial. That's still out there, now whether that all happens in one year, because we think that's about $300 million, it's still to be debated, but maybe it happens over two years we get a $100 million to $200 million next year and you get the rest in 2023. So that's kind of an addition to all the things that Jim just mentioned.

Our next question comes from Julian Mitchell with Barclays. Your line is open.

Hi, good morning.

Good morning.

Good morning, just wanted to circle back on the operating margin assumption. So it looks like you're aiming for around firm wide and 11% operating margin or so in the fourth quarter, just wanted to check that was roughly the right ballpark. And then for next year, it looks like the margin is sort of flattish maybe up a bit for the whole company for the year so maybe 14% or so. Maybe just help us understand how you expect the first half, second half margin cadence to move given your comments on the price and cost dynamics. Thank you.

Yes, I would say that your presumption on the fourth quarter is pretty accurate. And next year, yes, the operating margin rate expands maybe 30, 40 basis points in that category year-over-year. If you look about, how things will kind of play out quarter-by-quarter, we will see a significant improvement in Q1 versus Q4. Things will get a little bit better in Q2 and then the back half, you'll see another step up of maybe half a point to a point in the back half versus the front half. So we would expect continued progression and improvement in those areas. The cost of serve will still be very high in particular in the first half of the year, but that's probably the right cadence for you to think about.

Thank you. Our next question comes from Nigel Coe with Wolfe Research. Your line is open.

Thanks. Good morning. Thanks for the question. So just to recap, so we've got a 4% to 5% base price increase going in during the fourth quarter that then rolls forward – whatever rolls forward into 2022. And then we've got a 5% surcharge in North America in Tools & Storage. Just want to clarify that's what the plan entails and then what's the competitive response here and just if you can just give some flavor in terms of what you're seeing from competitors, are they going out with similar price increases and surcharges and given the import model from similar competitors, which are obviously more import intensive than you are, kind of any share shift that you're seeing within your channels?

So I would say that, yes, the number you mentioned for price going in the fourth quarter is the right number. We believe that everyone for the most part is doing some type of price increasing. The question is what geographies and what magnitude, most of our competitors, if not all of them are being impacted by higher logistical costs to serve, additional costs, so to speak. So everybody's dealing with the same dynamic and it's a question of how much you want to have your margins impacted for a period of time versus offsetting it as quickly as you can with price increases. We've taken a very proactive approach where we have, as you saw from Lee, some significant headwinds that we're dealing with here in 2021 that carry over into 2022. They appear to have stabilized in the last 30 to 45 days, which is in our mind a very positive sign. Maybe we've hit the peak in this area. So now it's really about how do you drive the price increases on various products and different geographies to more than offset that. And so we feel fairly confident at this point that we can get, if not a 100% recovery on the price side versus the headwinds, pretty close to it. And so that's then our approach. Then we have productivity that over and above that, that'll help us fund investments and other things we need to do to continue to grow the business. That is the approach we're taking. And it's an unprecedented period of time around inflationary headwinds, but in some ways it helps us do what we need to do because it is so significant and everyone in the industries that we serve are dealing with it.

Thank you. Our next question comes from Markus Mittermaier with UBS. Your line is open.

Yes. Hi, good morning. Maybe just one on…

Good morning.

Good morning. On supply chain and your comments on semiconductors improving by Q1 2022, just to be sure I understand that right. Is that a Stanley specific comment around sort of your relationships with suppliers or is that market assumptions you make? And do we need that to happen for that dollar of accretion in the markets that you outlined? Thank you.

It's certainly not a – we do not expect the industry-wide semiconductor market, the semiconductor industry-wide market to basically meet balanced supply and demand until probably 18 to 24 months from now just based on lead times and so forth. But we're a small player in the semiconductor world. We're a niche player and our ability to secure supply has been adequate at this point in time. And as Don mentioned in his remarks, we're already programming to have at least a 25% increase. But that is a Stanley specific phenomenon. And I can't speak for the auto industry or the appliance industry or other industries that use these types of semiconductors.

And I would add to that. To be very, very specific in my comments, we have enough commitments in battery cells and electronic components/chips to be able to expand our supply chain by 25% in power tools, if the demand is there for that to be served. And so that will happen by the spring of 2022 is what I was trying to say. And as we said, the guidance that we had for 2022 was mid single digits volume increase. So what he’s basically implying here is that there is, if the demand is there and it’s very robust, we have – we will have the ability to serve that demand.

Thank you. Our next question comes from Mike Rehaut with JPMorgan. Your line is open.

