Welcome to the First Quarter 2020 Stanley Black & Decker Earnings Conference Call. My name is Shannon and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is now 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 2020 first quarter conference call. On the call, in addition to myself, is Jim Loree, President and CEO, and Don Allan, Executive Vice President and CFO. Our earnings release, which was issued earlier this morning and a supplemental presentation, which we will refer to during the call, are available on the IR section of our website. A replay of this morning's call will also be available beginning at 11:00 AM today. The replay number and the access code are in our press release. This morning, Jim and Don will review our 2020 first quarter results and various other matters followed by a Q&A session. Consistent with prior calls, we're going to be sticking with just one question per caller. And as we normally do, we 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 the actual results may materially differ from any forward-looking statements that we might make today. We direct you to the cautionary statements in our 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.

Thanks, Dennis. And good morning, everyone. I'd like to begin with a short passage from our most shareholder letter. "The new decade is upon us, and with it comes a host of new challenges with the most significant one of them all being something called VUCA, a term which emanated from a Military College in the US in response to the onset of the post-Cold War era. VUCA stands for volatility, uncertainty, complexity and ambiguity. And while back in that period, VUCA described the backdrop for the formation of a new world order." "This time, I believe it describes what leaders of all institutions will have to consider as we devise strategies and tactics to thrive in what can now be called the New World Disorder of the 2020s. It's an exciting world full of disruptive risks and opportunities, with the accelerating pace of technological change always pushing the limits of what individuals and institutions can absorb." "In 2019, we put much thought into what it will take to win in this environment and we were perhaps blessed by having to deal with the unusually volatile conditions we faced in 2018 and 2019. For structural reasons, our recent external challenges may have been more pronounced than encountered by most diversified global industrials. Ironically, we feel blessed that we have experienced them and endured through them and have now emerged with a fitness and mindset to take on the challenges of the 2020s." I put the finishing touches on that shareholder letter on February 9, several weeks before the devastating impact of COVID-19 began to unfold in real time across the globe. It struck suddenly and jarringly. And while no one could fully understand what to expect next and exactly how it would impact public health policy, consumer behavior, the global…

Thank you, Jim. And good morning, everyone. I hope you are all staying safe and healthy. Before I take a deeper dive into Q1 results, I just want to share my deep appreciation for all our Stanley Black & Decker employees around the globe, who have been working night and day to keep one another safe, operate our business in this challenging environment and still give back to our communities. Thank you very much. So, let's move on to Q1. Tools & Storage revenue declined 10%, with volume down 9% and currency contributing an additional 2 points of pressure. Price was a positive 1 point, driven by the benefits from our actions in response to continued tariff and currency headwinds. The challenging revenue environment as a result of the COVID crisis emerging in Q1 has impacted all Tools & Storage regions and SBUs. The operating margin rate for this segment was 11.5%, down from the prior year as the benefits from cost control, margin resiliency and price were more than offset by lower volumes due to the virus, tariffs and unfavorable currency. As the quarter unfolded, we saw the humanitarian crisis from COVID-19 evolve quickly into an economic crisis and started to experience demand impacts in virtually all global markets we serve – first in Asia, then in Europe and finally in North America and the emerging markets. Our planned organic growth for the quarter was relatively flat to a slight decline. As we detailed in January, we anticipated a difficult comp due to the significant load in of Craftsman in early 2019, as well as softer industrial channels and emerging markets in our guidance at the time. The entirety of the miss versus our plan can be attributed to the impact from the virus. However, our proactive cost control…

Thanks, Don. It would be easy to lose sight of the opportunities that arise during moments like this, given all the detail and difficult actions that we're taking and we'll continue to take, but I also want to emphasize that we continue to execute on a number of outstanding growth catalysts that we believe will position us to perform in this difficult market environment and beyond. The iconic Craftsman brand rollout continues to have a strong customer response, excellent growth and we remain well on our path towards the $1 billion marker. This brand is well-positioned to capture the DIY and value-oriented professional, a growing market in North America. Our innovation machine is a strategic differentiator and enables us to generate share gain, with a steady stream of innovation that we bring to the marketplace across our businesses. More specifically, our recent series of DEWALT product breakthroughs, including FlexVolt, Atomic and Xtreme have been well received by end users and now account for more than $0.5 billion of revenue, with a healthy growth rate, at least pre-COVID-19. And then, lastly, we are the tools industry leader in e-commerce with 2019 online revenues of $1.3 billion. And this global opportunity has outstanding potential for rapid growth in today's environment and in the years to come. And during the last couple of years, we've very methodically expanded this program from a North America focused e-commerce platform to a globally-focused platform with strengths in many, many of markets around the world. It's going to be a huge advantage for us going forward. Of course, during 2019, we closed on that 20% stake in MTD, a leading outdoor power equipment manufacturer based in Ohio. This is an exciting opportunity for us to increase our presence in both the gas and electric outdoor power equipment…

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

[Operator Instructions]. Our first question comes from Nigel Coe with Wolfe Research. Your line is open.

