Welcome to the Fourth Quarter and Full-Year 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 fourth quarter and full-year earnings conference call. On the call in addition to myself is Jim Loree, President and CEO; 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 AM today. The replay number and the access code are in our press release. This morning, Jim and Don, will review our 2020 fourth quarter and full-year 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 based on our current views. Such statements are based on assumptions of events that may not prove to be accurate, and as such, they involve risk and uncertainty. It's therefore possible that actual results may materially differ from any forward-looking statements that we 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.

Thanks, Dennis and good morning. Today we issued record fourth quarter results marking an outstanding close to a very dynamic and successful year. As I mentioned in our 2020 shareholder letter, we expected the operating environment of the 2020s to be one of volatility, uncertainty, complexity and ambiguity or VUCA for short. Lest we had any thought of easing into that construct over time. Like others we were thrust into action as the pandemic roared onto the scene in March and April. And as for many companies, the early days of the pandemic brought into focus the first rung of Maslow's hierarchy of needs. We quickly established pandemic era tactical priorities. First, protect the health and safety of our employees and supply chain partners. Secondly, ensure the continuity of our operations and financial stability. And third, do what we can, or could to mitigate the impact of the virus in our communities. We undertook a myriad of actions consistent with those priorities, including the implementation of intensive companywide safety protocols, including mandatory masks from day one, significant liquidity enhancements, cost reductions, some temporary, some permanent as well as a substantial increase in our philanthropy, both in dollar terms and in-kind. We asked our people to be guided by our purpose. For those who make the world, we emphasized our three simple leadership principles which include creating clarity, inspiring engagement, and growing and delivering. Our people, while dealing with a personal hardships and challenges characteristic of this era, responded beautifully to our lead. Amidst four weeks of collapsing sell-out revenue in April, we were hunkered down, ready to ride out the storm. And then suddenly in the last week of April, and on into the summer months, an abrupt and very positive phenomenon emerged in the tools business. Our end users,…

Thank you, Jim and good morning everyone. We're incredibly pleased with our fourth quarter financial performance which closed out an amazing back half to 2020. So now, I'd like to review our business segment results for the fourth quarter. Tools & Storage delivered an exceptional 25% total and organic revenue growth with volume up 23% and price contributing an additional two points. All regions continued to benefit from exceptionally strong revenue trends related to the consumers' reconnection with home and garden. E-commerce continued to be very strong. We had a strong holiday season, and a robust lineup of new products and innovation. The operating margin rate for this segment was another outstanding result at 20.7%, up 420 basis points versus the prior-year as volume, productivity; cost control and price were modestly offset by new growth investments. As the revenue outlook improved during 2020, we released incremental SG&A investments to further the development of our brands via digital marketing, increased distribution capacity, and added commercial resources to support our business model in brick-and-mortar and e-commerce. We believe much of these investments will drive further organic growth in share gains in 2021 and 2022. Now let's look at some of the geographies within Tools & Storage. North America was up a robust 27% organically. Retail continued to see exceptionally strong POS, delivering 36% organic growth through a very strong holiday season along with continued momentum in e-commerce. POS growth for the quarter approximated 30% and retailer inventories ended the year slightly below Q3 levels and well below prior-year, an amazing Q4 performance for the Tools & Storage team. And what's incredibly amazing is we still have a channel refill opportunity of four weeks in front of us that will likely materialize in the front part of 2021. The North American commercial and…

Thanks, Don. Very clear, very transparent, very exciting. In summary, 2020 was an extraordinary year for Stanley Black & Decker. This performance was possible due to the agility, passion and dedication of our people combined with a strong cultural and financial foundation. It's hard to pick one element to get most enthused about given the 2020 performance, especially in the second half as well as the improving outlook. Is it the growth, the margin expansion or the extraordinary cash flow and the potential for more? Is it a demonstrated resilience of this purpose-driven company? Or is it the enormous potential given the way the company is positioned for 2021 and 2022? In my view, it's all of the above. We're energized by the existence of a multi-year runway for growth and profitability improvement. The shareholder value creation potential is certainly compelling over the medium to long-term. And while pursuing these shareholder rewards, we're also mindful of our responsibility to society and the multiple stakeholders that we serve and our sustained commitment to ESG and social responsibility is strong, authentic, and we continue to elevate it over time. And as you can see, there's a lot to be excited about with our MTD partnership and for 2021, these opportunities are planned to deliver more than $100 million of organic growth for SBD as well as to support additional growth for MTD. So I want to thank everybody. It's been an exciting year. There's a lot of really great things ahead. And now I'll turn it over to Dennis. Dennis?

Great, 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.

