Q2 2021 Stanley Black & Decker Inc Earnings Call
Welcome to the second quarter 2021 Stanley Black <unk> Decker earnings Conference call. My name is Shannon and I'll be 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.
Please note that this conference is being recorded.
Now I'll turn the call over to the Vice President of Investor Relations Dennis Lange, Mr. Wang you may begin.
Thank you Shannon good morning, everyone and thanks for joining us for Stanley Black <unk> Decker is 2021 second quarter conference call on.
On the call. In addition to myself is Jim Loree, CEO, Don Allan President and CFO, and Lima, Chesney, Vice President of corporate finance and CFO of tools <unk> storage.
Our earnings release, which was issued earlier this morning, and a supplemental presentation, which we'll refer to during the call are available on the IR section.
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 Don and Lee will review, our 2021 second quarter results and various other matters followed by a Q&A session.
As with prior calls we're going to be sticking with.
Just 1 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 the 8-K that we filed with our press release and in our most recent 34 Act filings I will now turn the call over to our CEO Jim Loree.
Thanks, Dennis and good morning, everyone. This morning, we announced a record second quarter, which capped off a historic performance over the last 12 months.
Over this period, we have delivered $3.1 billion revenue growth.
Now at a $17 billion LTM run rate adjusted operating margins reached new heights approaching 17% tools operating margins are in excess of 20% and we added $2.9 billion of sales.
Growth in tools, including outdoor over the last 4 quarters my.
My team and I are proud of the collective effort of our 56000 and Stanley Black <unk> Decker colleagues, we thank them for their resilience and dedication their agility to cut through the many challenges associated with executing on this massive growth trajectory during the global pandemic.
The way they have stepped up his impressive taking care of customers or people are.
Our communities, it's a great story.
Turning to the second quarter.
Revenues were up 37% versus prior year to $4.3 billion, we achieved an all time organic growth record of 33% and Marc the.
I N downtime all 3 segments as currently Organised achieved double digit organic growth in the same quarter.
The extraordinary organic growth of 41% and tools demonstrated the power of the world's leading tool company with the best brands and innovation in the industry all regions delivered robust double digit.
First off in our strong commercial and supply chain execution enabled us to capitalize on the positive secular trends and strong markets.
<unk> accelerated to 14% organic growth behind the second straight quarter of double digit growth and share gains.
In our automotive general industrial and attachment tool businesses.
Greg as recoveries in these end markets are continuing the growth would have been even more robust if not for auto OEM production delays related to electronic component shortages and.
And by a few continued cyclically depressed markets such as aerospace.
Security had its strongest quarter in the last 10 years.
During 2014% organic growth the security business transformation to a data enabled technology provider is accelerating and the team successfully converted a strong backlog into revenue.
Rates were red hot in the quarter up 36% and the ending executable that backlog was at record levels.
Deliberate we're excited about the full potential of these opportunities to support elevated revenue growth in the back half and beyond.
Our overall company adjusted operating margin rate remained strong at 15, 5% up 270 basis points from the prior year with volume leverage price.
Mixed benefits from innovation and margin resiliency more than overcoming the cost of growth investments commodity inflation and higher expedited transportation costs required to serve the strong demand in tools.
Adjusted EPS for the quarter was a second quarter record at $3.8.
93% over prior year and free cash flow for the quarter was $339 million up 28% versus prior year and over $300 million better on a year to date basis than our record setting 2020, a year in which free cash flow was $1.5 billion.
On the heels.
Great performance, we entered the second half with positive momentum and a portfolio that is well positioned to capitalize on the key trends that are driving growth the consumer reconnection with home and garden E Commerce electrification and health and safety, we are investing across our businesses to capture these opportunities and enable sustained.
<unk> above market growth with margin expansion and to that end, we are raising our 2021 full year adjusted EPS guidance range to $11.35 to $11.65 per share a 27% increase versus prior year at the midpoint.
Finally, I'd also like to.
A highlight that last week, we increased our dividend for the 54th consecutive year.
The quarterly payout now stands at 79, a share which represents a 13% increase this is a reflection of the continued confidence we have in the cash generating power of the company.
A strong growing dividend is a key element of our shareholder value.
Proposition and it is consistent with our capital deployment strategy to return approximately half of our excess capital to shareholders over the long term.
Of course repurchases are the other major vehicle, we can employ to do that and notably our board increased our repurchase authorization last quarter to 20 million shares giving.
US the flexibility to do some of that as well.
During our May growth summit broadcast we showcased several significant catalysts that represent opportunities for a long and rewarding growth runway for Stanley Black <unk> Decker. These catalysts capitalize on key 2000 twenty's trends many.
