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Stanley Black & Decker, Inc. (NYSE:SWK)

February 21, 2013 10:35 am ET

Executives

James M. Loree - President and Chief Operating Officer

Jamie A. Ramirez - Senior Vice President and President of Global Emerging Markets

Analysts

Stephen Kim - Barclays Capital, Research Division

Stephen Kim - Barclays Capital, Research Division

Well, thank you very much for joining us. Up next, we have Stanley Black & Decker. And we are very pleased to be -- I am very pleased to be joined by Jim Loree, the President and COO; as well as Jaime Ramirez, who is the Senior Vice President and Head of Emerging Markets. For those of you who don't know me, I am Stephen Kim, Barclays' housing analyst and building products analyst. I've been covering Stanley Black & Decker, in one way, shape or form for quite a long time, almost 2 decades. I think Jaime, you have me beat by about a year. Jaime came into the business in 1991.

As people are coming in and finding their seats, I wanted to start off with a few audience response questions to get things going. So, we're going to start off with a couple of basic ones. I think most of you have done this before, but there's a connector in front of you. And the question before you right now is, do you currently own the stock? And you can answer with either: a yes, we're overweight; yes, equal weight; yes, underweight; or no.

[Voting]

Stephen Kim - Barclays Capital, Research Division

Okay, so we have a lot of opportunity here. With about 70% still yet to own Stanley Black & Decker.

And then the second question is, what's the general bias towards the stock right now? Positive, negative or neutral?

[Voting]

Stephen Kim - Barclays Capital, Research Division

And a pretty good split there between positive and neutral, so that's encouraging.

And then lastly, in your opinion, on what multiple of 2013 earnings should Stanley trade?

[Voting]

Stephen Kim - Barclays Capital, Research Division

Okay. Well, it seems to be a pretty good consensus there around 13% to 15%. Well, that's great. Well, thank you very much for that. We're going to get started here with a few basic questions. And of course, we will leave plenty of opportunity for your own questions. But Jim, I wanted to first ask if you could give a brief overview of the industrial businesses you're in because you're obviously in quite a number of them, and I think it might be helpful to start there.

James M. Loree

Sure. There's 3 basic elements of the Industrial businesses. The total segment's about 25% of the company, roughly. Company is $11 billion, expected to be about $11 billion this year. And the first one is the Industrial & Automotive Repair tools segments. Think Snap-on. If you want to look for a comp for that one, that's the comp. The second piece is called Emhart Teknologies, and they're in the Engineered Fastening business. And they provide engineered fastening solutions, equipment and fasteners to the automotive industry, and as well as aerospace and electronics and general manufacturing. And then the final element is the Hydraulics and CRC-Evans business, which together comprise the infrastructure segment or subsegment. And that is a growth platform for the company, meaning that we expect to invest growth capital into the infrastructure segment. Today, it's relatively small. It's about a $350 million business combined. But the CRC business does automated welding and coating and inspection for both the onshore and offshore pipeline industry. And the Hydraulics business does a lot of heavy hydraulic attachment and those types of things, for scrap reclamation and items of that nature.

Stephen Kim - Barclays Capital, Research Division

Okay. And could you give us an idea of the common thread between these business, particularly as they may relate to your Security business or your CDIY. To what degree you see synergy opportunities there?

James M. Loree

I think the -- we're the only tool company in the world that has both industrial tools and construction and DIY tools, which gives us a tremendous advantage in the marketplace -- because especially the emerging market place, because the channels tend to get very blurred when you get into the emerging markets between the industrial tools and the construction DIY tools. So that's a simple and most obvious one. I'd say all of the Industrial businesses for Stanley Black & Decker, probably similar to most Industrial businesses in the universe, really provide one common thread, which is productivity and value creation for the end user. And I think those are very consistent threads across our businesses.

Stephen Kim - Barclays Capital, Research Division

Great. And then you've changed -- the company has changed a lot. Actually, you have helped engineer a lot of that change yourself. And over the last 5 years, I would say that the change has been pretty profound. What's in store for the next 5 years? How do you see Stanley Black & Decker as a company in 5 years?

