Welcome to the Fourth Quarter and Fiscal Year 2019 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 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 fourth quarter and full-year 2019 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 11:00 AM today. The replay number and the access code are in our press release. This morning, Jim, Don and Jeff will review our fourth quarter and full-year 2019 results and various other matters followed by a Q&A session. Consistent with prior calls, we’re going to be sticking with 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 or 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 any forward-looking statements that we might 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 President and CEO, Jim Loree.

Thank you, Dennis, and good morning, everyone. As you saw in this morning’s press release, we successfully closed out the year with an in line 4Q performance. Quarterly revenue was up 2% to $3.7 billion, with organic growth of 2% amidst a mixed global macro. Our total company adjusted operating margin rate was 13.6%, up 30 basis points year-over-year, and adjusted EPS for the quarter was $2.18, up 3%. Full-year revenues were $14.4 billion, up 3%, with a solid 3% organic growth performance. Our operating margin rate was quite resilient at 13.5%, just 10 basis points under last year, despite absorbing $445 million of external pre-tax headwinds from tariffs, FX and the like, a significant portion of which were not and could not have been anticipated at the beginning of the year. Adjusted EPS for the year was $8.40, a 3% increase versus 2018, a notable accomplishment under the circumstances. And finally, we were thrilled to deliver $1.1 billion of free cash flow for a conversion rate of 113% and a CFROI of 14%. Working Capital turns improved to 9.8 turns, up a whole turn versus prior year. And this strong cash performance helped us support our growing dividend and enabled us to finish up the year with the balance sheet and great shape with a debt-to-EBITDA of approximately 2.0 times, while absorbing $900 million of capital allocation to M&A in 2019. And in this regard, we closed on two previously announced transactions. And during 2019, first, our 20% minority partnership with MTD provides a path to enter the $20 billion-plus outdoor power equipment market with an industry leader in a financially prudent way. Beginning in July 2021, we have an option to purchase the remaining 80% of MTD, with the potential to add approximately $3 billion of revenue at…

Jim, thank you for the kind words. It is a tremendous pride that after more than a quarter of a century in this company and a decade and a half leading the Tools business, I share with you my decision to transition my responsibilities. 15 years ago, I set out to establish our Tool business as the biggest and best in the world. That mission has more than been accomplished. At this point, I want to share more time with my wife and children, as they so willingly shared me all these years. This transition allows me to do just that and at the same time, remain professionally connected to the company that I love through 2023. A great deal has been accomplished in the past 15 years by the Tools & Storage team in Maine. And while I’m in transition, the team that remains has delivered incredible results, including increasing the size and profitability of the Tools business by more than 17 times, making us the world’s largest Tool company, developing over 10,000 new products and growing our flagship brand to their largest sizes in history, including Stanley Black & Decker, Irwin, Lenox, Craftsman and DEWALT. I lead the Tools business in excellent care. The management team is the absolute best in our industry and have known and worked alongside Jaime Ramirez for more than a decade. His long tenure and successful track record in this wonderful company have prepared him well for this role. Our strength in every major geography in the world and our unparalleled stable of brands, combined with our robust pipeline of innovation, as well as pervasive faith in Jim, Don and our entire management team, instill tremendous confidence in me that this organization’s best days are ahead. I will always be indebted to our customers and employees for making all this possible. And with this, I turn the call back to Jim.

Thank you, Jeff. It’s been a great journey and not over yet. And before I turn it over to Don Allan, I just wanted to cover a little more detail on CAM. Growing and diversifying our industrial business through M&A is a priority for the company and a key element of our strategic capital deployment. Our vision presented at our 2019 Investor Day is to create a $3 billion to $4 billion global industrial platform that is made of highly engineered application-based solutions. We are looking for businesses that have the attributes you see on the left side of this slide, strong engineering capabilities with technology that has industry-leading, customer recognized and trusted brands, and a recurring revenue component or heavily weighted aftermarket element. Additionally, we want businesses that are global and scale, can differentiate through innovation and operate in strong end markets and have the potential for robust growth over the long-term. Consistent with this strategy, we are very excited about today’s announcement of the CAM acquisition. CAM is a leading manufacturer of specialty fasteners & components for the aerospace & defense end market. This acquisition is an ideal bolt-on to our existing Engineered Fastening business and further adds to our industrial portfolio in a new high-growth, high-margin market. The transaction is valued at up to $1.5 billion, with $200 million held back and contingent upon the 737 MAX receiving timely FAA authorization to return to service and Boeing achieving certain production levels. When adjusted for approximately $185 million net present value of expected cash tax benefits, the net transaction value is approximately $1.1 billion to $1.3 billion. CAM has LTM revenues of approximately $375 million and attractive profitability characteristics. This business has strong brands, a proven business model, deep customer relationships and an experienced management team, which will…