Thanks. Good morning, everyone. I just wanted to circle back to some of the pluses and minuses of the guidance change in 2021. And apologies, if I didn’t catch all the details when you were kind of highlighting the four major differences. But you obviously, the big incremental headwind being the extra $230 million from the supply chain outlook and several offset to that, but still a net $0.50 impact on EPS. I was just trying to ascertain, you highlighted for next year the $100 million to $150 million of margin resiliency. I just wanted to understand how that had been factored in to guidance up until prior to today. And if you were expecting the $100 million to $150 million as a potential benefit this year if that’s still the case and how that has or continue to be reflected in guidance?

Yes. Sure, Michael. So as the year has gone on, obviously some of the margin resiliency has flowed through as each quarter has gone by. So as we got to the back half of the year, we still had $75 million to $100 million out there of possible margin resiliency available that was not in our guidance. A lot of that’s dropping through when I made reference to pricing actions and other actions of $0.30 of a positive when I did the walk from our previous guidance to the new guidance. And so that’s where you would see that play through. We do see another $100 million to $150 million next year that is not in the numbers that I mentioned. And so that would be there for contingency or outperformance as we usually do at the beginning of a year. And so I just wanted to clarify that as well.

Thank you. Our next question comes from Ken Zener with KeyBanc. Your line is open.

Good morning, everybody.

Hey, Ken.

So Jim, you kind of talked about verse 2019, the $6 billion of incremental, including MTB, and it is very impressive growth. I don’t recall you guys putting a surcharge in all the years that I’ve covered you. So can you talk about maybe just the battery technology that you talked about TTI’s out there, you guys are here, the platform, the batteries, the competitors keep getting squeezed yet, as we saw you couldn’t hit the growth rates in the fourth quarter because of these supply constraints. But could you just maybe take a step back and talk about how technology is really affecting the breadth of product and the tool platform is really increasingly squeezing out the competitors. And if that might change kind of less competitors, more capacity, if that might really change your kind of outlook in terms of how the competitive landscape is moving in your favor. Thank you.

Yes. Well, I wish the competitive landscape was getting easier, but it’s not, it’s intensifying and hence the investments in innovation and capacity and growth and everything. So the pouch technology is very exciting though. It is as I mentioned in my remarks, 50% more power, 25%, more compact, 15% lighter and it lasts twice as long. You get twice as many charge cycles. And one of the nice things about it too, is that the pouch technology batteries do not compete with automotive. So we don’t have to worry about the cylindrical cells that go into power tools being much, much a smaller part of the cylindrical cell market. I don’t think cylindrical cells will go away over time, because the pouch cells are slightly more expensive. So, there’s probably a 10% to 20% type premium on the cost of a battery that lasts twice as long. It’s going to be a very pro oriented product. It’s going to play beautifully with the atomic and extreme compact tools. And over time, I expect it to grow to be a significant part of the market. But I don’t see it crowding out of the competitors. I mean, there are active vital competitors who are continuing to invest and it’s a hotly contested race for market share. I think we’re doing well, but so are some of the competitors.

Thank you. Our next question comes from Joe O’Dea with Wells Fargo. Your line is open. Joe O’Dea: Hi, good morning, everyone.

Good morning. Joe O’Dea: Another one for you on pricing, but I just wanted to understand the mix of the surcharge and then the base pricing. And so when I think about kind of what’s implied in terms of the benefit that you’re anticipating next year, it looks like what would be – if we apply the total base pricing across the whole portfolio, it looks like what’s implied is more in the kind of 2% range. So when you talk about what you’re implementing right now versus what looks like could be maybe anticipated in terms of realized. Is that kind of the right interpretation that you’re just not sort of fully baking in 4% to 5% of realized base pricing? And it’s more the expectation that that could be 2%. And then why wouldn’t that be better?

Yes. I’ll take that. So I’ll give you a quick answer, we can certainly answer more offline. But keep in mind that we put in the 4% to 5% price increase in the third quarter, and then globally here in the fourth quarter, we’re going after another 5% target. So, you will get to exactly what Don talked about a little bit earlier, which is this kind of 3.5% to 4% zone. That’s really the right mindset to have for 2022.

Thank you. And this concludes the question-and-answer session. I would now like to turn the call back over to Dennis Lange for closing remarks.

Thanks, Shannon. We’d like to thank everyone again for calling in this morning and for your participation on the call. Obviously, please contact me if you have any further questions. Thank you.

This concludes today’s conference call. Thank you for participating. You may now disconnect.