James M. Loree

I think it's important to understand the historical context. When I joined the company in 1999, we were basically a $2 billion company. We had $100 million a year of cash flow. We essentially sold tools and hardware to the home centers and the mass merchants and a few other activities. But it was pretty focused in that particular area. And over the course of the last 13 years or so, we've converted that into an $11 billion company, which is about half construction and DIY, about 25% Security and 25% Industrial. Those are kind of round numbers. And so we're differently much more of a diversified company, but we are the largest branded tools franchise in the world. And we have some incredibly powerful brands such as Stanley, Black & Decker, DeWalt, PORTER-CABLE, Powers Fasteners. I mean, just really a "Who's Who?" of brands in the tool industry. We have the -- as I said, both channels, Construction DIY and Industrial. And we have a tremendous geographic footprint across the world, which means we stand to benefit from the globalization of the emerging markets and so on.

Stephen Kim - Barclays Capital, Research Division

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James M. Loree

So that history is all good today. Our cash flow is about $1 billion a year. So we've done about a 10x improvement in that over the course of that period of time. And we have some very specific mid-decade goals and objectives for the company. And that would be to be a $15 billion company with return on sales or operating margin to be about 15%, greater than 15%. Today, we're running around 13.5%, 14%, to have return on capital in the 12% to 15% range, to be growing to $15 billion with about a 10% to 15% or 10% to 12% growth rate in sales, and a 4% to 6% organic growth rate. We see a more diversified segment mix. As we get out into those out years, we see Construction & DIY becoming a smaller part of the company and Security becoming a larger part of the company, as well as some of our new growth platforms, which are, as I mentioned, Infrastructure. And in addition to that, we have a very small but very, very interesting high-growth potential business in healthcare, which provides productivity solutions to hospitals, which you can imagine, I think at this point in time, is a pretty important value proposition. And we've got some great technology in that particular business, and we expect that to be a really nice growing business in the future. So that's kind of the vision for where we'd like to go. The Engineered Fastening business, the Healthcare business and the Infrastructure business, we all expect to be between $1 billion to $2 billion in that timeframe. So a lot of the growth will come from there. And then the core business in tools, and the Security business as well will grow at a very healthy pace.

Stephen Kim - Barclays Capital, Research Division

Okay, great. I want to throw in an audience response question. The basic -- basically, I want to get a sense for people's opinions on what the through the cycle or over the course of the cycle, EPS growth for Stanley Black & Decker is going to be. And so you have an opportunity to talk about it from above peer, in-line with peer or below peers. And while we're tabulating that, could you just remind us again of your base case assumptions for housing starts, global GDP, U.S. GDP?

James M. Loree

Yes, we're pretty simple when it comes to this. Because the one thing I think we've learned over the last decade or so is that the more you try to be clever in terms of how you predict where the economies are going and so on, the more trouble you get into. So our approach is pretty much just assume that things will stay the same. So today, we're at a roughly 1% to 2% growth rate in the United States, we're at a 3% global rate, 6% -- 5% to 6% in the emerging markets. That's a little bit lower than it's been, but it seems to be kind of the -- where things are right now. And so we've just assumed that, that would be more of the same. And then as far as housing starts, we're -- I guess, we all saw the numbers. I mean, we know where we are. we're right around 900,000, and we expect the year to kind of pan out that way.

Stephen Kim - Barclays Capital, Research Division

Okay, got it. I'll assume growth for next year though, in housing starts, would be in your model?

James M. Loree

Well, it's not really in -- certainly not in our guidance, right. And we haven't really provided guidance other than multi-year guidance. So do we think it's going to be stronger? Yes. But we don't really have any guidance that would tie to that at this point in time.

Stephen Kim - Barclays Capital, Research Division

Great. Well it looks like we a -- some pretty friendly crowd here, with about almost exactly 46%, both thinking you're going to be either above or in-line with your peers in terms of your through cycle EPS growth. So that's good. I want to skip, if we could, to the emerging markets. And I know, Jaime, obviously, that's a scenario that you have a vested interest. Remind the audience a little bit, over the last -- I think almost a decade, that business has grown pretty significantly from your time when you were at Black & Decker. And to where it is now, it's almost a $1 billion business. Can you give us a sense for what some of the major milestones have been in your estimation in growing that business, just so we can have some historical...

James M. Loree

Yes, and maybe just even before Jaime gets in to it, just to mention a little bit about Jaime's background, Jaime was in charge of Latin America for Black & Decker for about, I think it was 6 years before the merger with Stanley. And during that timeframe, he grew the Latin American business from roughly $200 million to -- might have been about $700 million or $800 million at the time of the merger, now it's $900 million. And so in the fourth quarter of last year, as we decided to undertake a very aggressive thrust globally into the emerging markets, we appointed Jaime as Senior Vice President of Emerging Markets across the globe. So with that as background, why don't you tackle that question.