Any of which are expected to continue into the foreseeable future. We are expecting that the key market drivers across our global tools market markets will continue to be strong demand drivers and support tools growth for some time, including the secular surge in consumers' reconnection with the home and garden as well as the cyclical expansion.
<unk> in North America home improvement driven by new and existing home sales associated with household formation and the urban Exodus, we are investing more than $200 million in innovation e-commerce sales and marketing and others and we've never been better positioned to capitalize on market trends.
Across the board we.
We have strategic Differentiators that make us the world's leading tool company.
Our iconic brands to walk Craftsman Stanley Stanley <unk>, and Black and Decker, our category depth channel development and operations excellence and a track record and commitment to market leading innovation our pipeline has never been stronger we are expanding.
Expanding our cordless product offerings up and down the power spectrum to new users in product categories with our flexible flexible advantage and dewalt power to tech platforms. We are the industry leader in maximizing power output with plans to nearly double the number of products on these platforms over the next 3 years.
Our atomic and extreme platforms leverage.
Leverage the smallest most power dense brushless motor technology in the industry to deliver the highest power to weight ratio available in compact 20 volt and 12 volt platforms and will expand the product offering across these platforms roughly 4 times over the coming years.
These breakthrough products have already delivered significant share.
Our gains and they are just getting started.
The massive acceleration in the shift of demand to E. Commerce was amplified during the pandemic, which was an enormous positive for US we have approximately 3 times the share in E Commerce as our next closest competitor and we grew our global E Commerce business from 13% of tool sales.
To 18% in a matter of 12 months now about a $2 billion.
Channel this shift to E. Commerce is going to continue and we are doubling down our investments in talent digital capabilities and our brands, including the revitalization of Black <unk> Decker.
Which is an iconic brand that has a license to play in the largest breadth of categories.
Within our portfolio.
We see a significant opportunity over the coming years as the team re imagines black and decker to drive it towards more youthful buyers as an e-commerce lifestyle brand.
The increased focus on ESG and climate and what that means for electrification presents a very compelling multiyear opportunity.
<unk> for us as well our existing cordless outdoor power equipment business has grown over 70% in the first half of the year and in engineered fastening the move from internal combustion engines to hybrid and EV platforms. Ultimately results in a 3 <unk> increase in content per vehicle.
And lastly.
Transformation of our security business to become a technology driven data solutions provider is gaining significant momentum and the timing is excellent and the team has done a great job, creating various solutions and products that are focused on health and safety, which has never been more relevant as the world continues to battle the pandemic.
In addition.
Lastly, these growth opportunities, we are gaining momentum with our margin resiliency program. We continue to find new applications and use cases to apply our technology enabled approach that will deliver a runway for sustainable margin expansion in the coming years and now a brief update on MTV.
As many of you.
You know our option to acquire the remaining 80% of MTV opened up at the beginning of this month.
This opportunity is exciting as we bring leading brands and capabilities in the electric outdoor category as well as the ability to deploy.
The SPD operating model and apply our.
Our global scale.
TD bring superb product engineering and manufacturing expertise in outdoor power equipment capabilities, and robotics technology as well as access to the independent dealer channel in outdoor.
We were just at Mtv's facilities in Valley City, Ohio last week.
And came away even more energized by the pipeline for innovation and the runway for growth in 2022 and beyond.
The strategic fit is hand in glove and the revenue and cost synergy opportunities are compelling. We are currently in negotiations with MTT on the option execution and should they come to our success.
Conclusion, and subject to all regulatory approvals, we will begin work on tackling this multi year opportunity for growth and margin expansion upon closing.
And now.
I'll hand, it over to Don Allan to cover a few financial details on MTV, a more detailed discussion on second quarter.
<unk> and offer up some 2021 guidance John.
Thank you Jim and good morning, everyone before we leave slide 5 as Jim mentioned I want to make a few remarks about some significant financial attributes related to the to this exciting potential transaction.
First over the last 12 months ending June 30th MTBE.
We achieved revenue of approximately $2.5 billion.
They are seeing great traction on their spotlight 10 initiative and have improved their EBITDA rate from approximately 4.5% in 2018 to high single digits over this LTM period.
As I referenced at Investor Day MTV.
Has worked tirelessly to meet the supply chain challenges brought about by the pandemic Inc.
Including limited throughput on larger products as well as component and input shortages. However, this has muted their output and revenue over the last 12 months.
We believe these are temporary and manageable disruptions.
That can improve with our application of the SPD operating model.
Consistent with Investor day, and taking into account our recent diligence, we believe that our combined MPD and SPD outdoor platform can become a growth catalyst to deliver $200 million in organic growth per year over the medium term.
I think assumption for 2022 continues to call for the addition of M. T D.
Assuming $2.6 billion in revenue and continued progress on all of them expansion.
We believe this could contribute approximately 9% adjusted EBITDA margin or just over $230 million and consolidated adjusted.