Congrats on beating your $8.90 guidance, you got there in a slightly different way, but well done there. So on MTD, just wanted to just touch on that. There's a bit of confusion out there just want to clarify MTD is not in your guidance at all. Let me just clarify that. And then on the 7 to 8 times EBITDA, updates on a trailing EBITDA, or would that be a forward EBITDA? Just want to clarify that as well. And then just my real question is on the road to mid-teens margins, what do you think are the biggest drivers of that move? And any kind of time scale on that would be helpful? Thanks.

Okay, thank you, Nigel. To be very clear, there's no acquisition of MTD in the guidance. There's some licensing income associated with some of the opportunities I described in the comments. There's some organic growth in Stanley based on some collaboration with MTD on products that we'll be selling through our own channels and our own brands. But there is no, nothing related to the acquisition in the guidance. The multiple is going to be a trailing multiple, because that's how the option is basically priced. It's based on a trailing EBITDA. And so that's where the 7 to 8 times comes from. And as far as the road to mid-teens operating margin, it's our objective to get the operating margins up to around somewhere around eight-ish percent next year, maybe a little higher if the volume kind of comes through the way we think. And so if we start from say a base of maybe 8% to 10%, there is a whole series of cost reduction value creation activities that exists in a plan, if you will, it's a somewhat high-level plan, because we're not able to get into super detailed diligence at this point. But we have been working with a major consulting firm to come up with some point of view on how we can get to a number something in the neighborhood of probably $50 million to $100 million of additional margin improvement that is not being implemented by MTD for various reasons. One, they may not have the appetite for it, or they may not have the capability to do it. But we have some ideas that are pretty specific in that regard. That gets us up into like the 12-ish kind of zone. And then from 12 to 15, it really is going to…

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

Thank you, good morning. Congrats.

Good morning.

Good morning.

Hard to say where to start, you guys could have just maybe dropped the mike and ended the call. But I was wondering, I guess it's for Don, but maybe elaborate a little bit more on how we should think about Tools margins going forward. As Jim said, you kind of showed us here with the cost back in the base what you can do. But it sounds like there's some investment coming back in and some other things. So should we be thinking about this kind of 18% to 20% range that I think you were talking about on the Q3 call is kind of a reasonable framework, as we pencil out 2021 here?

Absolutely. I mean we feel even more confident now to kind of confirm what I said in October on the earnings call, that that range does make sense for 2021 between 18% and 20%. And you should see all four quarters in that range. So there shouldn't be a lot of significant variation in that regard. There will be a little bit of investment that we will make. But it's going to be more along the lines of some of the growth initiatives that we started here in 2020 in e-commerce and a few other areas. And so we're going to continue to invest in that space that'll drive additional share gains and more organic growth. So, we feel really positive about how the business positioned itself from a profitability perspective and although the rates are in the back half were over 20%. So we'll see a little bit of a retraction going into next year for the reasons I articulated. I think over the long-term, we feel like it's a business that will continue to progress and improve its profitability over the coming years. It won't just be a one or two-year phenomena.

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

Yes. Hi, good morning, everyone. Thanks for all the detail. Maybe in recent weeks, there's obviously been some concern around raw materials. And Don, you mentioned the $100 million to $150 million contingency that is not part of guidance. Just want to make sure that I understood that right that is not part of the guidance. And wondering how quickly, you could put that into effect? And also, what are you seeing up to-date so far on the raw material side? Thank you.

Yes. I'll start with the raw material part of that question. I mean, we saw these trends kind of emerge in October timeframe, November. And in the categories I mentioned, of steel, resin, electronic components. And so that that is going to continue for a period of time, right now, we have $75 million of an increase in those types of categories in our guidance for 2021. I don't think it's going to radically deviate from that, it could go up a little bit as the year goes on. But we do have to keep in mind the way that we structure our contracts, it usually takes a good six months for that to really impact our P&L, which gives us time to respond with pricing actions, if that makes sense or productivity or whatever the case may be. And then that kind of helps us mitigate that over a longer period of time, maybe over a multi-year period of time, those actions. The margin resiliency program is an annual program that we started about three years ago, which was built on, let's look at the different areas of our company, the functions, the operations teams, how we price our products, et cetera and use technology such as Artificial Intelligence, Advanced Data Analytics, and make better decisions in those particular areas to drive efficiency and effectiveness. And we've seen that over the last few years the ongoing process of the team that's been created and the technology that they use; we have about 100 people that are focused on this full time in the company drives about $100 million to $150 million of annual value. Now we could put that in our P&L and make it part of our guidance. But we think it's more prudent involved for times like this to have it outside the guidance as a contingency. And so when new things come your way that are headwinds, you have an offset. These things are underway, they're in process, and so they're driving value this month in all 12 months out of the year. And so if the headwinds don't come, you get the opportunity to position yourself to outperform. And we think it's a very balanced way to approach guidance in the way to operate in this world, given the level of volatility that we've all seen in the last four years, but in particular, the last 12 months.