Jamie A. Ramirez

So basically, and this is going to be more related to my experience in Latin America within the last 6 years. And we, we're very focused on, I would say, 4 areas to really go after the business. Number one was to have the right products for the market. And I would say, in Latin America, we took a different approach. We went out of the company and looked for products that we expect were going to meet customers' expectations and were going to be good for the business. We also worked very closely with our distributors and end users. So we have a very solid commercial organization calling the users in the different channels. One of the things in emerging markets is you have such a big specialization in channels. You can call it -- you can have a morning channel, which is basically home centers and hypermarkets. And then you have a lot of traditional hardware stores. Those traditional stores -- hardware stores, they sell any kind of products. They go from Consumer Products to Industrial products. So it is not very black and white. So working with these people very closely while some were taking key strategy. The first [ph] Strategy was the end user, that was another key area. And then we were very focused on execution. So those are kind of the focus area or the milestones to be successful in what we did in our business the last 6 years.

Stephen Kim - Barclays Capital, Research Division

And aside from -- at a point when Stanley acquired Black & Decker's operations, were there other significant milestones, either significant challenges that you faced in growing that business where you had to alter your trajectory or your approach to the market that you think may be worth talking about?

Jamie A. Ramirez

Well, the biggest challenge we have brought in business in emerging markets, and I call this is -- it's been related to what happens with the external environment. You get into a lot of issue with currencies and also a lot of changes in terms of what the governments do. So the reality of this model is that we have to be very flexible. So in the good times, I mean, you take advantage of that, you speed up the process. In bad times, you control your business, don't lose market share, but you protect your profitability. So flexibility is a keyword to deal with these markets.

Stephen Kim - Barclays Capital, Research Division

Now, I know that Stanley has articulated a 20% vision for the company in terms of emerging market exposure. Can you talk about -- or just summarize the strategy from a corporate perspective to achieve that kind of penetration in the emerging markets?

Jamie A. Ramirez

Okay. First of all, I have to say that before we treated the business in emerging markets in a global perspective in a very opportunistic way. Now, it's a very strategic focus for the company, and it's a key part of the growth initiative that we have to get to this target in 2015 as a $15 billion company. So I think I have to start with the fact that we're moving the center of gravity of our business from an LBU orientation to a regional focus. So the business will be run by the regions. We'll make decisions in the regions. So that's a big change for us as a company, number one. Number two, in terms of products, we have put together 3 new LBUs that will be fully dedicated to develop products for emerging markets. One for power tools, another for hand tools and another for security products. Those LBUs are based in emerging markets. So the power tools LBU is going to be based in Shanghai in China. The hand tools will be based in Taiwan, and the security is also based in China. So these LBUs, the leaders who are running these LBUs are people who have experience in emerging markets. So they are very close to the market, they know how the markets work. So they know exactly the prowess we have to develop, partnered [ph] With the right features with the right cost. I'm very focused on the NPP segment of the market. That's the biggest segment of the market -- mid price point, exactly, in emerging markets. So that would be the focus of that LBUs. We will also continue working with the LBUs in the ADT segments and, I mean, we will be altogether. The second one is we're expanding the commercial organization that we have in emerging markets. So we're going to hire almost 1,000 people within the next 3 years. People on the street, calling the customers, calling the end users, commercial people who are very close to the end-users and to the customers, who will be covering new geographies. So we're going to be very aggressive from that perspective.

Stephen Kim - Barclays Capital, Research Division

That wasn't happening before or it was happening differently?

Jamie A. Ramirez

It was happening differently, exactly. And again, I have to go back to the Latin American case. We did that in Latin America, but it was more very tied to P&L. And if the numbers were good, so we best it. If numbers were tough -- I mean, we're kind of -- we have to coddle. We have to just say it as it was.

Stephen Kim - Barclays Capital, Research Division

Got it. Okay, that's really helpful. And then as you get to this 20% exposure, what would you say the anticipated mix of acquisitions versus organic growth may be?

James M. Loree

We can get to the 20% purely organically, and we will. So to that extent we do acquisitions, that will enable us to accelerate or will enable us to outperform, but we don't need acquisitions to get to the 20%.

Jamie A. Ramirez

Yes, there is more than enough potential to grow.