At EBITDA in 2022.
Considering the benefits of our 20% stake currently in our P&L and applying interest and intangible amortization assumptions. This would result in approximately 50 cents.
Incremental adjusted EPS accretion in 2022.
With our pathway for.
Growth and margin expansion this EPS accretion increases to over 1 dollar by 2025.
A strong P&L result that also carries a robust year for cash flow return on investment in the high teens.
I will now take a deeper dive into our business segment results for the second quarter.
Tools <unk> storage delivered 46% revenue growth with volume up 38% currency up 5% and price contributing an additional 3 points.
The operating margin rate for this segment was 22% up 320 basis points versus prior year.
Volume.
<unk> price and benefits from innovation and productivity were partially offset by commodity inflation.
Higher expedited transit cost to serve stronger demand and new growth investments.
The extraordinary tools <unk> storage growth was realized across the globe again in Q2.
With organic growth of 30% and north.
Fourth America, 63% in Europe, and 85% in emerging markets.
This performance was driven by the ongoing strong professional demand and robust levels of innovation across our brands.
In addition to the continuation of the global penetration of ecommerce outdoor product electrification.
And the consumers reconnection with home and garden.
We continue to see growth and share gain across our brick and mortar and e-commerce platforms in the U S retail with the channel up 22% organically in the second quarter.
POS remained robust and retailer inventories ended the quarter still below.
So normalized levels.
Professional products are leading the growth across the front half and the share gains are consolidating.
The first half 2021 Pos is up approximately 40% compared to 2019.
The North American commercial and industrial tool channels.
Once again experienced positive sequential trends accelerated to 68% organic growth.
The growth was supported by strong professional driven demand and a positive and positive trends in manufacturing and industrial production, while our company specific marketing and digital efforts drove share gains with our industrial.
Sure customers.
The European tools business realized 63% organic growth driven by an expansion in commercial retail brick and mortar and e-commerce channels.
Due to the strength of the industrial rebound coupled with professional construction demand.
All regions contributed to double digit growth and.
Gains were led by the U K, France, and Greece, which were up 130%, 73% and 67% respectively.
Finally emerging markets was up over 85% driven by higher construction related demand.
All markets contributed to share gains Latin America.
<unk> was up 130% I'm, sorry, 136% organically with all countries at least doubling in Asia delivered 36% organic growth.
With at least double digit growth across the region and India up nearly 3 times.
Russia, and Turkey delivered another solid performance.
With organic growth of 78% and 114% respectively.
As highlighted at our May growth summit, our E. Commerce initiative is a strategic growth driver for the business and we are continuing to invest for further expansion second quarter global ecommerce revenue was up nearly 40% versus 20.
With a double digit growth result from each region.
Turning our attention to the tools and storage SB use all 3 sbu's had excellent contributions to the overall performance.
Tools delivered 39% organic growth.
Benefiting from supportive markets and our growth.
Catalysts.
This was enabled by the relentless supply chain execution, combined with new and innovative product launches across Craftsman Stanley fat Max and to Walt.
This includes an industry, leading breakthrough innovations such as the Walt power detect flexible to advantage atomic.
Tony had extreme.
<unk> flexible was our first breakthrough as many of you know.
Once again, a leader in 2021 under this brand we are introducing a 15 amp hour battery.
And the 60 volt Sds Max 2 inch hammer, both of which will be worlds first innovations.
Our flexible system is now up to 45 products and is forecasted to represent over $600 million in 'twenty 'twenty 1 revenue.
It remains a key growth driver and is a unique and advantaged platform that we continue to leverage.
We are passionate about innovation and.
The pipeline continues to be robust stay tuned as more breakthroughs are on the horizon for a power tool products.
The outdoor products business grew 40% organically with all regions contributing.
This performance is driven by new listings in cordless innovations under the black and Decker Craftsman and Dewalt brands.
This also includes expanding our offering and walk behind mowers and pressure washers, leveraging our flexible technology and the black and Decker robotic mower launch in Europe.
We continue to expand our cordless technology and other innovations to the outdoor electric category to drive growth and are very encouraged about the future.
Product pipeline.
Finally hand tools accessories, and storage grew 42% organically fueled by robust market demand and new product introductions, we launched the new default tough series tape measures and hammers as well as brought new power tool accessories to the market.
We.
We are expanding our offering of new metal and plastic storage solutions across both Craftsman and dwell brands. In addition to further innovations across our key construction auto and industrial markets.
In summary growth continues across the globe and within all 3 of the tools and storage SBU.
Equally as important this growth.
<unk> comes with strong margin performance as a result of the team's continued resilience and disciplined price and supply chain execution.
It was a fantastic performance for the tools <unk> storage and outdoor teams. Thank you both teams.