Thank you, Jim, and good morning, everyone. I would also like to express my gratitude to Jeff Ansell and let him know how much I enjoyed working with you for over 20 years. We work together to drive our company forward operationally. I will miss having you in those moments going forward, but I’m so excited for you and the next stage of your SPD journey. Thank you, Jeff, for being an amazing leader through this wonderful transformation of Tools & Storage. Now I’ll take a deeper dive into our business segment results for the fourth quarter. Tools & Storage delivered 1% total revenue growth, with 2% organic growth and a 1 point headwind from currency. Price was modestly positive in the quarter, but slightly below our expectation. As we saw, our promotional mix increase in North America, which partially offset the continued pricing benefits we are receiving across the global business. The operating margin rate for the segment was 16.5%, up 110 basis points versus prior year. The benefits of significant margin resiliency actions taken, volume and price were partially offset by tariff and currency headwinds, as well as unfavorable product mix and plant under absorption related to significant inventory reductions. Total tariff and currency headwinds amounted to approximately $85 million for the entire company, with 95% impacting Tools & Storage. The unfavorable product mix was caused by reduced levels of hand tools, accessories and storage revenue versus the prior year, which of course has higher levels of profitability, combined with the increased promotional activities in the power tools SBU. We took the opportunity within the quarter to begin to normalize our inventory levels following the completion of the Craftsman roll out and other various brand transitions we have been executing across the marketplace. This effort resulted in a…

Thanks, Don. One last look at 2019. It was a successful year considering the environment. The performance was possible due to the agility, passion and dedication of our workforce and I thank our people for their commitment. It’s their extraordinary dedication, passion, teamwork and sheer will to win that makes this company so special. Our teams acted with speed and determination, while facing into $445 million currency commodity and tariff headwinds, as well as very dynamic end markets. We delivered 3% total revenue growth, including 3% organic growth, and our OM rate remains strong at 13.5% and adjusted EPS expanded by 3%. In a really positive note, free cash flow was $1.1 billion, with very strong conversion and a CFROI consistent with our long-term financial objectives. And as we turned to 2020, our leadership team will act with agility, leveraging our proven ever-evolving operating system to successfully navigate the underlying external environment. And additionally, we’re continuing to execute on our margin resiliency initiative $300 million to $500 million over several years to get our margins back on an upward trajectory, despite whatever headwinds might appear on the horizon. We’re looking forward to another successful year in 2020, continuing to achieve our vision to deliver strong financial performance, become known as one of the world’s great innovative companies and elevate our commitment to corporate social responsibility. We are ready for the 2020s, and now we are ready for Q&A. Dennis?

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

[Operator Instructions] Our first question comes from Jeff Sprague with Vertical Research Partners. Your line is open.

Hi, good morning. This is Brett Linzey in for Jeff. Hey, just want to come back to the incremental revenue opportunity. I think, you said 2 points contribution from Craftsman. But if we include some of the other key programs, Flexvolt, Atomic, Xtreme with Craftsman, what are you contemplating in the guide in terms of incremental growth from those programs? Thanks.

Yes. I would say that, the 2 points from Craftsman, obviously, I stated in my prepared remarks, we expect mid single-digit performance for the overall business on a global basis. You’ll have – the other share gains that we will achieve above market GDP, which is probably in the high ones, if you look at our global mix anywhere from 1.8% to 2%. And so, any other share gains that we gain along there will add to that, and then we do have some pressures, as I mentioned, in emerging markets that we expect to continue in the first-half and then some of the industrial tool channels as well. In the first-half, there will be a bit of a drag on that, but those are the main categories. So I would expect share gains, some of those innovations, Craftsman, market growth of close to 2 and then you’re going to have some drag in the areas that I mentioned that kind of gets you to that mid single-digit number.

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

Hi. This is Jason Makishi on for Julian. Just a question around the first quarter guidance, particularly around the margin rate. I think last year, there was about a $40 million to $50 million inventory charge taken as a result of commodity cycles and the Tools business. Is there a reason why despite that, theoretically being a non-repeat in Q1 2020, the operating margin rate is going to stay sort of flat year-on-year? Can we get a little bit more color as to what the offsets are? And then maybe just any guidance around what the total commodity headwinds plus tailwind is for the full-year?

