Welcome to the Second Quarter 2018 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 would 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 second quarter 2018 conference call. On the call, in addition to myself, is Jim Loree, President and CEO; Don Allan, Executive Vice President and CFO; and Jeff Ansell, Executive Vice President and President of Global Tools & Storage. 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 AM today. The replay number and access code are in our press release. This morning, Jim, Don, and Jeff, will review our second quarter 2018 results and various other matters followed by a Q&A session. Consistent with prior calls, we are 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. 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 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 will now turn the call over to our President and CEO, Jim Loree.

Thank you, Dennis and good morning everyone. As you saw from our press release, we delivered an impressive second quarter under the circumstances and reaffirm total year EPS guidance, up 13% at the midpoint. In doing this, we fended off a significant array of exogenous headwinds, which included input cost inflation, FX and most recently, tariffs. Our ability to do that was a result of an outstanding growth performance, which provided both incremental volume and volume leverage as well as tight cost controls, especially on the SG&A line. And while we had telegraphed in our April release that these headwinds would create short-term margin pressure, we also expressed confidence in our ability to substantially offset them through pricing actions and productivity, albeit with a brief timing lag. And as it turns out, our pricing options are progressing according to plan as evidenced by our actual price realization, which was a full point in the quarter. That number will continue to grow in Q3 and Q4 and there will be substantial price carryover into 2019. The short story behind our success in the quarter was agile management that provided real-time visibility into the issues, leveraged our growth momentum and included a rapid and decisive response to headwinds with pricing options and cost controls tools. Tools & Storage and Industrial both exceeded our growth expectations and all three segments contributed to a robust 7% organic growth performance for the overall company. Acquisitions contributed 3 points of growth and the total company revenue increased 11% to $3.6 billion. With tools and markets remaining healthy in most areas around the globe, we continue to see strong underlying demand and share gain in Tools & Storage which delivered an outstanding 10% organic growth in the quarter. In Tools, we are utilizing multiple levers to deliver…

Thank you, Jim and good morning everyone. I will now take a deeper dive into our business segment results in the second quarter. Tools & Storage delivered 11% revenue growth, with an impressive 10% organic growth and 1 point of currency. And as Jim highlighted earlier, the initial effects of our price increases contributed 1 point of organic growth. The operating margin rate was 16.2% versus 17.6% in the second quarter of 2017 as benefits of volume leverage pricing, productivity and cost control were more than offset by commodity inflation and currency. The vast majority of the $50 million of commodity inflation and $20 million of currency that the company experienced in the second quarter was absorbed by the Tools & Storage business. The strong organic growth and related share gains were experienced across each Tools & Storage region and SBU. On a geographic basis, North America was up 10% organically with growth across all channels. The U.S. retail channel has generated low double-digit growth, U.S. commercial markets posted high single-digit growth and our industrial and auto repair markets generated mid single-digit growth. Additionally, Canada contributed exceptional organic growth of 13%. North America’s growth continued to be fueled by new product innovations, the initial Craftsman rollout supporting the Father’s Day promotion at Lowe’s and Ace, a recovery in the outdoor products segment, and of course, our pricing efforts in response to commodity inflation and currency. This growth was achieved while maintaining normal inventory levels within our major customers in North America, the U.S. tool market continues to be supportive providing a sound backdrop for organic growth initiatives that Jim just mentioned. Europe delivered another solid performance with 5% organic growth. All 10 markets grew organically, with above average contributions from Central Europe, the UK, Greece, France and Iberia. The team…

