Stanley Black & Decker's CEO Hosts 2013 Investor Day (Transcript)

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

2013 Investor Day

June 05, 2013 12:00 pm ET


Kathryn H. White Vanek - Vice President of Investor & Government Relations

John F. Lundgren - Chairman, Chief Executive Officer and Chairman of Executive Committee

James M. Loree - President and Chief Operating Officer

Scott Bannell

Jeffery D. Ansell - Senior Vice President and Group Executive of Construction & Diy

Donald Allan - Chief Financial Officer and Senior Vice President

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

Stephen J. Stafstrom - Vice President of Operations, Cdiy & Emerging Markets

Jeff H. Chen - Vice President and President of Asia Tools

D. Brett Bontrager - Senior Vice President and Group Executive of Stanley Security Solutions

Massimo Grassi - President of Stanley Security Solutions Europe and Executive Director of Industrial & Automotive Repair

Michael A. Tyll - President of Engineered Fastening

JoAnna Sohovich

John H. Wyatt - President of Construction, Diy, Europe & Anz


Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Clifford F. Ransom - Ransom Research, Inc.

Eric Bosshard - Cleveland Research Company

Jeremie Capron - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Jason Feldman - UBS Investment Bank, Research Division

Walter D. Scully - Great-West Funds, Inc. - Great-West Putnam Equity Income Fund

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Kathryn H. White Vanek

Everyone can have a seat. I think we're getting ready to get started. Great. Well, welcome to Stanley Black & Decker's 2013 Investor Day. I'm Kate Vanek, Vice President of Investor and Government Relations. And we could not be more happy and appreciative and honored that you choose to attend today in person, and thank you to those listening on the webcast for joining us for a spectacular event today.

I have 2 things I want to cover: number one, our agenda; and number two, our 6 key messages that we want to make sure that everybody, here in person and listening today, walks away from the day fully having embedded in their minds. First, as it is my job to do, I'll flip past the cautionary statements. You're welcome to go back and review at a later time in more detail.

And now just to dig into the agenda. We created today's agenda with you in mind. We took your questions, comments, skepticism, excitement, and we built this agenda to address all of those items. We did this by segmenting it in 5 buckets: Stanley, past, present and future; emerging markets, a model for hypergrowth; acquisitive growth platforms; global leadership and tools, CDIY and IAR; and the final bucket, financials and a road map to 2016 and 2017.

Guiding you through these 5 buckets today are 19 of our executives from around the globe from every single business that is a part of our company. John will be formally introducing them and talking about their contributions and their tenure to the company, but I promise you, you are in for one fantastic show today.

Embedded in the agenda are 4 Q&A periods. So you have over 40 minutes today to interact with the executives that we've brought. And you'll find that within the Q&A panels, it's not just the people presenting, we've brought additional people to represent specific regions and other businesses, because we wanted you to interact with the true management depth and breadth that is Stanley Black & Decker.

To end the day, at 4:30, when John gives the signal, these curtains will rise, and you will find that we are flanked on either side with spectacular products, hundreds of products and services. They are hands on. We invite you to get your hands dirty. Get involved. Get a really good feel for what we're doing to drive organic growth. I think you'll be impressed.

Six key messages for today: number one, organic growth. Our organic growth initiative continues to gain traction, and we are on track to achieve our goals of $850 million in revenue and $200 million in incremental operating profit.

Number two, emerging markets. Stanley Black & Decker possesses a tested and proven management team. We have the depth and the breadth and the experience, combined with a world-class approach for profitable growth in emerging markets.

Number three, the Stanley Fulfillment System, SFS. It has been and will continue to be a competitive advantage. And we are on our journey in making great progress to 10 working capital turns by 2016, '17.

Number four, innovation and world-class brands. This, combined with our new product development and our go-to-market strategy, are core competencies, and they all help us drive continuous market share gains.

Number five, our capital allocation strategy. We have an attractive hybrid value proposition. We are a growth company that still deploys a large percent of its shares and of its cash back to shareholders.

And finally, a very compelling 2016 and '17 vision and a very clear roadmap of how we get there.

So at the end of the day, what does that mean? We are all here building world-class branded franchises, with sustainable strategic characteristics that create exceptional shareholder value. And with that, I'll turn it over to our Chairman and CEO, John Lundgren.