Yes. So the first quarter, I mean, as I mentioned in my comments, we do have an incremental tariff and currency headwind of the annual number is about $115 million, that’s about – half of that’s going to hit in the first quarter. So that’s clearly of the magnitude of very similar to the number you mentioned related to the item in the first quarter of 2018. So, that’s a significant drag that we’re seeing. So you had a one-time now that last year that goes away, but then you had this particular issue that comes in. The – if you look at the split for the full-year, I said under $115 million of headwinds, the tariff numbers, $80 million to $90 million, and then the rest is currency. Commodities, at this point, we expect to be neutral. But, of course, that’s an opportunity as we go throughout the year to see if we get a little bit of deflation as the year goes on.

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

Yes. Hey, guys. Good morning.

Good morning

Good morning.

I had a two-part question, if I could. So I guess, the first just the guide for Q1 implies acceleration through the year in Tools and some more meaningful margin improvement through the year. So I guess, what’s your line of sight to both of those within the Tools segment? And then the other side of this is just Jim, you talked about Black & Decker revitalization. I was hoping you could give us just a little color on what exactly that means?

Don, you take the first part. Yes. So we really respect and appreciate you so much. We’re actually going to take your two-part question, even though it’s really two questions. Don?

I think it’s very cool how you addressed that, Tim, two-part question, it’s actually one question. Yes, so the cadence for Tools is that, we expect, in the first quarter, kind of relatively flat, maybe down slightly for organic growth, but I feel like it’ll be close to relatively flat. And then as we go throughout the year, there’s this comp issue that we’re dealing within the – in the first quarter for Craftsman is quite significant. It’s almost 3 points in the quarter. And so when you factor that in and you factor in some of the slower markets, I mentioned in emerging markets and industrial, it’s kind of how you get to that number. That’s going to start to regulate in Q2, and it obviously going to get to the back-half. You don’t have those types of pressures you’re dealing with year-over-year. And we expect nice growth from the program of Craftsman for the full-year, as I mentioned, 2 points. And I will remind everybody, the POS continues to be very strong for Craftsman. And it’s double digits – that has been double digits throughout 2019, and we expect to continue to be strong as we go through 2020 and the success of this roll out will help us drive that type of performance. And then we expect some of these markets to get a little better in the back-half and that’s probably the right way to think about the cadence.

And on the revitalization of the Black & Decker brand, this is an opportunity that has been in front of us for a long time and it’s taken a lot of thought and preparation and we’ve had so many other priorities in revitalizing brands that it was a little bit lower on the list. But it truly is a remarkable brand, one of the great consumer brands in the world. And it’s an opportunity to unlock some great value from this asset. And Jeff, as you know, is the mastermind behind the Craftsman revitalization and execution of that, and now he tackles this Black & Decker project and he’s actually worked and done a fair amount of work on this already, has a fair amount of definition for what it is. But how much of that he and we want to share right now is not very much, because there’s always the element of confidentiality and to some extent, surprise when it comes to these sort of things. And – but I will turn it over to Jeff and you can tell him then whatever you’d like to disclose at this point in time with recognizing that, it won’t be too much.

So well, to add on to what Jim said, I guess, the genesis of this was that, Black & Decker in any survey, any study you do is like iconic, remains iconic from an aided and unaided awareness perspective. And we looked at the progress across our tremendous stable of brands these past 10 years, and I’ll give you a rough ranges. But we had growth like 70% in the Stanley brand, 9% and 10% with Lenox and Irwin, since we acquired it, over 250% in DEWALT and 500% in Craftsman. we love those numbers. We’re really excited. It’s fueled that growth. Black & Decker is also at the biggest – the largest size in history, but it’s only been up about 3% in that timeframe. So we look at it as a really opportunity cost. We could do so much with that brand. We haven’t had the time to do it. I now have the opportunity to do just that, and we’re excited about what can happen in the next few years here. So you can see, we’re not disclosing a whole lot right now other than it’s a big opportunity. But more to come on that, you’ll see it over the coming quarters should have some impact by next year and really material impact beyond that.

Thank you. Our next question comes from Nicole DeBlase with Deutsche Bank. Your line is open.

Yes, thanks. Good morning, guys.

Good morning.