James M. Loree

When you think about it, you have 15% of the company today. It's going to be 16% when we close the Infastech acquisition. He is going to grow them between 20% and 25%. And it's a 20% operating margin, by the way, today, too. So I mean, you think math kind of gets you there. The exciting thing is that our acquisition pipeline is very strong in the emerging markets and the deals aren't that large, but they're very strategic. You could buy a hand tool company in India or a power tool company in China, those types of things can really accelerate your progress through access to those local channels, strengthening the access, getting -- accelerating the product development. Just getting more local nationals that know the markets and things like that. So I think it works out pretty well.

Stephen Kim - Barclays Capital, Research Division

Good. Well, I've been pretty greedy hogging all the question. And I know we may have some questions in the audience, and I want to make sure me leave time for that. So why don't we just initially turn it out to the audience. Does anybody have a particular question they'd like to ask at this time? Well, they're friendly, but they're shy. So we'll keep going. So your historical capital allocation has been -- I've always sort of thought of it as 2/3, 1/3 acquisitions and dividend. Does that still hold?

James M. Loree

It sure does. Historically, we've said 2/3 to acquisitions and 1/3 to -- back to the shareholders. And that would be sufficient to give us the growth rates that I talked about before, which was the 10% to 12% total growth rate, mid-teens earnings-per-share growth and 3% to 4% organic -- or 4% to 6% organic growth. The reality is, the number over the last decade has been, take, 57%. Is that right? 57% of the money has gone back to shareholders, it's not 33%. So we've been able to do what we have set out to do, with returning more money to the shareholders. And the dividend today for this stock is about 40 to 50 basis points above the S&P, which is nice. It's a nice, good, healthy dividend. Got the best industrial dividend record on the New York Stock Exchange. And so, we like the dividend a lot. That'll continue to increase, and then we'll continue to buy back our shares opportunistically. And hopefully, we can keep the ratio somewhere between 50% and 2/3. So we're saying 2/3, so that nobody gets disappointed if we end up spending 2/3 because the opportunities were there.

Stephen Kim - Barclays Capital, Research Division

Okay, that's actually very helpful. Actually, it's a good time for another audience response question. How about the one on excess cash. In your opinion, what should Stanley Black & Decker do with their excess cash? We have a variety of choices here, bolt-on M&A, larger M&A, share repurchases, dividends, debt paydown or internal investment?

[Voting]

Stephen Kim - Barclays Capital, Research Division

So while they're tabulate -- well, we'll just wait for that. Well, it certainly looks like with over 50% looking for shareholder returns. Looks like your -- 51%, 57% your priorities are pretty much right there, so that's great. Jaime, I want to turn it back to you because I'm very fascinated about emerging markets opportunity and the shift that's occurring here. I'm curious, you spent a lot of time in the emerging markets, obviously, in managing and with all those challenges, can you talk to me about lessons that you have learned as you've looked across, perhaps at other companies attempting to also penetrate the emerging markets and maybe facing unexpected difficulties? Or difficulties you, yourself maybe have experienced? But in either case, what are some of the lessons you think you're carrying with you as you take this new step?

Jamie A. Ramirez

Well, I think based on the lessons learned that we had, from the previous experience, and it's very tied to the strategy we have right now. So number one, it's really to drive that mentality of being very aggressive and being very focused on growing the business. That's key. I mean, the opportunity is huge in emerging markets. The markets are growing. So that's number one. Number two is having the right products. I mean, that's a key. When you try to sell high-spec products in those markets, you end up not making money. The products are very good, but you don't make any money in those markets. So having the right products is really key, to really address the customer needs and the customers, the company expectations in terms of profitability. Number three is being very close, very close, to the end-user and the distributors. Relationships are very important in emerging markets. 80% of the business in emerging markets go through traditional channels. And traditional channels is kind of, okay, you have to be very close to them, you have to have very good relationship. So having good sales people, and that's another key area we're addressing, is critical to support what the customers expect.

Stephen Kim - Barclays Capital, Research Division

Can I follow-up on this product issue? I mean, as being that we're sitting here in the United States, I mean, there may be a tendency to sort of think about mid-priced point products as a fairly easy design proposition. Just basically take a high point, price point product, and you strip out some of the things that maybe cost a little more and place them with something that cost a little less or maybe not replace it at all. So can you give us a concrete example of something that you've done where you've developed a mid-price point product, particularly for a market that you probably would not have been able to do if you didn't do it sort of on a more local basis?