Now turning to industrial this segment delivered 16%.
Both total revenue growth, which includes 13% volume, 3% currency and 1 point of price.
This was partially offset by 1 point from an oil and gas product line divestiture.
Segment organic growth improved sequentially with positive 14% growth in the quarter.
The operating margin rate of 10.9.
<unk> was an increase of 210 basis points versus the prior year.
Benefits from volume price and productivity were partially offset by commodity inflation growth investments and choppy markets and oil and gas as well as aerospace.
Looking further within this segment engineered fastening organic revenues were up 26 person.
<unk> as we continue to see improving automotive and industrial end markets.
Our automotive fastener and system sales were up 63% organically.
Our fastener organic growth significantly outpaced global light vehicle production and was up nearly 90% in the second quarter.
Our.
Our automotive systems business was up 5% the second consecutive quarter of growth and a positive indication of improving OEM capital investment.
At the segment level, we had an approximate 2 point negative revenue impact versus our second quarter plan from OEM semiconductor shortages, which disrupted.
<unk> production throughout the quarter.
Industrial fasteners accelerated to 29% organic growth behind the continued recovery in global manufacturing and industrial activity.
All regions contributed double digit growth and realize share gains.
The business soundly outpaced the global industrial production.
It via clicks.
Aerospace fastener revenues continued to reduce by 2 versus 2020.
As they deal with very slow markets due to limited new plane production.
However, the recovery is on the horizon and expected likely to begin in 2022.
Infrastructure organic revenues were down.
And in percent attachment tools realized 16% growth, which was driven by increased OEM and independent dealer demand.
Momentum continues to build in this market with strong backlogs and order rates at our OEM and independent dealer customers.
However, there was more than offset by.
By the dramatic.
11 pick reduction in pipeline activity, which resulted in a 55% decline in oil and gas.
This market is longer cycle, as we know and has yet to see a recovery in new pipeline construction.
Shifting to security total revenue was up 16% with 13% organic volume of 6 point positive impact from currency.
<unk> and a 1 point contribution from price.
This was partially offset by a 5 point decline related to Internet. The international divestitures that we completed in the third quarter of last year.
Overall, North America was up 16% organically, we continue to get better access to customer sites, and we're able to convert our backlog.
Dramatic within commercial electronic security.
North America also benefited from strong growth within automatic doors and health care.
European organic growth was up 12% as new data driven product solutions supported gains in France and the Nordics.
Our strong performance considering that many of.
Backlog, it's still have pandemic related restrictions impacting installations.
Our new digital solutions continued to build momentum contributing approximately 2 to 3 points of growth as the business continues to execute a required digital transformation.
Overall order rates grew 36% in the second quarter.
These marc in the quarter and executable backlog was a record high.
Which positions the business to deliver high single digit organic growth for the remainder of 2021.
Overall security segment profit rate, excluding charges was 8.5% down 110 basis points versus the prior year rate as price and volume gains were.
Offset by the inefficiencies related to pandemic restrictions.
And the cost impact from growth investments, such as SaaS solutions, Touchless store technology, and other health and safety options.
We believe these inefficiencies will fade when the pandemic reaches its final stages and is the growth investments.
More than a tribute larger larger revenue dollars, we will see the profitability rate of this business expand as well.
Now I'll turn the call to Lima, Chesney to review cash flow and an update on material inflation expedited transit costs and our price actions Li.
Thank you Don and good morning, moving.
<unk> 7 we will review cash flow performance free cash flow in the second quarter was $339 million, which brings our year to date performance to $93 million.
The quarter and year to date improvements versus prior year are predominantly driven by robust operational performance and earnings growth and was partially.
To slow by higher working capital and capital spending versus prior year.
We are investing in working capital to serve the unusual demand as well as improvement inventory positions for our customers and for us.
Working capital turns had 6.7%, a 1.1 turn improvement versus prior year.
Offset reflecting efficiencies delivered in accordance with the SPD operating model and the strong revenue performance.
We're also making capex investments to drive margin resiliency and productivity as well to expand capacity and support further growth.
We've had a great start to the year for free cash.
Up over $300 million versus the record 2020 performance and remain confident that we will deliver strong cash flow generation for full year 'twenty 'twenty 1.
Turning to slide 8.
On the left side of the page I will share some insight regarding the commodity and supply chain environment.
Cash flow and Spd's countermeasures.
Looking at the top of the slide we have included approximately $80 million of incremental expedited transit costs in the second half that we will incur to serve our improved demand assumption.
The level of spend is fairly consistent to what we've realized in the front half of the year.
<unk> foods items, such as premiums for expediting should carrying containers for our supply chain and air freight to keep pace with a hot tool market.
These costs should alleviate as a global supply chain rebalancing and presents an opportunity for cost savings and margin improvement in 2022 and beyond.