Good morning, Jim.

Good morning.

Yeah. Thanks for all the details. It's really helpful. And the context around what you expect for 2Q and the full year is very helpful. Not all companies are doing that. So, much appreciated. We'll take a lot of the details offline with Dennis, but in terms of the cost savings, can you just confirm – I think the answer is yes, but this is additive to the costs savings in train right now. So, this is $500 million plus $200 million. So, it's more like $700 million of cost reduction this year? And then, the second part of the question is, given it's a billion dollars to analyze savings, $500 million for the full year, really, this is second half and not much of this falls into 2Q. Thank you very much.

Yeah, I'll provide a little clarity on that. So, the $500 million in 2020 related to the billion dollar program is in addition to the actions that we took in Q4 of 2019. So, that's correct. As it relates to the timing, what I said in my very long script was that $500 million for the year, we think $375 million of that will be in the back half. And so, that obviously gets you about $125 million in the second quarter. And so, that's kind of how it lays out.

Thank you. Our next question comes from Jeff Sprague with Vertical Research. You may begin.

Thank you. Good morning. I guess a multipart one from me also. Can you provide a little color on how the manufacturing footprint realignment plays into this, specifically thinking the shift out of China and into the US? And if I could squeeze a second part in, with sell-out so strong, how long do you think the home center is going to actually draw down inventory before they actually have to kind of hit the reset button to start ordering on the other side? Thank you.

Okay. I'll take the second part your question first. Because I think a lot depends on the POS. We're seeing some eye-popping numbers on a weekly basis in a couple of the places. And if that continues, there will be some replenishment that would be advisable, no later than the third month of this quarter, June. So, it's really their decision. They make those decisions in how they want to play their inventory. I can completely understand the challenge they have, trying to balance the opportunity that might be out there, but they don't know for sure versus the risk of getting stuck with a significant inventory problem if all of a sudden those trends change. So, it's just a balancing act and it's a tight wired one at that. As far as the manufacturing footprint, it's an interesting question because with virtually 98% of our salaried population stuck in their homes working virtually, it's hard to really execute on these types of projects, in addition to the fact that they can't travel. So, there's a travel ban in place. Like most companies, we have a complete ban on travel. It has very few, if any, exceptions. So, there will be some delays in the footprint program until we're able to travel and that sort of thing. But I think we're talking probably months in terms of delays, but there will also be an acceleration because the importance of making of footprint happen even faster is amplified by the nature of the crisis. So, you end up with a lot of planning going on right now virtually. And then, when we get into the execution, we're going to try to accelerate. Long story short, I think we're going to be looking at roughly the same kind of two to three-year time frame for the moves to be complete.

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

Yeah. Hey, guys. Good morning.

Good morning.

Appreciate all the details that you've provided. I also have kind of a two-part question. I guess, first, how are you balancing just R&D and innovation and growth investments? So, just specifically, is that something that's been preserved and protected as you've kind of make these cost reductions? And then, second, how should we think about balancing just both production and working capital? I guess, at this point, would you expect working capital to be more released than you thought prior to this or would you expect it to carry that working capital just given the uncertainty around retail stocking levels?

I'll take the first part of your question. I'll give Don the second, even though I know the answer to it.

I know the answer to the first too.

Fair enough, Don. We have largely protected any applied innovation. So, there may be some theoretical innovation that we cut back a little bit on, but not much. Some of the programs that are still looking at 5 years out, 6 years, 7, 8, 9, 10 years out in terms of how some of these look like, the construction industry will change and what the impact on our tool business would be and how we're going to manage through all that. That program, for example, is alive and well. And so, when you think about the nature of the comp and ben reduction, so many of them in this are temporary – 70% are temporary. So, instead of maybe working five days on a project, we're working four, and for a period of time. I think that's the way to think about it.