Thank you, Don. That was a comprehensive overview for the quarter, but I just want to highlight a few key points. First, we continue to generate share gains around the world as evidenced by the strong double-digit growth in North America and emerging markets as well as mid single-digit growth in Europe. As you look across the strategic business units, or SBUs, both delivered 10% organic growth. As expected, our outdoor business recovered on a year-to-date basis in Q2 from the decline in Q1 due to weather. Overall, underlying demand looks to remain strong for the remainder of 2018. Next, Craftsman remains on track delivering about 1 point of growth in the quarter and the initial indications on sell-through are positive. Notably, we are converting new users to the Craftsman brand, which is a share gain opportunity for our retail partners in us. The end-user feedback has been positive with top quartile product rating reviews. We remain on track to execute the initial wave of product and store conversion in the second half of this year. Consistent with our prior communications, Lowe’s and Ace will begin to transition to the new Craftsman offerings across the back half of 2018 with completion in 2019. Lowe’s and Ace expect to have promotional product in all stores by the end of the year. We also expect to begin to provide the Craftsman metal storage to Amazon in Q4, with broader rollout to continue in 2019. Other acquisitions remain positive as well. The integrations remain on track and growth of Irwin, Lenox and Waterloo demonstrated high single-digit organic growth in the quarter. Finally, we are encouraged by positive price in the second quarter and are confident that we will achieve the price realization actions that Don outlined earlier. Now, I will turn it back to Jim to wrap up today’s presentation.

Okay. Thanks, Jeff. Another great quarter for you and your team at Tools and for the total company. In summary, second quarter revenue growth was 11%. All businesses contributed. This was powered by 7% organic growth for the overall company 10% as I mentioned earlier in Tools & Storage. We successfully offset approximately $70 million of headwinds tied to the inflation currency. Importantly, a factor in this was the initial benefit of our pricing actions in the quarter. We delivered 1 point of organic growth from price in the quarter and continue to display the agility necessary to deal with the adversity from some of these external factors. We are confident that we will continue to be successful in the second half. Therefore, we are reiterating adjusted EPS guidance of $8.30 to $8.50, representing a 13% year-over-year increase at midpoint. Capital allocation remains a priority. And as I said, we are evaluating near-term actions to create shareholder value, including both acquisition opportunities and the potential for additional share repurchases. And as we look to close out a successful 2018, we are focused on day-to-day execution and operational excellence. This includes generating above market organic growth leveraging our momentum, driving operating leverage, delivering price productivity and cost actions and successfully integrating our recent acquisition, so lots going on to drive a great year. All of this will also result in strong free cash flow generation at near 100% of net income. And I am confident that we will bring the same level of passion, intensity and agility that we demonstrated in the first half to successfully deliver the second half thus producing another great year for Stanley, Black & Decker. In fact, we are already on it. Dennis, we are now ready for Q&A?

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

Thank you. [Operator Instructions] Our first question comes from Steve Winoker with UBS. You may begin.

Thanks. Good morning guys and great to see the volume and pricing traction. And I just want to stick on that, the detail is very helpful on Slide 8. In that though, when you talk about expecting to mitigate the potential additional $25 million if that comes to path, how long you think you can really get the price or how much price you really build in, in that short timeframe given how long it takes as you have taught us all in terms of the lag time for pricing to materialize and how does this relate to the contingency that you guys have talked about also in prior months? I assume that’s all gone at this point. But maybe just give us some color on that.

I will take that. Yes, so the latest proposed wave of tariffs as I mentioned in my presentation, if, now still a big if, if it was implemented on September 1, the impact would be $25 million to us in 2018. We believe that within a reasonable timeframe given what we have done with other tariffs and the pricing actions associated with that, that we will be able to offset maybe a third to a half of that with price increases in the year if that occurs on September 1. And then the remaining component of that we would utilize what we have is a contingency to cover the gap between the difference, but you are correct, our contingency within our current guidance is relatively small right now and so we don’t have a lot of ability to maneuver beyond these types of things, but we still have some contingency left. It’s just not as significant, than it was 3 months ago given all the other actions in headwinds that we have seen over the coming 90 days or the last 90 days.

Thank you. Our next question comes from Richard Kwas with Wells Fargo Securities. You may begin.

Hi, good morning everyone.

Hi, Rich.

How are you doing? On 301, just as we think about it given your manufacturing capabilities, you talked about price in using that, but it also seems like you have some optionality around taking advantage of your manufacturing base here in North America versus the competition. So, how would you think about toggling price and then potential opportunity for share gains?

