Welcome to the Second 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 being recorded. I will now turn the call over to the Vice President of Investor Relations, Dennis Lange. Mr. Lange, you may begin.

Thank you, Shannon. Good morning, everyone. And thanks for joining us for Stanley Black & Decker’s 2020 second quarter conference call. On the call in addition to myself is Jim Loree, President and CEO… …this morning, and a supplemental presentation, which we will refer to during the call, are available on the IR section of our website. A replay of this morning’s call will also be available beginning at 11 a.m. today. The replay number and the access code are in our press release. This morning, Jim and Don will review our 2020 second quarter 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 on 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 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.

Okay. Thank you, Dennis. Good morning, everyone. It’s great to be here with you today and now we are about five months in since COVID-19 began to roll across the globe. And while this pandemic has created an incredibly challenging time for all of us, it has also cast a new and very positive light on our portfolio as three powerful trends have emerged, which worked to our significant benefit. First, there’s the sudden acceleration in the shift to e-commerce, and then there is a reconnection with the home and garden and a trend towards nesting and DIY, and thirdly, a newfound societal obsession with health and safety, read security. The combination of these trends has profound and exciting implications for our future growth and strategic positioning, but more on that in just a few moments. In the meantime, we just completed what I would characterize as one of the most storied and most successful quarters we have experienced in my 21 years as a C level executive at this company. It was successful based on the sheer magnitude of the challenges we faced and overcame, and it was also successful in that we have managed to operate effectively and maintain the strength of our enterprise throughout the crisis to-date, while further strengthening the company and positioning it for even better margin performance and growth as we take stock here in the middle innings and we look forward. Let me give you a sense of some of the accomplishments our team has racked up since this crisis began. We were able to operate continuously across the globe with only minor and temporary supply disruptions, while protecting our employees and maintaining the highest health and safety standards. We managed to handle with remarkable efficiency. The most volatile intra-quarter demand swings we…

Thank you, Jim, and good morning, everyone. I will now take a deeper dive into our business segment results for the second quarter. Tools & Storage revenue declined 16% as volume was down 16%, currency contributed an additional one point of pressure, while the impact to price was a positive 1%. The positive impact to price was driven by the benefits from our actions in response to continued tariff and currency headwinds. The operating margin rate for the segment was 17%, flat to the prior year with the benefits from productivity, cost control and price offset the impacts from lower volume, tariffs and currency. The segment delivered decremental margins in the teens, which is an outstanding result and a reflection of a strong operational performance by the Tools & Storage team. They were quick to execute on the cost actions and productivity opportunities, while also demonstrating excellent agility by responding to the higher North American demand levels that emerged in the middle of the quarter. So let’s now take a look at the regions for Tools & Storage and starting with North America, which was down 10%. U.S. retail was flat organically as channel inventory reductions early in the quarter were offset by the strong underlying demand trends that emerged in mid-April. This demand inflection was primarily driven by a DIY phenomena that started shortly after the lockdowns emerged. The end-users refocus on the home has increased activity levels for our categories resulting in historically high POS levels. We experienced multiple weeks that demonstrated POS growth in the 30%s, 40%s or even over 50%. While we do not know the duration of this trend, we can report that the strong POS has continued into the first four weeks of July. More details on these July trends a bit later in…