Jamie A. Ramirez

Well, first of all, it helps [ph] To understand that the market outside the U.S. is completely different. I mean, concrete, metal working are our key products for emerging markets, not the wood-working product, for example, that's number one. And number two, is our cordless business, which is huge in developed markets. It's growing outside the interest market, but it's not a significant business for us. It's been more than 8% or 10% of the business. So we're very corded-oriented. So I'm going to give you a very good example of a product that we developed in Latin America, again, because that's the experience we have. And we're very successful. The small angle grinder. I mean, we have the small angle grinders in the U.S. If we try to take those products and just sell those products, that product in Latin America, it would've been very expensive. So we developed a specific small angle grinder for the region, with the right specs and the right cost. And that product today is the best-selling unit for us. And we're making very good margin, we're meeting the customer expectations. And we have the product under the Black & Decker brand, not the DeWalt brand, which is big difference. I mean, you don't sell an angle grinder for a do-it-yourself. It goes right to the tradesman, which is the MPP segment. So that's a very good example, what we did and what we have to do with several products.

James M. Loree

And Steve, let me explain why the MPP products never were developed. It's pretty simple, and I think that 3M and GE and other companies have learned this lesson as well from talking to different people. That the engineers in the developed markets, number one, are very -- they have this idea, this paradigm in their brain about what product performance needs to be. And to break that paradigm is almost impossible. And then on top of that, the prioritization process that occurs in the corporation for new product development ultimately always has a tendency to drive the emerging markets stuff to the bottom of the list. Because the dollars -- everything is prioritized on dollars, and the immediate dollars are always bigger. In our case, it would have been the lithium-ion redesign attracted all the engineers over the last 4 years. Nothing for the emerging markets. So that's why taking these SBUs, putting them in the emerging markets, keeping them away from the developed markets, creates that -- it solves both of those issues that I mentioned.

Stephen Kim - Barclays Capital, Research Division

That's actually very helpful. And then one more question for Jaime with respect to strategy for emerging markets. Obviously, you talked about your background being primarily Latin American. We talked about a lot of commonalities that exist between emerging markets, whether they be in Latin America or the Far East or whatever. But there must be some differences. And so, in particular, as I think about other companies that have said, "Wow, the emerging markets opportunity is great, let's go for it." I imagine probably from your vantage point, there are some things that were done that you would say, "That's not for us. They have overlooked this or that as it relates to differences within these various regions." Anything comes to mind there that you'd like to share?

Jamie A. Ramirez

I mean, right now, I'm going through the process of learning about all the other regions and the specifics. And there are differences, but I have to say that being in a city in Asia, for example, and being with the customers, it feels almost the same way. I would say that there are more common things than differences in the different regions. And that's the beauty of this opportunity. We can leverage a lot. We're going to be up to maybe the execution, I think. You'll find within the emerging markets more developed countries than others. That can make a difference in how we approach and the business model that we have. That could be a good difference. In some countries like, for example, Mexico and Latin America, let's say, maybe Indonesia, we're going to have a very solid model. In other countries, in small countries, it's going to be more an expo model. But that's kind of where we have to adjust what we're going to do and how we're going to execute.

Stephen Kim - Barclays Capital, Research Division

Okay, got it. No, that's very helpful, actually. Now, actually before I go to my next set of questions, are there any questions from the audience? Okay. I'm going to keep pressing on. Emerging markets is really just one component of the strategy that you've laid out over the sort of the 1- to 3-year time horizon that we're in. And particularly relevant I think to 2013, while you're digesting some of the larger important acquisitions you've made. Can you give us a quick overview of some of these other projects that you've outlined, of which I believe emerging markets is I think 25%, roughly, of the goal.