So, I will take the question. This is Jeff. The make where you sell initiative that Jim has talked about for several years now at this point has certainly provided us an opportunity. So we will take price to offset both commodity inflation and tariffs, all the things that Don has already outlined, but beyond that, we clearly are in the best position from a made in North America perspective around tariffs to execute two things. One, the great volume increases that we have just outlined for the quarter. That was our domestic manufacturing footprint allowed us to keep up pace with that tremendous growth. It also provides us opportunities for the future in terms of products, but not impacted by tariffs while competitive products are. So we feel like we are probably in the best position in the space to deal with the future given these things.

And the other point I would like to make, it’s Jim, is that we don’t know what the lifespan of these tariffs is going to be a couple of months, couple of years forever, who knows. So, supply chain maneuverability is there, but we also have to be cognizant that anytime you move supply chain around significantly there is cost associated with it and there is also risk associated with it. So in the near-term, there won’t be a lot of supply chain maneuvering, it will be mostly price and then we will see as time goes on if there are structural changes to the supply chain that we would like to make, because if it appears that some of these tariffs are going to be longer term in nature.

Thank you. Our next question comes from Rob Wertheimer with Melius Research. You may begin.

Hi, good morning everyone.

Hey, Rob.

So, you have quantified I think pretty rigorously all the tariff impact, so that’s extremely helpful. One quick question, are there any other offsets that are possible, so Jim mentioned, you have take care of a consideration on changing sourcing, but Chinese currency weakening any categorization or exemptions or whatever, I am just trying to figure out how much of potential offsets you have included in the numbers that you have provided on the actual cost could be, what can come back that’s not in there?

Yes. I would say, right now, the vast majority of the assets are price increases being passed on to our customers. As Jim said, we will continue to evaluate other alternatives as time goes on here, but we really don’t know the length of these tariffs and if they preview them to be longer term, then as we get into next year, we will start to evaluate other options, but our focus right now is really transferring the stock’s increase on to the customers and the end users, because we have seen a very direct cost increase and it’s something that we believe that’s the more appropriate response in the short and medium-term.

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

Thanks. Good morning, everyone and congrats on the quarter. I also wanted to just circle back to price cost, obviously one of the key investor themes so far year-to-date. And what strikes me, I think a lot of people from the slides and again going back to Slide #8, which is very, very helpful? So thanks for that. You see the acceleration in price recovery now expected this year whereas previous couple of calls, you are at a $50 million to $60 million gap, if you just look at commodity inflation versus price. And now you have narrowed that gap pretty significantly as you talk to accelerating some price actions. So just trying to get a better sense of which regions those might be and I think you have talked about at points, emerging markets having some better ability to exact price. If it’s possible to kind of roughly break down that $190 million and also what you have achieved a year-to-date?

Okay, it’s Jim. We are not going to necessarily breakdown the entire 190, but I can tell you of the, first of all, currency is probably the most volatile of all the different headwinds that we have this year and currency when it hits in the emerging markets, it’s almost instantaneous our ability to respond, because the markets are conditioned and our organization is conditioned and we have excellent tracking of the FX impact on various countries and so on. So, we have institutionalized a kind of price increase, price management function within the emerging markets and our systems enable us and the market enables us to react almost on a dime. So, that’s the first thing. The second thing is with respect to cost inflation when the cost inflation first started hitting, it was a gradual kind of increase over several months at the back – starting with the back half of last year and it was very difficult to have customer discussions until it became large enough so that we could have those customer discussions when it was large enough to do that, we did it and once we did it, there was a lag in implementation that naturally occurs when you have the discussions and then the discussions turn into agreements and then the agreements turn into implementations and that’s particularly true with the larger customers, especially in North America, but also in Europe. So, that’s inflation. Tariffs are relatively straightforward, because they are very easy to calculate. You know what, the percentages, you know what the impact is, they affect the entire industry and there is – it’s highly unlikely that anyone competitor is going to say a 20% increase or 10% increase in the cost of their products is going to eat that. And so it becomes a fairly kind of logical action for both the suppliers and the customers to implement and that’s until the timing is much shorter in that regard and also in some cases, the tariffs overlap – or tariffs that were already implemented and price increases have been instituted and in some cases we are able to go back and just incorporate the new tariffs into the previously implemented price increases. So, for all those reasons, there is no straightforward answer to your question, there is a lot of complexity to it, but we have a fantastic ability to have a control of it and handle on it and be able to predict it.