Yeah. On the operation side, we gave a lot of thought to how we ramp down the labor force in manufacturing and distribution, and in particular in tools. In engineered fastening, it was fairly straightforward because you had OEMs shutting down and we basically would shut our plant down in a similar correlation and then we'll ramp up a little bit in advance of them ramping up. So, it's fairly straightforward from that perspective. But on the tools side, it's a little bit more complex, especially in North America, in that we have several major customers in retail that are continuing to perform. As we talked about earlier, the POS is very strong through the first four weeks of April. So, we did a planning assumption around our second quarter revenue decline, but we didn't reduce production to that level. We actually reduced production to a more modified view of that. So, if you look at the – maybe tools being down somewhere 35% to 45% in Q2 like the company, we're probably somewhere between 0% and 35% to 40% is where we cut that production. And so, we recognize the importance of continuing to serve those customers, but also making sure we're prepared as things start to accelerate maybe in June or in the third quarter, whatever the timing is, we're prepared for that. And given our supply chain, with some of the lead times we have, we have to make sure that we strike that right balance, which we will carry a little higher level of inventory probably through Q2 and Q3 and maybe longer, but I think we're striking the right balance to ensure that we meet our customers' needs now and going forward, but also ensure that we get the right dollar value out of working capital performance in 2020.

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

Thanks. Good morning, everyone. And congrats on all your efforts so far managing the challenging backdrop. First question, or I guess my only question, but I do have a clarification question as well if I could, but the core question is just also around some granularity on the cost reduction program. Just trying to understand it relative to the prior margin resiliency efforts. You had noted that it is inclusive of the $100 million to $150 million that you're expecting to realize this year. I was curious if the next two years, that would overall encompass the total number of $300 million to $500 million. If that remaining portions are also included in this $1 billion program or if that's still kind of years out. And then, in terms of the clarification, there are a few different numbers in terms of the sell-in and the sell-out on North American retail. I was hoping if you could just kind of review for March and April so far what you've seen. It is roughly what you had in terms of sell-in and sell-out.

So, for the sell-in and sell-out, so for March, the POS, as I mentioned in my script, was flat – relatively flat. The POS in April is up low double-digits. So, it's very strong. And the sell-in that we're seeing in the month of April is consistent with what I showed on that chart, which for Tools & Storage is in that ballpark of the 2Q range I mentioned, probably turning towards the lower end of that range. So, that gives you a sense of those aspects. As far as the cost reduction goes, if we reflect back to the January earnings call, we talked about having $100 million and $150 million of margin resiliency initiatives that weren't in our guidance. They were just there as a contingency, things we were going to execute on as new headwinds came our way. So, clearly, some big headwinds have come our way, much bigger than anyone anticipated, for us and many in the rest of the world. But when you think about what those opportunities were in margin resiliency, there were things around higher levels of procurement savings due to utilizing technology in certain tools to drive that value. Using industry for that old technologies around automation and data analytics, artificial intelligence that would drive more value to our manufacturing footprint and eventually into our supply base as well. Those things are not driving a lot of value in the billion dollars. So, those two buckets, in particular, were a large part of our margin resiliency program. There were other aspects around indirect and a few other things, like functional transformation. Functional transformation will continue to move forward and that'll be a value driver for the next two to four years depending on the function. Indirect, yeah, we're probably pushing a lot of that right now in the next 12 months, but what we need margin resiliency for us is to help us sustain that savings going forward because, right now, what we're doing is really brute force. So, that's a long-winded answer to your question, but I still think there's a very big opportunity for margin resiliency out there when you think about those different categories and then there's a sustaining aspect around indirect that really helps us keep that significant number that we're getting in the billion dollar program in our P&L, so it doesn't pop up in a very large way in the coming years.

And as you can imagine, we really haven't had the opportunity to get into tremendous amount of detail ourselves as we work through this crisis. On that particular question, really just trying to find every cost savings opportunity we could find and we'll go back and do the detailed analysis over the next couple of weeks. In probably the next earnings call, we'll give you a little more granularity around the answer to that question. But as you can see from what Don said, it's partial basically. Partially included, partially not and more to come later.

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

Hi. Good morning.

Good morning.

Hey, morning. My first question just really around the free cash flow. You've spent a lot of time discussing the sales and earnings trends and slide 10 was very helpful in that regard for historical context. Just wondered what the historical context was around the free cash flow in downturns and how you think it might be similar or different in this current downturn. And then, my clarification would just be around – you talked about decrementals all-in this time of, I think, low to mid-20s this year. That's a bit heavier than the last two downturns on slide 10. Is that simply because of the tariff and currency costs? Or is it more about just the sort of starting point, i.e. the notion that this downturn could carry on into next year? Thank you.