Good morning.

My question is around free cash conversion. If you guys could talk a little bit about the differences between the low and the high-end of the guidance for 2020. And I guess, what’s the scope to get to a 100%-plus conversion sustainably from here?

Sure. Yes, I would say that for 2020, that range of 10% of 90% to 100% is really dependent on probably primarily two factors. One would be working capital. We did end the year at close to 10 turns. And so we will continue to drive improvement in that number. But to get a positive impact in your free cash flow related to working capital, you need at least a half to 0.07 [ph] of a turn improvement for the whole company to make that happen. So we might get close to that, but it might actually be closer to neutral than a positive impact from working. And then CapEx will be something that continues to be between 3% to 3.5% of our revenue. But we also know that it’ll probably at the higher-end of that range in 2020, as we start to work through some of these China supply chain mitigation strategies as we move production to other countries in certain cases, as well as we will be building our Craftsman plant in Fort Worth, Texas as well, and there’ll be a fair amount of costs in 2020 related to that. So those are really the two factors that kind of result in that variation. Our goal is clearly to get to a 100% or more and always is, but we occasionally on an annual basis will manage that to achieve these other strategic objectives.

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

Thanks. Good morning, everyone.

Good morning, Mike.

First question, I guess first and only question I have is on – just kind of parsing out the 2020 guidance a little bit more. Specifically, just wanted to revisit the margin resiliency initiatives, you referred to it in the prepared remarks is something that you expect to continue to materialize. And just wanted to get a sense of how you’re thinking about that flowing through and the timing of that benefit flowing through in 2020, if you’re still thinking about the $100 million to $150 million type of benefit for the year and how it would hit the P&L? And then just as a slight clarification, the $200 million cost reduction, I’m coming to that being about $1.05 in EPS benefit, I just didn’t know if my math is off, if there was something different between that and the $0.95?

Yes. The last part of your question is really just kind of timing of that particular – as we know certain things, certain parts of the world, you can’t do it as quickly as you’d like. So you have a little bit of an impact to that. That’s why it’s about $0.10 different than what you’re calculating for your math. But that obviously will carryover into 2021. Our margin resiliency, I’m glad you asked that question. The – if you remember from the October earnings call, when we gave you some initial thoughts about 2020, we were really had the objective of trying to position the company with an EPS growth that was reasonable, given the headwinds that we were going to experience or as a carryover into 2020. And I think we’ve done that with the guidance today at 6% midpoint. But we also wanted the margin resiliency to get about $100 million to $150 million of value in 2020, but we wanted that to be more of a contingency. And I mentioned that in my comments earlier, and that’s really the plan. So it’s not baked into our guidance right now. It’s there for, if other headwinds come our way that we have to deal with, like this virus and China as example might be a little bit of a headwind for a period of time. Currency might be a headwind that emerges or it doesn’t emerge, these headwinds don’t happen. And there’s an opportunity for us to outperform, and as I mentioned, reinvest in the business. The cadence by quarter is relatively consistent. It’s not going to be backend loaded in a big way. So, I would expect you can be pretty close to evenly split, maybe 40% in the first-half, 60% in the back-half.

And if I could just add. When we look – we look at the environment that we’re in over the last three years, the external headwinds have averaged about $300 million a year. And if you look at the five years preceding the 2017 to 2019, which is – would be the last three years, we look at the previous five years, they averaged $135 million a year. So we had a step function change in headwinds and most of those headwinds at the beginning of the year are a significant proportion of them were – it was impossible to plan for them. And so I think we’re sitting here at this juncture with the potential that we could have headwinds of hundreds of millions of dollars like we had over the past few years. And obviously, we have some of that in the plan or not, or something less. And so, it’s only prudent to reserve a pretty significant contingency for the potential that we could have really, really significant headwind similar to we’ve had over the last three years. And so that’s kind of where we’re thinking about it. And if they don’t come, then we have a fantastic opportunity to outperform our earnings, as well as reinvest in the company – in the company’s growth.

Thank you. Our next question comes from Deepa Raghavan with Wells Fargo Securities. Your line is open.

Hey, good morning. Thanks for taking my question.

Good morning.

Good morning.

Okay. Question is on capital deployment. It’s a good start, especially purchasing some different exposure with CAM. But, Don, what – how should we think about deployment pace, the pace of deployment going forward, given the $1.5 billion cash deal takes up much of the excess cash availability over the year, even as you’re deleveraging. Any thoughts there? And thank you.