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

Hi, guys. This is actually Jason on for Julian. Maybe more for Jeff, so the scope of the Tools & Storage volume improvement was that sort of the cadence of that more weighted towards the back end of the quarter? And I guess in terms of the volume surprise, where did the greatest amount of strength relative to your expectations come in and if there was scope for further improvement geographically or by product, where would that be?

Well, if you look at the growth profile for the quarter, I guess the word I would use would be pervasive. So, if you look at the results that were shared earlier, the double-digit growth across North America, single-digit growth across Europe, double-digit growth across the emerging markets and double-digit growth across both strategic business units, I would just say there is not a really easy way to explain, but just pervasive would be the point. So, that explains 8 points of the growth. We did get a benefit of 1 point from Craftsman, we got a benefit of 1 point from the outdoor recovery, but just fantastic growth pervasively around the world is probably the best explanation I can give you and we are very, very pleased with it.

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

Hey, everybody. Good morning. Nice job managing through all this.

Thanks, Tim.

I had just more of a strategic question. So there is a larger lawn and garden OEM that sounds like they are exiting a portion of their business over the next couple of years. And so my question is, is there opportunity for you to get bigger in lawn and garden from a manufacturing perspective? And how critical is having that manufacturing for Craftsman reaching that kind of line average margin by 2021?

Very good question. And the answer is lawn and garden is strategic to us post the acquisition of the Craftsman brand. We are exploring opportunities to form partnerships and/or acquiring some assets within that space that would have manufacturing and we have been working on that for a while. And I would expect sometime in the foreseeable future some sort of an announcement coming from us that will leverage our Craftsman brand and presence in the marketplace in lawn and garden, but in a way that will not subject us to the types of volatility that you saw with that one announcement or also in a way that will not subject us to severe operating margin dilution that sometimes occurs in that particular industry, especially from the standpoint of first half versus second half. So, we are actually all over this. We have studied it very thoroughly. We have had numerous conversations with participants in the industry and stay tuned, it won’t be long, I think before you see something that will make a lot of sense for Stanley Black & Decker.

Thank you. Our next question comes from Justin Speer with Zelman Associates. Your line is open.

Good morning, guys.

Good morning.

Recognizing, I know you are not going to guide to 2019, but to me the market is pricing in a structural issue with regards to the margin and return profile is associated with some of these tariffs and currency moves – auditing moves. I wanted to get your sense for the levers that you had to pull to offset the carryover of the current FX and prospective tariffs and commodities that are rolling through as you look to next year just walking through. And as you think about it, I mean, as it graduates to next year, I think there is some concerns that you won’t be able to do that and I guess I’d like to get your perspective on that both from a pricing and internal levers to pull standpoint.

It’s Jim. I will tackle this as an ex-CFO.

We are in trouble.