And I just wanted to comment, too, on the inflation perception, because it was really interesting, sitting here and listening to some of the feedback from investors over -- from the last couple of weeks about this inflation concern. And we were scratching our heads to some extent, because we've had inflation more often more years than not over the 20 plus years I've been here. And we've always been able to offset a part of it with price and new product in development, new product introductions, and so on. And then there's always productivity that has come through and helped offset the rest of it, and actually given us some decent margin accretion in certain years, even when there was inflation. And so this reflex reaction that, that occurred, which was oh, my gosh, Stanley Black & Decker is inflation prone. It didn't make any sense to us. But then when we thought about it, we realized that if you go back to the 2017, 2018, 2019, kind of timeframe, there was this billion dollars of headwinds that we have all behind us now. And that billion dollars of headwinds was a triad of things, it was the inflation, it was the tariffs, and it was the FX, and a billion dollars was just too big a series of headwinds to just offset with the normal types of offsets that I talked about. So we ended up having to do some restructuring. And by the way, we still generated 6% earnings growth during that timeframe. So it wasn't catastrophic, it was just a lot of work and a lot of pain in order to get through that period, and we did it. But in any one of those, whether it was the FX, or the inflation, or the tariffs, any one of those, we could have handled it easily through our normal contingencies and things like that. But when we put them all together, and that three years in a row, it just -- it became a lot. And so that perception, I think develops. So immediately when the winds of inflation started blowing in the third and fourth quarter, we got this reflex from the investment community. But I think, as of today, I hope that we can put that behind us because it is not a significant material issue to us in 2021.

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

Yes, hey, good morning, guys. Nice start.

Thanks, Tim.

Thanks, Tim.

My question really just, I'm curious if there's a way that you could kind of frame or parse out what you're seeing from the DIY and your Pro business. And I know, it's more of an art than a science, particularly in the home center channel, but just kind of curious and we started to hit tougher DIY comps in the second half, if your Pro business, and the Pro channels can help absorb this. So just any color on DIY versus Pro and if there's any acceleration in Pro that fits into your assumptions?

Well, I did lay out in my remarks, kind of the things that I thought were driving the demand, which is one is a secular shift to DIY with so many people at home and with the home being the focal point, as well as outdoor, being the focal point of people's activities, and the number of projects and the number of people doing projects and doing projects for the first time is at record levels. And I think another thing is the installed base of battery systems is a big deal, with this kind of growth that we have in 2020 and now into 2021. There are going to be more and more first timers or people that have bought new battery systems, investing in additional tools for their battery systems. And frankly, I think when once people discover DIY; it tends to be somewhat addictive. So I think that, we're going to have, it is a secular shift in my opinion, I think the home center CEOs would agree with that. I've heard them talk about that as well. So that's a big deal. Obviously, it abates over time as the comps kind of get tougher in terms of its percentage impact on growth. And what we saw in 2000, what relative to the Pros was in the beginning the Pros like let's say like April/May projects kind of came to a grinding halt for the most part except for the really essential ones and then into the summer, the Pro started coming back and into the third and fourth quarter, you can't even get a contractor in this country anymore if you want one. So at least I've had that experience. I think the contractors are very busy in the resi and both the remodeling and in the new construction areas. They've got a tremendous backlog. I think they're back. I mean, I think that that has played out. So, as we go forward, I think what we're really looking at is more of kind of going up against the comps and getting back to a more normal environment as we get into 2022 and beyond. But it's -- it is one, it is an artist, you say, and it's difficult to really parse in great detail exactly what's happening. But that is our gut feeling instinct based on what we could see here at this point.

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

Yes, thanks. Good morning, guys.

Good morning.

Can you just clear something up with respect to the inflation headwind? Is that just the pure inflation headwind? Or is there any offset from pricing embedded in there? And then secondly, my real question is, can you just talk a little bit about expectations for margins within the other two segments, whether you want to talk about expected incrementals on the volume growth that you set out, however you want to do it, but will be good to get some color there, too.