This Inc. Now moving to commodity inflation, we continued to see elevated commodity prices and now expect $260 million of commodity inflation in the second half versus our prior assumption of $210 million.
In particular elevated steel pricing is largely driving the $50 million increase.
For the full year. This is up about 65 million, an approximate $300 million cost for 2021.
Now in April we discussed taking pricing and productivity actions to partially offset the incremental headwinds identified at that time. We are now in a full implementation mode and believe.
And for the in a position to offset approximately 50% of the 2021 headwind.
Netting material inflation and better price realization is a neutral effect versus the prior guidance. The goal is to have our actions in place during the third quarter. So the 2022 carryover benefits of price and.
We've we should actions fully offset the carryover inflation.
And finally, we also have $50 million to $60 million of margin resiliency savings that is not included in the guidance to absorb volatility or support better performance now I will turn it back to Don to cover our revenue assumptions for.
Margin F.
Thanks, Lee shifting to the right hand side of the slide I will now outline the full year organic growth and margin margin rate assumptions.
Overall and by segment.
We are raising the total company organic growth range to 16% to 18% versus our prior assumption of 11 to 13.
The back half.
The primary driver is an improved outlook for tools <unk> storage, our visibility and confidence for sustained market demand continues to strengthen in addition to bringing channel inventories back to historical levels.
We are raising the organic growth expectations for this segment to the low twenty's versus our prior estimate.
Pristine to 16%.
This results in mid to high single digit organic growth in the second half, which is supported by increased customer inventory as well as continued strong global demand.
This assumption represents second half organic growth of about 26% versus 2019.
<unk>, which is consistent with what we've just delivered in the front half of 2021.
Sure.
The industrial outlook is in the low to mid single digit range, which is slightly lower than our mid single digit assumption in April the.
The primary factors for the change or the impacts from the second quarter as well as moderating our assumption.
<unk> for oil and gas for the remainder of the year.
Lastly, security organic growth is assumed to be high single digits.
The record backlog in commercial electronic security is encouraging and coupled with our data and technology based product offerings and health and safety solutions. We are optimistic for a strong second half for the business.
<unk>.
We are assuming the margin rate for the entire company will improve 40 to 50 basis points year over year.
We expect the tools and storage and industrial margins to increase year over year, even given 1 some of the significant inflationary pressures expected in the second half.
And 2.
Key new investments to drive 2022 growth.
The security margins will be relatively flat to the prior year as we manage through the inefficiencies related to the pandemic restrictions as well as the cost impact from our key growth investments.
Now I will summarize the remaining guidance assumptions on slide 9 on.
On a GAAP basis, we expect the earnings per share range to be $10.80 up to $11.20.
Inclusive of various 1 time charges related to facility moves deal and integration costs and functional transformation initiatives on an adjusted basis, we are increasing the EPS outlook to 11.
$11.30, 35 cents up to $11.65 from the previous range of $10.70 to $11.
Our revised 2021 guidance calls for organic revenue growth of 16% to 18% as just mentioned.
And at the midpoint adjusted EPS expansion of 27%.
Versus prior year.
And 37% versus 2019.
The updated outlook reflects our strong first half performance as well as improved visibility to demand in tools and storage.
We continue to make investments to support our growth catalysts increase the capacity in our supply chain.
And drive our margin resiliency.
CNC initiatives.
The drivers for improved adjusted EPS are outlined on the right hand side of this slide walking from the $10.85 EPS mid point from our April guidance.
Second quarter performance adds 35 cents.
Second half volume leverage net of expedited transit.
Costs required to meet the improved second half demand adds 30.
Lastly, as Lee referenced earlier strong realization on our price actions offset increased commodity inflation and net to a neutral impact to our guidance.
On the left side of this chart, we have disclosed our current.
Current year assumptions for the significant below the line items and our expectation for pre tax M&A and other charges to assist with your modeling.
Behind the strong start to the year. The company is reiterating free cash flow to approximate GAAP net income.
Therefore, we believe the free cash flow will likely approximate 1.
$1.7 billion in 2021.
And lastly, we expect third quarter adjusted earnings per share to be approximately 21, 5%.
Full year earnings.
So in summary, our revised guidance calls for organic revenue growth of 16% to 18% and approximately 26.
29% adjusted EPS expansion for the company in 2021.
This is a very strong year over year expansion, yet balanced recognizing the dynamic operating environment, we all continue to navigate.
Many of you are probably trying to gauge what this all means for 2022.
While it is too early to make.
A call in the markets for that period of time.
Our objective in mindset is to grow our core earnings in 2022. In addition to the MTV accretion I outlined earlier.
As you heard from Lee.
We are in a great position from a price cost perspective, and are expecting a neutral impact in 2022.
From these.
Items at current commodity prices.