James M. Loree

A little bit more. But yes, it's probably closer to 40%. But 40%, okay, yes. Sure. So we have about an $850 million goal over a 3-year period cumulative revenue contributions from these organic growth initiatives that the company is undertaking, $350 million from emerging markets. And then there's several others. They tend to be in $100 million chunks, some $50 million, but nothing smaller. One of the most exciting ones to me is the Security verticals. And our Security business, while it has been a tremendous success story in terms of growing from $100 million to $2.4 billion in terms of revenues and being a nice mid- to high-teens operating margin business and so on, it has not exhibited the kind of organic growth that we would have wanted when we built this. Now, in fairness to the team, they did 50 acquisitions in 10 years, so they were busy. And we were hoping that we were buying into higher growth, higher margin markets. And we got the higher margin part of it. We just -- the higher growth part of it was true in the early part of the last decade, but not so true right now. And so we have to do something in addition to what we've been doing in order to get the growth rate up to where we want it to be, the organic growth rate. And what we're doing is we're converting our go-to market strategy from, I'll call it, a generic kind of across-the-board shotgun approach to more of a vertically market-focused approach. And there happened to be some vertical markets that are very, very promising that we are best -- we have -- we're the second-largest commercial security company in the world, and we're the only commercial security company in the world that has both electronic and mechanical, and we have a global footprint. So, I mean, we have a lot going for us that we've built. But these vertical market solutions, basically will focus in on certain markets such as education. One that's really interesting to us right now, obviously, is the K through 12 market, where it's about an $800 million market -- was an $800 million market. I suspect that's going to be at least $1 billion this year, and maybe even bigger as we get into next year. Because every school board in the United States is going back and revaluating its security kind of configuration and trying to figure out what to do. And we have this company that if we provide them with that solution and that subject matter expertise, and maybe some financing, and whatever else they need, access to grants, and so forth, we can really make a lot of progress. And so, a part of the $100 million from this initiative comes from that vertical market focus. The keys in this being education, with in particular, K through 12; healthcare and also financial services. So that's one. Another one which I think is really interesting is smart tools and storage. And this derives from 2 small acquisitions that we made in the last couple of years. But we have now assembled some technology in the active RFID and also in passive RFID that enables us to take storage units for tools and make them intelligent so that they know who took the tool out, who put it back. If it was put back, who put it back. If it wasn't put back, who has it?

Stephen Kim - Barclays Capital, Research Division

Sounds like I need something like that in my house.

James M. Loree

And it's particularly important in aerospace applications where they have this foreign object damage need that if a tool ends up in an aircraft engine, the whole line shuts down and so on. So tool identification tracking, these types of things -- this technology enables us to do that, all right. And we also have, with the active RFID, the ability to go into factories and provide electronic kanbans. So using lean manufacturing principles and then automating them, so that you know when a kanban is almost empty or if it is empty and it hasn't been refilled in a certain amount of time, then alarms go up to the supervisors and so forth. And so that's another piece of it. I mean, it's really using some technology that we acquired to create productivity applications for Industrial customers. So that's another one. I don't know if you want me to -- you probably...

Stephen Kim - Barclays Capital, Research Division

Well, no that's good. I mean, those, I think give an idea of -- good examples and give it breadth. And I'll just tack on to what you said about education. Because only a few days ago, Armstrong World, which is another company that I follow, that does a lot of commercial flooring, mentioned that the education -- they cited that as an area of weakness. And I'm sort of wondering you talked about your exposure in education. It's really more in the Security end, which has clearly been a step up -- you would think. And it perhaps could be that you're seeing a diversion maybe or a diverting of funds, maybe from maybe that floor can stand not being replaced for another year or 2. And I guess that will put it into Security, so that's an interesting thing.

Let's go to the audience response system one last time. What do you see as the most significant investment issue for Stanley Black & Decker, whether it'd be core growth, margin performance, capital deployment, execution strategy?

[Voting]

Stephen Kim - Barclays Capital, Research Division

Wow, it seems like you're focused in the right way. This is a great audience for you. This is great, good. Okay, well, do we have any questions from the audience? Not so -- I think we're doing well so far. Okay, great. So let me press on. In CDIY, we've seen the yen move pretty violently here in the last few months, right?

James M. Loree

Yes.

Stephen Kim - Barclays Capital, Research Division

So with the devaluation of the yen, anything you're seeing on the competitive front? Particularly in the CDIY or the tools, the tools area?

James M. Loree

Yes, it's not really an issue. Because the Makita, which is the primary Japanese competitor for us in power tools, their plants are basically aligned with our plants in terms of location. So we're all manufacturing in the same places. Whatever they have in Japan is really focused on Japan, and we don't really have -- we have a very small position in Japan.

Stephen Kim - Barclays Capital, Research Division

Okay, that's helpful. And then in the Industrial section, recently European automotive production's, I think, down in the double digit. It's expected to remain down, at least according to Barclays, for the next couple of quarters. Can you give us a sense for how that may be affecting your Industrial -- the Automotive Repair business?