Yeah, sure. Julian, it's really timing. I know I said a lot of things in my script, but as I went through that low kind of 20s for 2020, what I also said is when we when at the full 12 months going into 2021, we actually think we'll get better than that. So, hopefully, we get very close to that high teens number that we saw in the 2008 and 2009 period. What was the first question he had?

Free cash flow.

Free cash flow, yeah. So, free cash flow in recession has actually, from a conversion point of view, performed very well. Obviously, gets impacted by the charges that you put through your net income. You tend to get a good working capital benefit in a recessionary period. Now, this might be a little different. We're trying to manage that, as I mentioned, in my presentation with the right balance because we want to ensure we have enough inventory if the recovery is very quick. And we didn't face that type of challenge as we went through the recession because we don't expect quick recoveries. We expected very slow recoveries. This is a different scenario where you could see a V or, in our case, we modeled a U, and there might be a scenario where stronger growth comes later versus in the short term. And so, I think we have to strike that right balance to ensure that we don't go overboard in working capital. But, overall, I would expect conversion to be strong given the historical dynamics we have seen.

Thank you. Our next question comes from Josh Pokrzywinski with Morgan Stanley. Your line is open.

Hi. Good morning, guys.

Hey. Good morning.

I'll try to keep it to a mere 17 part question for mine. Just going back, Jim, to the point you made – or I think it might have been Don – about not just the sell-in versus sell-out, but more that the pros aren't working right now. What do you think those job site closures are costing you? Because I guess New York City and Northern California I think are opening in real time right now for construction sites. So, maybe some light at the end of the tunnel there if you wouldn't mind sizing that. And that's all I have to say.

Well, it's interesting to think about it because the pros do a fair amount of shopping at home centers. And so, I think what we're probably seeing is this DIY phenomenon is probably a lot bigger than we suspect because there's a big negative I suspect coming from the pros. They're just not stopping in the contractor's desk as much as they used to right now because the projects aren't active. And so, it's hard to pinpoint exactly what that difference could be because we don't really know how big the DIY impact is. But I think the ballpark, it's probably in the single digits for sure, but probably mid, low single-digits would be my – negative impact would be my guess, but it's a guess.

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

Hi. Good morning. Glad you all are well.

Good morning.

And thanks for all the scenario analysis. Very helpful. One question quickly on your base case. You've talked a lot about decrementals. What I'm wondering is, on the other side, given that you, I think, mentioned in your prepared remarks, indirect cost and deflation is about 60% of the cost-out. How does that compared to the past and what would that mean for incrementals because if 60% of total cost-out, incrementals should be quite interesting. Is that sort of like in a U-shape base case recovery that is outlined?

Yeah. You're right. it, obviously, depends on what type of recovery we see. If we see a very rapid V recovery in the back half of this year, then the incrementals will change because we will be adding that cost. We have 70% of our comp and benefits costs that we've kind of called temporary at this point, which is 40% of our $1 billion. And we probably wouldn't add it all back, but we'll add some of that back because we have modified workweeks and furloughs and things like that that are happening with the salaried part of our company. And so, that would clearly have a governing impact on incrementals as we grow. That being said, there's a lot of things we can do to continue to drive productivity. We touched on margin resiliency earlier in a question we had from Michael. And those are types of initiatives that have been little bit on hold for a period of time, but they are beginning to re-energize themselves going forward to create the value that we think is there. And so, I actually think the incrementals will see a bit of a governing impact in that recovery, but I think it's something we can manage through. So, it's not too significant. In a longer period of recovery, where it's a U or even an L, we will be working to make that billion dollars as permanent as possible, which means we could take some of the temporary things and make them permanent or we could take alternative actions to replace some of those temporary things over time. Because if we see that type of recovery where we have a bumpy performance from multiple quarters going into next year, then we're going to probably take the approach of how do we really make the vast majority of that permanent, which would not impact incrementals once we got into a growth mode.

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

Yeah, thanks. Good morning, guys.

Good morning.

So, I just wanted to ask on pricing, how pricing trended through the end of the quarter into April and if you're seeing more promotional activity from peers and whether or not you guys are getting more promotional activity to drive POS in the North America retail channel.

In this environment, promotional activity does not make a tremendous amount of sense. So, all the price that you're seeing is pretty much coming from programmatic price, largely from the margin resiliency program because we're not in there implementing across-the-board price increases in a deflationary environment. And so, we're also getting some carryover from pricing that we did from the earlier price increases on the tariff and other related inflation. But no new pricing actions other than maybe more surgical ones that are based on analytics and things like that that are being utilized in the margin resiliency program.

Thank you. Our next question comes from Joe Ritchie with Goldman Sachs. Your line is open.