Additionally, as you heard at our growth summit in May we have invested in a powerful set of organic growth initiatives and we are driving several key margin resiliency catalysts that give me confidence that organic revenue and earnings growth is achievable in 2022.
The organization remains focused on day to day execution implementing price increases and margin resiliency programs in response to commodity inflation.
And we are operating in accordance with our SPD operating model. We believe the company is well positioned to deliver deliver above market organic growth with operating leverage.
Strong free cash flow generation and top quartile.
The returns over the long term.
With that I will now turn the call back over to Jim to conclude with a summary of our prepared remarks.
Thanks, Don I'll keep this summary, very brief so as to get rates to Q&A and as you've seen and heard we had a very.
Strong finish to the first half as we delivered exceptional organic growth strong margin performance, reflecting positive secular trends vibrant markets and a strong array of growth catalysts.
I am pleased with the team's continued efforts and excited about the enormous potential given the improved outlook strong momentum we built over the last 12 months.
And as we look to the future our portfolio is uniquely positioned to benefit from these trends several of which have been accelerated and amplified by the pandemic the consumer reconnection with the home and Garden E Commerce electrification and health and safety.
We're capitalizing on this opportunity by funding innovation and commercial and.
So the investments to support continued organic growth and share gains in.
And Additionally, our option to acquire the remaining stake in MTV has the potential to generate significant revenue in 2022.
And create an exciting multiyear runway for growth and significant EPS and cash flow.
ROE accretion.
Our passion for and conviction in differentiated performance, becoming known as 1 of the world's most innovative companies in elevating our commitment to corporate social responsibility or ESG has never been stronger and now we are ready for Q&A Dennis.
Great. Thanks, Jim Shannon, we can.
<unk> the call to Q&A. Please thank you.
Thank you to ask a question you will need to press star 1 on your telephone to withdraw your question press the pound key.
Could you please limit yourself to 1 question. Please standby 1 pound the Q&A roster.
Our first question comes from Tim Walsh with Baird Your.
Your line is open.
Yeah, Hey, good morning, guys nice nice job on the first half here.
Thank you.
My question is really on DIY versus pro.
Just if you could elaborate.
And what Youre seeing maybe in both markets, particularly DIY as you're starting to.
My guess is or my sense is hitting tougher comps right about now and in that market and maybe you can dovetail that with some color on some of the drivers John that you mentioned about the confidence around organic improvement in 'twenty 2.
Yes, I mean, I think the way to think about DIY and professional clearly we've seen a really strong ramp.
Amp and professional activity starting in the fourth quarter of last year.
What's interesting when you look across all of our brands, we're seeing strength everywhere. So you saw strength across the different geographies I mentioned, the robust organic growth numbers, you've seen it in all of the SP use and Youre seeing it with all the brands and so the activity.
It's still pretty intense both on the DIY and the professional side.
Who knows how long the DIY trend will continue.
The potential for a delta variant, maybe slowing down certain activities in the U S and other countries could actually continue to stimulate DIY activity for a period of time.
Time.
But what really has us excited is what's happening on the professional side and how that continues to be very strong the activity across the globe.
<unk> is continuing to expand at a very rapid pace and obviously the need for our products continues to expand with it as well so we sit.
Here today and feel pretty good about the trend, we're seeing going into the back half.
We do believe there is a way to demonstrate growth in 2022, as I said and although we'll deal with some tough hurdles and comps.
These markets are very strong and then you combine it with all the growth initiatives that we talked about in our may.
Growth summit in.
And Jim went through them in a fair amount of detail in his opening comments as well today.
Those really get us excited about the opportunity so even if.
Demand does start to slow we see hundreds of millions of dollars of growth opportunities across those particular areas.
Which has us excited which is why we think we.
We have the potential to demonstrate organic and earnings growth next year.
Shannon Kenneth.
Thank you. Our next question comes from Nigel Coe with.
Research Your line is open.
Hey, Good morning. This is Brandon Reagan on for Nigel Coe.
I just was curious if you guys had any kind of position on the news that carriers potentially selling chubb for $3 billion.
I'm just wondering if that's had any influence on your thoughts about the security options.
Well that's a it's a it's an interesting question because I just happened to see a flash up on my phone about 30 minutes ago.
But it is a very nice price first of all $3.1 billion.
We consider 2014.
<unk> 5 times.
<unk> EBITDA.
Must be adjusted a little bit.
But still very high multiple.
We believe our business is.
Probably worth at least as much if not more probably another turn or 2 more than in Chubb while el.
Equal so I think pins.
<unk> evaluation on our business that is.
Perhaps a little higher than even we thought it was and so there is no direct response to your question right now other than we are obviously digesting the news and.
And we will continue to evaluate options.
Whether they be.
Retention of.