Thanks, Don. We continue to execute on a number of outstanding growth catalysts, which position us for continued market share gains, as well as buffering the shocks of a volatile global economy, like, we are experiencing in 2020. The Craftsman brand remains a key element of our growth strategy and we continue to see a strong customer response, excellent growth and remain well on our path towards $1 billion. This brand, with its enduring value proposition, is well-positioned to benefit from the positive trends we have seen in North American DIY. We are continuing to invest in our innovation machine, bringing the new core and breakthrough innovations to market, and most recently, our DEWALT product line has had innovations that span the power spectrum. DEWALT, ATOMIC and XTREME provide the highest power to late ratio tools in the market, while FLEXVOLT is reaching up into higher power categories where we continue to introduce new tools that are cordless for the first time. And during 2019, we also closed on a 20% stake in MTD Holdings, a leading outdoor power equipment manufacturer. This is an exciting opportunity to increase our presence in both the gas and electric outdoor power equipment markets, with the first opportunity to purchase the remaining 80% beginning in the middle of 2021. MTD continues to make progress on improving their operating margins and is also benefiting from the focus on the Home & Garden nesting phenomenon that has emerged in recent months. And as I mentioned earlier, downturns are a time of opportunity, as well as a time of disruption. So, for example, we are the tools industry leader in e-commerce with global 2019 online revenues of $1.3 billion. But with a sudden acceleration and a shift to e-commerce, our growth opportunity here has become immense. To…

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

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

Good morning, Jim. Good morning, Don.

Hi Nigel.

Good morning.

Hi. So I want to start off with the, first of all, thanks for details, these are fantastic on the second half of the year. On decremental margins, I just want to confirm the FY’20, mid- to high-teens commitment, implies second half closer to low- to mid-teens, I think, if we have taken the 24% decremental in the first half of the year, is that correct, number one? And number two, assuming that industrial is going to be a bit fresh in the back half of the year, it seems to imply that tools margins potentially up in the back half of the year. I just want to make sure that we think about this correctly? Thanks.

Yeah. So, on your first question, that’s an accurate kind of view of the decrementals in the back half. Yeah, I think, the margins for industrial will be a very pressured especially in the third quarter, but get better in the fourth quarter, but they still won’t be improving year-over-year, but at this stage, we do think tool margins will be improving in the back half year-over-year. But probably will be more improvement in Q3 than Q4 right now, due to various comp and other matters, but also our insight for Q3 is very clear versus the insight for Q4 is still a little unclear. So that’s probably another factor in that analysis as well.

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

Hey, everybody. Good morning. Nice job on the second quarter.

Hi, Tim.

Hi, Tim.

Thanks, Tim.

Just my question is on inventory really within the tools business. Just wondering if you could provide just color on where you think channel inventory is relative to normal. And as you are talking to your customers, just how long do you think it takes back to get to whatever, I guess, is normal? Just -- it seems like it could be a multi-quarter tailwind if you are only shipping the POS now. So just some color there on what you think inventory levels are relative to normal and how long it could take to get back?

Yeah. I mean, inventory levels are exceedingly low and pretty much as low as I have seen in my time here. And I think the customers would probably prefer to have higher inventories, if they could. But as you pointed out, we are simply keeping up with POS right now. We were fortunate that we built a pretty substantial amount of inventory early in the quarter when we started to see, the POS dramatically outperform the shipments and the customers in the beginning of the quarter were still in the process of an inventory correction themselves and then it took them a while to realize that the POS needed to be replenished like ASAP in the middle of the quarter and the orders started rolling in, probably in the back half of the quarter. But by then, with our supply chain cycle time, we are fortunately producing sufficient inventory to at least keep up with the POS and actually it took us a while to get to the point where we were keeping up with POS. There was substantial inventory drain in the channel throughout the quarter stabilizing pretty much near the end and then has been stable for several weeks now.

Yeah. And my comments in the script, and what Jim said, we don’t want to leave the impression that the inventory levels are so low that it’s causing major issues with the end-user. But then when you look at the weeks of stock and you look at the typical range of anywhere from nine weeks to 15 weeks depending on customer, we are definitely at the very low end of that range and so that’s a factor in as we think about going forward. And we are producing enough products in the tool space that if there is a desire of our customers later in the year to restock. We will have the ability to do that, even if the POS continues to run at the levels it’s trending at now.

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

Yeah. Hi. Good morning, everyone and thanks for the scenario. Very…

Good morning.

Hi. Very, very helpful. Can I ask about the positive carryover into 2021 that you mentioned the 150 million? Just confirming that this is pre any of the supply chain changes and potential cost savings that you might have from that by rearranging the China supply into Europe and the U.S.? So that would be incremental on top of that and then like is there any change maybe pulling that plan a bit more forward in time, would be great if you could elaborate on that? Thank you.