Yes, the $75 million is growth inflation, doesn't have any price offset in it. And we'll work through those plans as these emerge and decide, where it makes sense for pricing actions and when, but it is a gross number. And so that means, the annualized number is probably 125 to 150, when you think about it. So -- and that's the right magnitude at this stage for these different areas. The areas that really are being hit hard are steel, resin, electronic components, and then battery cells or base metals, if you want to call it, however you want to call it, but those four categories are things that there's a high demand for right now, as we all know. The question is, how long does that demand last? Is there a parts of the economy that are really going strong, and there's other parts of the economy that are not, that have not recovered as well, and the timing of that recovery is going to depend on how the vaccines roll-out, and how we eventually get the herd immunity, and how quickly that occurs. So, we could be seeing a short-term bubble here that maybe moderates for a period of time, or it could be something that continues to grow modestly over multiple years. So time will tell. But I think we've got that in the right box right now. And it's something we can manage going forward with all the levers that I described. The other two segments for profitability improvement, I could -- I could probably give you all kinds of leverage factors. But I think it might be simpler to just say, if you think about the whole company's operating margin, right, we're trying to improve about 50 basis points year-over-year. Tools is trying to improve roughly the same number, maybe a little bit more and so that means Industrial and Security are going to improve about same number too. So I think you can kind of look at a 50, anywhere from 40 to 50 basis point improvement in all three segments, with the net result for the company about 50 basis points for the full-year.

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

Hey, appreciate all the detail this morning, especially on the inflation front. So I only have one question. I don't have like three imaginary ones and a real one. Just thinking about the 4% to 8% Tools & Storage growth for the full-year, Jim, I think you gave some parameters around inventory. Seems like it rounds to something in the neighborhood of two points of kind of full-year benefit from replenishment if we're way off with that, let us know. But is the rest of that, kind of evenly split North America and international, I think if I'm taking some of the inputs and making some assumptions that the team play kind of core growth in the U.S. business inclusive of Pro is pretty modest actually stock, is that kind of a fair calibration of the moving pieces?

Yes. I think it is. It's -- we -- we were talking about four weeks probably is a reasonable number to improve. It is a global number we're talking about because we do see opportunity across the globe, probably heavily, more heavily weighted to North America because we know those inventories are definitely at the very low end of the range of where we like to be. And so maybe 75% to 80% of it is weighted to the U.S. and North America. But I think when you think about the growth that could come with that, it's probably a couple points of growth, maybe two-and-a-half points of growth for the full-year, which means it could be five points in the first half. So that's the magnitude we're talking about. And I think we'll see it start to evolve in Q1. But it might be more heavily weighted to Q2, because the POS just seems really robust in Q1 at this stage.

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

Hi, this is Alaei Homan [ph] on for Mike. Thanks for taking my question. Just following-up on that. I was wondering if you could talk about your ability from a production and inventory standpoint, to continue to meet the strong POS demand, both in 1Q and just through the remainder of the year ramp-up. And any potential challenges either in capacity or other COVID-19 impacts?

Yes. We were very fortunate that we were able to really -- first of all, we started the year with a really solid on inventory position, both in the company and in the channels, which are at least in North American channels, where the demand really spiked. And so that, that was helpful, because it was kind of a strange situation, but it got into May. And we were looking at POS that was starting to skyrocket and the orders were not coming in from the channel. And so we ended up building quite a bit of inventory, starting in May, actually over $500 million of inventory we built to serve POS demand that was occurring, and we had to kind of bet that the POS was going to continue at that rate, and it did. And that enabled us to really get ahead of the situation so that we've been. Now, if you look at us at this point in time, we're essentially serving the POS and have them for two quarters now. And we're able to do that. Our end user -- our end users continue to be very, very robust in buying Tools, and our channel partners would like more, they would like their inventory restored. That is the challenge. And so one of the things that we've done, and we were also very fortunate from the standpoint of are made in our "Make Where You Sell" campaign that we've been working on for three or four years had some pretty significant capacity additions, both in Mexico and in North America and in the U.S., and a number of those are either online or coming online, including a major plant in Mexico and a major plant in the U.S. in later in 2021. And so as we look forward, we're not counting on those to necessarily get the inventories to where they need to be in the channels. But we're looking forward to the fact that we will have more capacity in the system significantly more capacity as we get into 2021. So we're not too concerned about that. In the meantime, there's a tremendous amount of inefficiency that's been built into our cost of goods sold here in the second, third and fourth quarters, especially the third and fourth quarters where in order to meet the fill rate objectives and keep the inventories at the levels that we've been able to, we've done a lot of heroic things that have been costly, things like air freight and expediting and items of that nature. And those items, ultimately will be released, I think to some extent by the capacity coming online in the future. But in the meantime, they're kind of built into the run rate, you can see the margins are even with those inefficiencies are pretty good. And we have really pushed our supply chain hard to serve our customers thus far, and it's been successful as you can see.

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.