Disposition of the business or something in between so that's where we are right now.
And as I said in my comments, but it has us really excited before we make that decision that Jim was describing is.
The trajectory of time for organic growth.
Really amazing performance in Q2, we think we could be looking.
The business that is in the high single digit organic growth for the full year of 2021 and as the business continues to demonstrate that growth with its new growth initiatives into next year, the profitability rate will come with it and we will get past some of these pandemic restrictions as well as those growth investments will start to demonstrate.
At a building leverage.
So we have the best of both worlds I guess.
Thank you. Our next question comes from Michael Rehaut with Jpmorgan. Your line is open.
Thanks, Good morning, everyone and congrats on labor.
Sure.
Just wanted to talk.
More about MPD and.
Couple of questions, if I could kind of bought into 1 in this topic number 1.
Top line you had mentioned.
Looking at maybe $2.6 billion for 2022.
As the company has encountered some maybe supply.
Unless use.
I was wondering if you could kind of give US you talked about a 200 million organic growth type of opportunity on a combined basis, but how do you see.
Do you see that there was any kind of share issues that might have cropped up I assume the broader market grew.
I change Lee and.
How you intend to perhaps regain that share and grow the business organically.
And then when you talk about.
In negotiations for with MTV for the option exercise I was just curious.
I think too many people just seem.
Relatively straightforward that you had the opportunity to exercise or not if there are any types of nuances that we might not be aware of or is it more just a lot of.
More basic blocking and tackling.
Well, Michael that's a lot of questions packed in 1 but.
Tackle them.
Sure.
Room nights first of all.
The market itself.
Did grow nicely in 2021 and.
The growth for MPD.
Was minimal.
Minimal nominal.
And.
That can.
It can be traced entirely to supply chain issues.
The demand was there and it continues to be there.
But like many large equipment providers.
They are they have struggled a bit wood pandemic related issues.
Labor shortages also some component shortages and things like that.
Some companies.
Have been situated in ways to manage them.
Through through the turbulence and still come out with.
Greg growth as you can see in our tool business. For example, other companies may not have had all the wherewithal or the situation might not have lent itself to that same successful outcome.
So yeah.
Yes, there was a little bit of share loss because of the supply chain issues, but I can assure you that it has nothing to do with the fundamental strength of the company the strength of the products and the brands and the products themselves.
<unk> visited as I mentioned last week.
And so their headquarters.
Spend a couple of hours looking at their product innovation pipeline.
And I can tell you when we marry.
Successfully completing this deal with regulatory approvals et cetera, when we are able to marry the brands of Stanley Black <unk> Decker with our products.
<unk>.
Come up with already and it's going to be a very very exciting.
Combination so.
We're not concerned.
About the supply chain issues being a long term issue. We have included in our pro forma is a significant amount of resource to manage through.
Those we bring the scale and the expertise to help.
Help do that for.
For them with them.
<unk>.
Negotiations really so if you think back to the structure the structure was predicated on.
Essentially a multiple of EBITDA and the incremental.
Rental EBITDA that has grown since the time, we initially took our 20% stake times.
5.5 times.
That's the Formula So 5.5 times the EBITDA growth.
Okay.
Under the theory that we both worked together in.
Ways over the.
Of course of time to help.
Help them increase to EBITDA, so we can share that increase.
And so 5.5 times as have a 11 times, which is what we paid for the 20% and so really the only negotiation of significance.
Boils down.
Different wouldn't due diligence items, which would be.
Debt like items, maybe certain liabilities.
We would see an environmental or tax or those types of things as well as maybe some adjustments here and there for.
To get from a GAAP EBITDA and adjusted EBITDA, which the Formula is based on so 1 example of that would be since the formula was such a.
Quantitative formula that.
The temptation that those folks could have had an.
Didn't actually.
To do this but they could have say for instance decreased their R&D or they could have shut down their robotics business, which is loses a modest amount of money to increase the EBITDA. We asked them to not do anything that would impair the company strategically for the benefit of financial for their financial.
Actually just price and they've been very high integrity, and so there may be some adjustments of that sort, but that's fundamentally what's being negotiated.
Yes.
Thank you. Our next question comes from Nicole <unk> with Deutsche Bank. Your line is open.
Yes. Thanks, good morning, guys good morning.
Perfect.
So I guess, the <unk> 21, 5% of full year, EPS, clearly a bit lower than the normal contribution and then theres, obviously a lot of moving pieces. This year. So maybe you could talk a little bit about when you went through like the freight costs and.
The impact of price cost how does that differ if any between <unk> and <unk> can you just to think about the cadence of margins for the rest of the year.
Yeah sure Nicole.
Yes, I wouldn't say, there's a material difference between the third quarter and the fourth quarter. You. Obviously you have.
Some differences in the sense of the timing of the pricing.