The one thing people don’t really necessarily appreciate – and I think you obviously do based on the question is that when we go after offsetting these types of things whether it’s inflation, currency, tariffs, whatever it might be – yes, we are going to recover a certain percentage of the headwind in totality over time and the remainder – so let’s say that percentage on the average be 70% or 80%. The remaining 20% to 30% is more than offset by the productivity that we generate on a day-to-day basis continuously in our supply chain and our plant system. So we look at these things from a timing perspective, yes, they cause some AJA in the near-term, because we have to respond to the headwind when it arrives and it takes a little time obviously as witnessed this quarter with some operating margin dilution offset by volume gains, but as we flip into the successive year, 2019, by definition, there is going to be some price carryover that is not impacted by new headwinds, if all else equal. So, if there are no new headwinds, then we will have price carryover that will be positive and in the case of 2019, the initial look is meaningfully positive. And so we will see what happens with inflation, with FX and currency as we go forward, but all else equal if we had no more headwinds, there would be a meaningful number of positive accretion to margin that would ultimately end up in margins catching up to where they were before and maybe up a little bit beyond that. And then the story for 2019 for Stanley, Black & Decker is going to be what I talked a lot about earlier, which is the growth catalysts are going to really hit their stride in 2019. We have been growing incredibly well here in this company over the past few years and these catalysts are as strong as I mentioned earlier as I have seen in my entire career here, spanning two decades and we are setup for growth in 2019 that will I think be pretty significant. So, that’s kind of the story with us. There is an arbitrage. It’s affected by timing in the early stages of the headwinds. It’s negative in the late stages when they anniversary. It goes positive to catch up and then beyond that maybe some additional accretion based on productivity and mix management and so forth. And then, you have got the growth for next year.

And as I will just add on to that, as the current CFO, I will add on and validate what Jim said. It’s completely accurate obviously, but I think also when you look at history, you go back in time and you look at how we have responded to commodity inflation, currency, and you look at it over a 2-year window. In year one, we tend to recover depending on the timing of when these things happen, but in normal course, we tend to recover close to two-thirds of the headwind in year one. But when you look at it over a 2-year period of time, our history has been that we recover somewhere between 75% and 85% of the total headwinds through price actions and then the difference is covered through the things that Jim was mentioning around productivity. So, our history would demonstrate that for next year we would have a positive impact from the net of all these different things that Jim was describing. So I think that’s an important factor that you have to keep in mind that this is not something unusual, this is something that we can point to three or four different occasions over the last 20 years where this has occurred.

Thank you. Our next question comes from Michael Wood with Nomura. Your line is open.

Hi, good morning. I just wanted to ask you about the seasonality of earnings. It looks like to hit the fourth quarter implied guidance range, your Tools segment incremental margins – look like they would have to get back to or better than what you typically see in the mid 20% range. So, I just wanted to see – is that the correct way to think about Tools segment incremental margins as we go into the fourth quarter and just what does that imply with where you are in price/cost at that point in time in the segment? Thank you.

Yes. I think the way to think about it is you have to recognize that the commodity inflation started in 2017, so we had a fair amount of commodity inflation in the fourth quarter of ‘17. And in the fourth quarter this year, we will see the biggest impact from pricing actions will be in the fourth quarter when you look at the full year. So that pricing impact continues to grow from the second quarter to the third quarter to the fourth quarter. And actually at this point, the pricing impact reverses the headwinds in the fourth quarter and will be a slight positive and so that will be the first quarter we will experience that here in 2018. And so that’s certainly going to help margins combining with the fact that you have a comp where you are dealing with margins that were suppressed in the fourth quarter of 2017, because that was really the beginning of the commodity inflation wave. I think that’s the best way to think about it why the profitability will be higher in Tools in the fourth quarter versus what we have experienced in the first three quarters of this year as well as why it will be higher versus prior year.

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

Gentlemen, good morning.

Good morning, Ken.

Jeff, could you comment on North America Pro Power Tools, the gains were so strong. It seems as though much more of the gains were happening on the pro side versus the DIY side. So Hitachi in the private equity company, Makita, Bosch, are the share gains really coming from like-for-like product or how should we think about your extending your product reach? So, it’s obviously flexible. You are able to dislocate Bosch’s high end table saw for example. That’s kind of a new reach for you. How much of it share gains in the like-for-like categories as opposed to your vitality rate and all this innovation, I am just trying to see how dynamic that pro side is? Thank you very much.