James M. Loree

Yes, it's not dramatic in the Automotive Repair business, because that tends to be more of an aftermarket business. So mechanics, actually, it's somewhat positive for that business because cars have to be in the road long, et cetera. That's a long-term phenomena, but it is somewhat positive. Where it does affect us is on the Engineered Fastening business, and that is -- a good 1/3 of it is in Europe, and 2/3 of that is -- 2/3 of the 1/3 is in Automotive, so we're clearly affected by that. We tend to be in the higher-end models, which we'll see where that goes, but the ones that tend to be more exported from Germany. And also, we are the market leader in a certain type of fasteners that are required for aluminum cars. And so we're on, say, the new Audi platform. We're on the new Range Rover that's being produced as we speak. And those types of platforms forms typically have $30 million or so worth of equipment that go with the fasteners, which the equipment is not being deferred. So even though the fasteners might not be selling as quickly, we're at least selling the equipment, which provides a little bit of a buffer against an ugly situation in that market. And then I would -- lastly, I would say our guidance reflects this kind of reality as well.

Stephen Kim - Barclays Capital, Research Division

Okay, that's actually very helpful. And then, one of the things we've noticed domestically, keeping a -- moving us to CDIY again, is the Private Label activity seems to have, to my eyes at least, have changed a little bit. We're starting -- initially, when, let's say, 10, 20 years ago, Private Label was always talked about as something at the lower end of the market. But recently, we've begun to see or I feel like I've seen more Private Label products, a little bit more upscale, kind of going up the price spectrum. I was curious as to whether that's, in your view, an accurate observation and what it means for the industry?

James M. Loree

Yes. I think there has been a modest progression in that direction, particularly in power tools. I think the retailers on their own couldn't do that. But when they create alliances with companies like TTI and so forth, that puts them in a position where they get a little more access to R&D, a little more access to category management skills and things like that, that enable them to manage more effectively at that kind of, what we'll call it, the middle -- the MPP level for developed markets. It's different than the emerging markets. And so, you do have some alliances that have been created over time. And the other phenomenon is that the marginal brands in an environment like this tend to get squeezed. So this is more relevant on the Hand Tool side where you do have some marginal brands. Some of our Industrial peers may have legacy product lines, and so forth, in tools that are not really core to them, but they have some brands that are niche brands in the market place. They're the ones that tend to get squeezed. They kind of need us because we have the end-user demand, we have the brand strength that we're investing in, we have the product innovation. And so, what we see on the Hand Tool side is kind of a gradual squeezing out of the middle-tier brand. And ultimately, my view is that, ultimately, this could become sort of a 2-horse game between Stanley Black & Decker and the Private Label.

Stephen Kim - Barclays Capital, Research Division

Got it, that's interesting. One of the other things that we've seen also, particularly in the Hand Tool side is you have introduced some of the -- I guess you would say, the power tools or in the case of Bostitch, I guess you'd call it more of a pneumatic side. You've brought the Bostitch and the DeWalt, hand -- brands into the Hand Tool category, which were formerly power tools. I was curious as to whether or not -- how you managed the potential for that to make Stanley, the Stanley brand, not have the same luster. For example, 10 years ago, when you launched FatMax, it was Stanley FatMax, and that significantly upgraded, I think, people's view of Stanley. How does this compare?

James M. Loree

Well, we're doing this in places where either it's an alliance with a retailer or it's in a channel where the Stanley brand didn't have any real strength. And so the best example of that is the staff to channel.

Stephen Kim - Barclays Capital, Research Division

And you might want to explain with that.

James M. Loree

Yes, that's basically independent fastener distributors. It's a pretty big channel. But Stanley, for legacy reasons, which I really can't -- don't understand, was never very strong in that channel. And so, when brought the DeWalt, and DeWalt was very strong. So when we brought the DeWalt Hand Tools in, they were extremely well received. Whereas if we brought upscale Stanley tools in there, they would've been the sound of one hand clapping. So it works out well. We're being very careful with it, and it's very surgical.

Stephen Kim - Barclays Capital, Research Division

Okay, that's good to know. If you can just comment briefly on some of the trends you're seeing in the commercial markets in particular. Are you seeing a picking -- pick up at all? We've gotten some conflicting data recently on commercial. Is it picking up? Maybe yes, maybe no? What do you...

James M. Loree

I think that -- well, I think we all saw the billings index at $54.4 million, I said 2, something like that. It was very strong. So that was a -- it was a positive surprise. We've seen the commercial construction in late '11, early '12, it looked like it might be getting some legs, and then the wind came out of the sails. And I think this time, it might be for real. I think clearly, multi-family is strong. Whether or not we get any strength in sort of commercial, general commercial or in retail, I think remains to be seen. They're definitely weaker than multi-family, but they don't appear to be going negative at this point in time. So in some ways it's like the economy. It's sort of creeping towards being better, but painfully slow. And then every once in a while, you get a positive indicator and you get all excited and then we'll see. But I think it's more positive than negative.