<unk>, whereas we continue to have discussions with our customers on price price to be implemented throughout the third quarter and that should be completed by the end of the third quarter. So you have a bit of a cadence of that with a full quarter impact in the fourth quarter is a positive so.
That'll be helpful trends you also.
Something going the other way and the seasonality that plays out.
Q3 versus Q4 every year, just the mix of promotions and mix of activities that happened in Q4 versus Q3.
Can result in anywhere from in.
80 basis points to.
120 basis point decline in margins in the tools.
<unk> had some business from Q3 to Q4.
And so you know when you factor those types of things in we think the tools margins in the back half will be somewhere between <unk>.
16% and 17%.
So roughly 16, 5% on average.
Q3, you'll be around the high point of.
Tools beans, and Q4 will be at around the low point of that range and so that's probably the right way to think of it just due to that dynamic that I. Just described the other 2 businesses will continue to modestly improve.
As far as Q2, Q3 to Q4 and their profitability rates.
But not in a significant way.
So I think that that's probably helpful color in that area for you.
Thank you. Our next question comes from Ross Gilardi with Bank of America. Your line is open.
Hey, good morning, guys.
Good morning.
Yes, I just wanted to go back to you.
Empty.
D a bit.
Clearly you guys are youre characterizing.
The revenue.
Yeah.
Issue is more of a supply side issue, but.
Clearly gas powered outdoor equipment and losing share to battery electric which is part of the reason your own outdoor business is up 40%. So I'm just a little bit confused as to.
Why you would characterize the shortfall in revenue for MTV is purely a supply side issue.
Primarily correct me if I'm wrong.
Our gas powered outdoor equipment company today and.
Gas power equipment is seeding share to cordless.
So could you just elaborate on that a little bit more.
Well, if only it were as simple as that.
<unk>.
MTV folks basically make.
Gas powered equipment and specialized in higher end.
Zero turn mowers and riding mowers.
But.
Relatively limited.
Walk behind business.
In terms of dollar.
Dollar percentage of total so.
Electric penetration into riders and zero turns is roughly about 1%.
And as David has stayed pretty constant so.
We cant paint MTV wood that brush that you are painting them with.
Number 1 because their mix is.
As gas powered and we know that other gas powered.
Heavy outdoor power equipment makers grew.
These include some.
Companies that were very familiar with that grew in the 10% to 20% range.
During that quarter. So it is what it is it's not a shift to electric we will make that happen later.
If we're able to execute on this and.
That's kind of where we are at this point.
Thank you. Our next question comes from Eric Bossard with Cleveland Research. Your line is open.
Good morning.
Okay.
On the tools business, just 2 things would love to understand a little bit better first of all.
Your sense from a market share standpoint, where youre, making.
The most notable progress and then secondly.
Your interaction with your retailers you talked about inventory, but.
Their commitment to building inventories from here.
And their focus on that if you could just expand on those 2 areas that would be great. Thank you.
To hear your opinion on that Eric but.
Market share.
In terms of progress are you talking about.
Products are you talking about competitors.
All of the above.
I mean clearly there's.
Hey.
Very intense.
That.
Good luck on between Us and DTI.
<unk> has picked.
Exclusive and exclusive strategy in the home centers.
With 1 player as well as a.
Yeah.
Kind of commercial and industrial strategy predicated on a lot.
Lot of feet on the street in a lot of investment in.
Sales and marketing resources in that regard.
Brand to brand I would say.
When you look at the 2 brands to Walt and Milwaukee.
We believe the waltzes stronger brand, but not by that much.
When we.
I'll go into Craftsman, and Ryobi, we think that.
Craftsman is a far stronger brand and ryobi and Thats based on actual research.
So that's kind of the setup there globally.
<unk> is making some progress, making some investments around the world, but it's large.
Look at focused historically on nor.
In North America and on.
Australia, New Zealand so.
That's kind of.
No.
The stage there the interaction with retailers.
I think the retailers are.
As <unk>.
Largely because we are about the future.
And I think they would love to have more inventory yesterday.
And we keep getting that those reminders as we operate our factory system at full bore.
And we're.
We're adding capacity, we're adding several plants.
This.
Optimistic.
That will help we're also working on.
Making sure that we're looking out far enough on all components that we.
We need an expediting.
Components, all around the world to make sure that we can serve their needs from a supply chain perspective and continue to gain.
A gain share so.
This year with retailers is great. It's intense people are.
Kind of.
Really seeking more product and we're doing everything we can do that meet their needs.
Thank you and this concludes the question and answer session I would now like to turn the call back over to Dennis Lange for closing remarks.
Interact.
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.
This.
Today's conference call. Thank you for participating everyone have a wonderful day.
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Marc.
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Okay.
Robert.
Okay.
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