Thanks. Good morning, guys. Hope you are well. And echo everybody else's comments. Great detail on the call today.

Thank you.

Just one question. Just going back to slide 8 and the trend that you're expecting in Q2. So, I think the way to think through this, auto and aero probably already down more than that number for 2Q. And the commentary around Tools & Storage, it is really interesting to hear point of sale is up double digits. If I heard Don's comments correctly, the sell-in already at the 2Q number, with an expectation that it'll remain there unless the point of sale becomes – stays as strong as it is. Is that the right way to think about it?

That's pretty much the right way to think about it.

The sell-in is right in that range of Q2 right now for tools North America.

Thank you. Our next question comes from Rob Wertheimer with Melius Research. Your line is open.

Good morning, everyone.

Hey, Rob.

If I could just ask a related question to the last one. I know you've given a tremendous amount of detail both on how you're managing and on the short term. There's disruption in supply chains globally. If there is a call for more sell-in into the home centers, is there a chance that that's just disruptive and, therefore, you miss out on some sales or do you feel like you've had a handle on that? And then, I just don't know – again, you give more detail than normal, which is very helpful, what's the normal sell-in process? I don't know whether the up doubles and the down is just – there's some seasonality to this, obviously, or whether, all else equal, you'd be expecting much stronger sell-in towards the end of the quarter? Thanks.

Yeah. We have a keen appreciation for the opportunity cost of not being prepared for a spike in orders from the home centers, in particular. And I would say supply chain approaches are somewhat different, but the general rhythm would be kind of monthly. We've gone to a weekly rhythm and, in some cases, a daily rhythm, monitoring the ins and the out. And it is a very, very significant opportunity for us. And so, actually, as it turns out, we have – and Don alluded to this, but we have actually programmed the inventory side – our inventory builds, if you will, to deal with the possibility that there could be an increase in sell-in in terms of orders later in the quarter. Normally, there is probably substantially more orders in the second month of the quarter for shipping in the third month. However, it remains to be seen if that's going to occur this time around. But I think it's one of these things that we're just managing on a real time basis and we're in contact with the customers and we're monitoring the sell-out and, at some point, those two things have to kind of equal each other.

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

Good morning, everybody.

Good morning.

The 2Q thoughts – I'm sure you've been working on the weekends here. I think you laid out 2Q pretty clear. For your base case growth rates for the second half, I'm interested, does the second half base case – are you implying 4Q is up there? And I ask relative to your comments around the 40% leverage, A. And then B, how that $375 million split? Does the majority of that fall into 3Q? I guess that's what I'm looking at, your base. Is that 4Q sales up? And is that $375 million savings split equally 3Q or 4Q? Thank you.

Yeah. The base case assumes – I'll start with the costs. Yes, $375 million which would actually be a significant impact to moderating those decrementals of 40%. And that's how we get ourselves to the low 20s, is we see that impacting the back half of the year. As far as the revenue performance goes, by the time we get to Q4 in our base case, we're kind of anywhere from flat to slightly down, and that's really where we are. And then, you can do the math for what Q3 would be based on that. We're not assuming growth right now in our base case in the fourth quarter because it is a U shape, but we'll see. There's still a lot to occur going forward and we'll have certainly a lot more color as we get to July for our next earnings call where we are. But we kind of planned a scenario that would be difficult, which is why we went after the billion dollars of cost, but we did it in a way that gave us the flexibility that both Jim and I've described over the last hour or so.

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

Thanks, guys. Good morning. Just a question on raw materials. I think you said $6 billion of materials input, this slide – roughly 70% of your cost of goods sold are raw materials and inputs. Just trying to understand what percentage decline you're planning in that cost-out this year simply based on the collapse of commodities in your broader plan? And is there anything beyond that deflation that's in that cost savings bucket? And then, secondly, how should we think about pricing integrity across the business for the year in this type of environment, just looking beyond the near term pricing dynamics?

Yeah. I think on the commodity front, we have a really nice opportunity to pursue as a result of the much lower global demand and the way that prices of commodities have adjusted in the last month or so. And that opportunity is now. We're really trying to make that happen in the next 30 to 60 days with all our respective suppliers in those categories. When I think about the billion dollar opportunity and 60% of it is a combination of indirect and commodity deflation, probably good way to think about that is, it's going to be anywhere from two-thirds as indirect to maybe 55% indirect and kind of in that range and the difference will be commodity deflation. That kind of sizes it for you for this year. And then, we'll see how we progress throughout the remainder of the year.

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.

Thank you, Shannon. We'd like to thank everyone 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. You may now disconnect.