Stephen Kim - Barclays Capital, Research Division

Okay. And then recent cost inflation trends, so you could comment anything worth noting?

James M. Loree

We've had a little deflation, which is nice. But nothing dramatic.

Stephen Kim - Barclays Capital, Research Division

Okay, done. Great. And then, if we could switch to the Niscayah business for a minute or the Security business. And obviously, Niscayah is a big part of that, and that's the European operation that you acquired -- it was last, actually it was kind of a year or 2.

James M. Loree

Yes, exactly.

Stephen Kim - Barclays Capital, Research Division

So when you bought that business, you had full intentions to shrink the revenue base for initially, right? And I guess the question is, do you feel that we have definitively -- are we done with that phase definitively? And are we going to be able to see a significant growth period from the Niscayah operation in your view?

James M. Loree

Yes, we definitely will see a significant operating margin growth. There is no question. I mean, we bought it, it was a 8% operating margin. It exited the year at 14%. Last year, it did 12%. This year it'll do 15%. And by next year, it'll be up into the mid- to upper-teens. So everything is proceeding as scheduled as it relates to the cost take outs and so forth with Niscayah. Now, we've been really aggressive on the cost take outs because we knew we'd have revenue pressure not only with the -- it's kind of weeding some business that they weren't taking, that was unprofitable, but also the market conditions themselves. We're clearly getting to the end of the weeding out the business that is unprofitable. And at this point, it's really now function of when we will get enough stability in the European markets to get growth out of that. But I think we feel -- we bought that company for $1 billion of cash that was sitting in foreign bank accounts earning 1%. Now, we've got a 14% to 15% return on our sales, which are about $1 billion. Actually, they're close to $800 million now. So it's got a nice return to it based on our what we were earning in these bank accounts. And ultimately -- and it's given us strength in our franchise, because it's been a very strategic -- it's allowed us to pursue the verticals that I talked about domestically the U.S., and it's given us a global footprint in Security, which are -- we're the only -- not only the #2 commercial Security company, we're the only company that can manage coordinated accounts across geographies like the Atlantic Ocean and so forth. So there's a lot of strategic reasons for doing it. It's a good cash return kind of investment for us as well. And when the market finally recovers in Europe, it will ultimately become a growth engine again. In the meantime, we'll do everything we can to keep it positive in terms of growth, but it's challenging.

Stephen Kim - Barclays Capital, Research Division

You talked about the casting generated from the operations. And it brings to mind an earlier audience response question where folks said that they were very interested in your dividend program and your share repurchase program. In the past, you had more of your businesses in the U.S. generating cash right. And obviously, one of the things that made in the Niscayah operations, as you talked about, acquisition interesting, was the fact that you had cash overseas. Can you talk to me about how you anticipate your cash generation from a regional perspective possibly influencing your strategies for share repurchases or dividend.

James M. Loree

I think we're in okay shape for 3 to 4 years, number one. Then it gets a little challenging as we continue to grow in the emerging markets and the cash continues to pile up overseas and so forth. And we're not -- just do what every Industrial that's domiciled in the U.S. has the same issue. So we're not alone. I think ultimately, either the government has to do the something to fix the situation. Or we, as management of these companies, have to figure out how to become domiciled in other places, because this is not something that we can -- that's sustainable on a long-term basis. And so, that's just the honest answer. And I think we will look at ways to do that, just like Eaton Cooper and Tyco and so forth did. We won't do it the way we tried back in '02 though, it was -- I think it was '02 where we had an unsuccessful reincorporation effort, where we did it with just trying to re-domicile it out a transaction. I do think you're going to see more foreign purchases of U.S. companies. In some cases, the U.S. management may be running the company after the acquisition. But I think you're going to see more of those for this very reason. It's just a reality that if you're going to create shareholder value and all your money is overseas and you don't want to pay a 25% tax -- you will see some companies paying the 25% tax, by the way. That's the other alternative. It just seems like such a value-destroying option to me and I think to most of my colleagues in these types of jobs.

Stephen Kim - Barclays Capital, Research Division

Great. Well, I think we're out of time. But thank you very much. I want to thank Jim and also Jaime. So thanks very much and best of luck.

James M. Loree

Thank you.

Stephen Kim - Barclays Capital, Research Division

Sure thing.

James M. Loree

Thanks.

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Source: Stanley Black & Decker, Inc. Presents at Barclays Industrial Select Conference, Feb-21-2013 10:35 AM
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