Yeah. I mean, maybe the best way to answer that question, because it’s a very good question is that, if you think about our margin resiliency program, which Jim commented on related to how it contributed to this year’s cost actions. We still think there’s a great deal of value going forward in that program and we believe this a range of $300 million to $500 million of opportunity that we can capture over the next three years to four years. And part of that will be what you are talking about really shifting the supply chain and the value opportunities that happened there associated with that. There’s also many other things associated with Industry 4.0, advanced analytics, better pricing, analytical and technology tools. I mean, our organizations have really digitized themselves and the supply chain continues to do that to really create more value on a go-forward basis. So one of the really positives that’s coming out of this crisis is that we are not like depleting our margin resiliency value creation. We still see a great deal of value going forward. And at this point, I would just assume it’s probably $100 million to $150 million per year for the next three years, starting next year. We will certainly refine that as we get closer to the end of this year. But -- that is an opportunity that we will continue to pursue, and as you can see, there are a lot of values still associated with it.

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

Yeah. Thanks. Good morning, guys.

Good morning.

Good morning.

So, I am going to ask one really easy question and so I was hoping maybe you could make an exception and answer two for me. First, on just the cost savings the remaining 3, -- what is it $325 million for the rest of this year. How does that split between 3Q and 4Q? And then, I guess, my bigger question is, when we think about the DIY potentially, I guess, as people go back to work. What’s the potential that that could be offset by the pro coming back as that is kind of compensated?

Yeah. The first one is it’s a pretty even split between Q3 and Q4 and then I will pass your second question over to Jim.

Yeah. I mean, actually, I think they are both relatively easy questions, because, clearly, the DIY fade is something that makes logical sense. When you take into account the factor, even if there is a stimulus, which I suspect there will be, it will be a lower dollar amount than we have seen thus far, and so, I think, that there probably will be some POS fade. I just -- it’s unsustainable to keep circa 40% POS going for a long, long period of time. So, yeah, I think that’s probably going to happen. But the pro has been pretty much on hold very, very quiet in terms of what we are seeing there, and of course, with the housing market potentially heating up here and if the urbanization and so forth, it’s likely to go on and starting to go on, likely to continue and so forth. I think we are going to see a fair amount of pros coming back into the mix from the sidelines. So I think there is some potential that that could happen.

Thank you. Our next question comes from Michael Rehaut with J.P. Morgan. Your line is open.

Thanks. Good morning, everyone and congrats on all the results and the efforts so far.

Thanks, Michael. Thanks.

I had a question around the cost savings program. Wasn’t sure, when you talked about still reiterating the $4 billion [ph] of savings -- $1 billion of savings and $500 million in 2020, from what I understand a portion of both of which is the temporary actions that you had said prior to this call is maybe about 30% of the overall total. At the same time, you are talking about welcoming back 9,000 employees, which is wonderful, but it’s -- I understood that part of that was perhaps part of the temporary actions. So just trying to get a sense for and then you talked also about the carryover at $150 million, which is close to that two-thirds of the overall actions being permanent. So just trying to get a sense for the remaining third, how that flows through and maybe the timing of that, if perhaps the solve in kind of talking about working to get those type reactions permanent. But it doesn’t seem like maybe in the next six to 12 months, you will get that $4 billion, if I am understanding that right, but perhaps, you could walk us through that?