I’m going to tackle that question, because Don has had so many questions about guidance, so I want to give him a break. But also, we both think about capital deployment quite a bit and we happen to agree on our approach. And so, as most of you know, our long-term capital deployment strategy is to allocate 50% of our excess capital to M&A and 50% to giving back to the shareholders in the form of dividends and repurchases. And over the last 20 years, you will find – if you calculate that, you will find that it actually turns out to be 50%, 50-50. And so we’ve been true to that and we will continue to be true to that, because we think that for this company, that is the best value creation strategy for the long-term. And so, we shouldn’t look at these things necessarily in isolation. But from a tactical point of view, we were at 2.0 debt-to-EBITDA at the end of the year. This will take us up to 2.66 for a period of time until we work it down again. So, there won’t be a lot of M&A activity – of significant M&A activity this year, unless something really significant comes along. And then we we look at what are the options and going forward, we have the Security business, which is a potential asset to monetize, if something really down the fairway came along our way. We also have the MTD option in front of us, but we have 10 years to execute that. So there’s no pressing need to have a – probably about $2 billion of – when we finally implement or execute that option, it would be about $2 billion if we did it in the 2021, 2022 timeframe. So I think, we’re in a great position from a tactical point of view, too. We have the opportunity to create excess capital if we see something really great that we want to execute on in terms of M&A. We also have the opportunity to kind of take 2020 as sort of rebuild the balance sheet year back to where we want it to be for the dry powder and we’ll go from there.

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

Thanks, guys. Just wanted to just follow-up on the comments on the promotional cadence and channel inventories, you mentioned them being full for at least a portion of the Tools & Storage business. You mentioned promotions being a little bit more elevated in parts of the Power Tool business. Just wanted to get a sense for what’s going on there? And thinking about the incremental tariffs, incremental pricing if these elements are going to make it really difficult to get incremental pricing to at least partially offset the the carryover tariffs and currency?

Yes. So, I’ll take that. The promotional activity, I would kind of summarize that as it’s an intense holiday season. There were a lot of things going on in the power tool space. And we ran probably higher-level promotions than originally expected as we went into the quarter, which that can happen sometimes in a holiday season, like the fourth quarter, even the second quarter occasionally, as we go into the – late spring and summer. So I would just say that’s things that happen and nothing really unusual about that. I would also say that, we did have a little bit of a reduction in the inventory and the channels by our customers, and so not a massive reduction in weeks on stock, but there was a little bit of a reduction in some of our major customers, which is good, because that’s just them managing their inventories appropriately. And as you know, in the case of one of our customers, in particular, they build a higher level of inventory due to those significant launch of Craftsman and that’s going to have to continue to be something we monitor. But we’re going to manage that throughout the year as we go through 2020 and still achieve 2 points of growth, as I mentioned, for Craftsman as we manage that dynamic. And if the POS continues to be strong, the way it has been in double digits, that the amount that we have to manage in inventory will become smaller and smaller. As far as tariffs go, the $85 million carry over, a lot of that is tariffs that were put in place in the back-half with some pricing put in place in that period as well. So there’s a little bit of carryover price, but we’re going to manage price more through the margin resiliency initiative versus specific pricing actions for tariffs, so there’ll be a little bit of that associated with $A, but that’s not a large number.

Thank you. Our next question comes from Ross Gilardi with Bank of America. Your line is open.

Hey, good morning.

Hey, good morning.

Good morning.

I was just wondering, can you give a little more details on CAM, like how profitable is the business? When did the transaction actually closed and sort of why is the equation so far out? I realize these are series of same questions, but a number of questions, but just really some more color on CAM aftermarket versus OE and Boeing exposure and whatnot?

Sure. I mean, we’re not disclosing the actual profitability level at the request of the CAM folks. However, suffice it to say that, it’s a high-growth, high-margin business and the – have substantial EBITDA and EBITDA growth potential ahead of it. The aftermarket is a pretty significant part of the revenue base. It has grown approximately 6% organically over the long-term. So very nice asset, high-growth, high profitability, good aftermarket content, and a lot of engineering content, which in a lot of these components are in critical functions on the airplane. So we’re very happy to have made this acquisition. It’s a strategic platform. There are multiple multitude of bolt-on opportunities, as well as some larger opportunities that may or may not become available over time. So it just gives us a great runway for future growth.

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

Shannon, thanks. 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.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating You may now disconnect.