Sure. But I would say the vitality rate and the share gains are kind of one and the same. So, we are experiencing share gains highly connected to the fact that we have really strong new product vitality. So if you look at the professional power tool business in North America, which is what you asked about, we were up in every portion of that business from a corded perspective, from a low voltage perspective to a high-voltage FlexVolt perspective. And so it’s a number of things, right. So, it’s the fact that we have the largest cordless system that brings the user into it. It’s also our made in USA strategy where we are the only manufacturer of professional power tools in America. So if you add those things together, it’s driven by vitality, but there is no doubt that there is share gain and that the share gain likely impacts all the companies you just described in your question.

Thank you. Our next question comes from David MacGregor with Longbow Research. Your line is open.

Yes, congratulations on the progress in a pretty tough environment. You guys have a lot on your plate. So I am surprised.

Thank you.

I guess just a question for Jeff I guess when we are obviously saw in power tools, there have been some talk about the second quarter planned channel inventory reductions around the Craftsman rollout. And I was just wondering if you could comment on how that unfolded. Was it aligned with plan? And we expect some of that will trigger into – trip into the third quarter, what are the expectations for that as well?

Really, the short answer is I think we commented more extensively in the first quarter as those inventory levels came down for the rollout from retail perspective for the Craftsman rollout. Everything throughout the second quarter remained on track, almost exactly as we had projected, where the inventory levels kind of solidified their position, new Craftsman rolled in, POS was very positive. So, all those things were in balance and so we anticipate that to continue on for the remainder of the year kind of as we described last earnings call, but we are very pleased with the ramp and the rollout.

Thank you. Our next question comes from Megan McGrath with MKM Partners. Your line is open.

Thank you. Good morning. I wanted to follow-up a little bit on your commentary around cash flow and marry it with your comments that you really don’t know how long these tariffs are going to last. So, how do you think about that in terms of potential M&A? Does it make you more likely to do a domestic acquisition? Are you hesitating at all on acquisitions outside? Are valuations changing at all, maybe talk us through that a little bit.

Sure. The acquisition pipeline is strong. And in several cases, there are deals that are right smack in our heartland and would strengthen some of our key franchises immensely and at the same time, we sit here today, we look at the stock price where it is and we say wow, we do tend to allocate half of our capital over a long-term basis to returning to the shareholders and we just raised the dividend, but that only accounts for something like 30% of the typical excess capital. And so there is always some room for share repurchases in that equation. And we look at our balance sheet right now, which is pretty strong and we say we have the opportunity to allocate capital at this point and so what do we do with it? And we look at these acquisitions, they come and they go over time. And as I said, the pipeline is strong and so it’s very difficult – it’s a challenging trade-off to make right now when we can buy our own stock and feel really great about it, because you can tell by the dialogue here that we are confident in our operations and our strategy and so forth in 2018 and 2019. So the way we are thinking about it right now is if the stock kind of gets some traction and starts going in the right direction again, we have the opportunity to dive into some really interesting M&A opportunities consistent with our 22/22 vision. And if we continue to languish in terms of our TSR performance, then I think stock buyback comes up front and center and we will just see what happens.

Thank you. Our last question is from Mike Shlisky with Seaport Global. Your line is open.

Good morning, guys.

Good morning.

So I wanted to ask quickly about Nelson Fasteners, can you guys give us sort of an update there on the timing? Do you think you will get the margins in line with the broader industrial segment by the end of this year and then next year will kind of be more of what to expect on a kind of full year basis from that one or is that more of a 2020 timeframe where you will get the margins in line for a full calendar year there?

Yes, good question. So, we are really pleased with the initial stages of the integration with Nelson Fasteners. It’s gone very well over the last 90 days or so and we would expect with the cost synergies and other activities and then eventually a little bit of revenue synergies playing out that by the end of next year, we will be approaching line average at that stage. And so by 2020 that full year – we will be right in line with the average for the segment. So, I think that’s the right way to think about it.

Thank you. This concludes the question-and-answer session. I’d now like to turn the call back over to Dennis Lange for closing remarks.

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

Ladies and gentlemen, this concludes today’s conference. Thanks for your participation. Have a wonderful day.