I think the way to think about it, Michael is that, if we got the $4 billion obviously, we have another $0.5 billion of incremental benefit in 2021. But we do recognize that that’s probably not likely that we are going to get that type of carryover. Because we are going to have some of these temporary things that come back into our systems such as, we have suspended certain employee benefits as an example, that’s going to be something we can tolerate as an organization for one year. But we can’t continue that into next year, so that will be something that comes back into our cost base. We did some of these temporary compensation things that we are reversing for the reasons we articulated, which will create kind of an incremental cost next year year-over-year. But then we are shifting into -- and we have some things in indirect that we did temporarily this year that will increase in our cost base next year. But then what we are doing is we are focusing in other categories where we are taking permanent headcount actions here right now through, as Jim mentioned, into September timeframe. That would kind of help offset a portion of that. And then, we also are trying to sustain some of these indirect savings, so they are permanent. And so ultimately, when you look at the $1 billion that we have gone after, we think we found $650 million of it roughly that is permanent. And when you do all the math of all those pluses and minuses, and Dennis can give you a little more detail off-line, if you would like. You are going to get a situation where you get a value of $500 million this year, it’s incremental over last year and you are getting at a value of $150 million incremental next year over this year and that’s really how it works.

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

Hi. Good morning.

Good morning.

Maybe just a question around the tools margins for the medium-term. So looking at your guidance, it looks like the tools margins are back to that sort of 17% plus level in Q2 and the second half. Historically, that’s where they have kind of peaked out. So I just wondered, as we look ahead, what type of incremental margins should we expect in tools when sales growth resumes. And do you think that in the medium-term an operating margin aspiration of sort of 19%, 20% or so is realistic given the margin resiliency efforts, so pushing through higher than those old peaks?

Yeah. And we are very, very pleased with the tools margins in this quarter, because they are pretty much at what have historically been peak levels at a time when revenue is in what we think is a trough in the cycle. So, yeah, I mean, I think, that’s a very significant probability that they will accrete upwards. There are a lot of positive things that Don has talked about. And I have referred to relative to the impact on margins from the cost reductions, from margin resiliency, et cetera. And so I think it hopefully will foretell a very positive story in the future. And I think equally important is the lack of what we have had over the past few years, which have been really significant headwinds from the dollar -- the strength of the dollar, which is now kind of backed off a bit and hopefully will continue along those lines for a while. And also the tariffs are kind of anniversarying out here as we speak in the next quarter and inflation has turned into some deflation. So there are a lot of powerful things happening in the tools margin story that I think bodes very well for it going forward. There’s always going to be new headwinds over time. So we can’t get crazy about it, but clearly, the momentum is upward.

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

Hi. Good morning all. Can you talk to…

Hi.

…what kind of initiatives are being taken other than just expanding -- other than just taking more -- taking the rest of the stake in MTD? If you can just focus on what kind of verticals or end markets, probably, perhaps, is it more DIY focused, maybe COVID-proof products, more eco -- more e-commerce friendly, et cetera? And just a broader question tagging to that is, in the process of managing through COVID, did you discover any new adjacent markets or newer opportunities you can expand into? Thank you.

Yes. That’s great. It’s a great question. And it’s -- I was trying to kind of get at that with -- when I talked about the trends that had occurred with the advent of COVID. The first being the sudden shift into e-commerce and -- in terms of the revenue weighting and the consumer preferences. And then in addition to that, you have this kind of re-imagination and re-acclimation to the home. People spending time at home, doing projects at home and then also out in the garden and landscaping, so a lot of the DIY in that area. I think that’s going to be a relatively, I will call it, a semi-permanent trend, which means, probably, for at least a couple of years, we will see that, and then finally, the obsession with health and safety. So all of those things play to our portfolio with the world’s leading, certainly, world’s leading tool business in a great position in e-commerce and in DIY both in the U.S. and in North America and in Europe. And then the MTD acquisition, which hopefully we will be able to do in early 2022, that’s going really well in terms of the cost takeouts that we had -- are working with MTD on, making sure their margins get up to acceptable levels and also from a revenue point of view, MTD is doing quite well as well with significant growth at this period of time. So that’s going to be a great story and that’s probably going to be about $3 billion when we exercise that option of revenue that we are going to bring on probably at a weighted multiple when you take into account the first 20% and then the second 80% will weighted multiple, probably be in the 7 times…

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

Shannon, thanks. We would 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. Thanks.

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