John F. Lundgren

Thank you, Kate, and thank you, all, for being with us. In addition to providing a couple of introductory comments and an overview, I have the pleasure, I'll say, an honor of introducing the cast of characters or, more formally, the management team, that will present to you today. And I wanted to do this to drive home a very important point. I couldn't be prouder of this team and their teams in terms of what they've accomplished in the past 3 to 5 years. But I also wanted to impress on you as a group the depth and breadth of experience we have in managing this diversified global entity.

Many of you I've met, believe it or not, 170-year-old company, I'm in my 10th year as the CEO of Stanley, or Stanley Black & Decker. Jim Loree, our President and Chief Operating Officer, preceded me at Stanley. He joined as CFO and for last 5 or 6 years has been operating as our Chief Operating Officer. As you know, Jim joined us from GE, and he's been an integral part of the leadership team of this company his entire time with the company.

Scott Bannell, who you're going to to hear from, you don't hear from as often. 30 years, his entire career with the Stanley Black & Decker, he's responsible for our brand management on a global basis. He's the keeper of the brand. And we joke with Scott, but it's not a joke. It's rumored when he cuts himself shaving, the blood is black and yellow. That's how deeply embedded Scott is with this company. Marc Hohmann from Lippincott is going to help him with the brand presentation.

Jaime Ramirez, who's responsible for our emerging markets, 15 years, previously led a very successful Latin American business for Black & Decker, and is now responsible for our activities in all of our emerging markets.

Steve Stafstrom, again, more than 15 years with our company. Steve is one of our most senior operating executives, and probably our, certainly, most successful and demonstrated leader and thought leader in the areas of SFS. And we've asked Steve to give you a little more granularity on that and how important it is to our business later today.

Brett Bontrager joined more than 10 years ago via the Best acquisition. Anyone who knows the security industry knows Brett. He's a very highly respected individual in that space.

Massimo Grassi joined us 5 -- more than 5 years ago to run our European Industrial & Automotive Repair business, and now is responsible for our European Security business. Some of you have met Massimo, who is the consummate European executive, an Italian living in Brussels, fluent in French, English, Italian and things that would embarrass most of us Americans. But is a very, very capable executive that it's important to get some more exposure to him.

Mike Tyll spent his entire career with the Engineered Fastening business. As an engineer and graduate MBA, joined Emhart Technologies, which was acquired by Black & Decker, which was acquired by Stanley. Mike has built a phenomenal business, a phenomenal team, and he's added to that strength with the recent acquisition of Infastech, and you'll hear a little bit more about that today.

JoAnna Sohovich runs our Industrial & Automotive Repair business on a global basis. JoAnna joined us more recently via the U.S. Naval Academy and Honeywell, after a very successful career there. We're glad to have her as the new senior executive on this team.

John Wyatt, after a long and very successful career with fast-moving consumer goods or packaged goods companies in Europe, joined Black & Decker 5 years ago -- more than 5 years ago. And he leads the entire CDIY business in Europe and Australia.

Jeff Ansell, more than 10 years with Stanley. But we joke, but it isn't a joke, that he's the perfect person to lead the combined CDIY business. Jeff's been in the business about 25 years. He's an extraordinarily well-known, well-respected leader in the industry. First 12 years of his career, he spent at Black & Decker and the next 12 with Stanley. So he's probably the right guy to be leading this business. And Jeff has created an incredibly strong business that continues to grow. And he and his team are going to be happy to show you some of the products that are going to continue to grow that business even more in the future.

Last but certainly not least, Don Allan with 11 -- almost 11 years of experience or more with our company, who joined us as the Controller, but for the last 5 or 6 years, has served as our CFO, and you all know Don.

Also, as Kate suggested, key members of the team will participate in the Q&A, but not necessarily present. Jim Cannon, who runs our oil and gas business. John has previously run our -- 2 of our other businesses, been with the company more than 10 years.

Jeff Chan, who's responsible for our China tools business. A tenured Stanley executive up from the operations ranks, global P&L experience, global operations experience, 30-plus years of experience in the industry.

Grethel Kunkel runs our Latin American business. Previously, Jaime Ramirez's Chief Operating Officer, a tremendous screens in that business and a phenomenally strong business.

Barb Popoli joined us less than a year ago from Honeywell. And Barb runs our infrastructure business. And Barb will be here to participate in the Q&A.

And last but certainly not least, Ben Sihota. A seasoned Asian expert, Ben has done a fabulous job deciding how we get into emerging markets, whether we do it direct, whether we do it through distribution, tremendous strategist, product person. And that's a benefit of the merger were we have Jeff Chan and Ben Sihota from respective companies. And instead of looking for a synergy, we were able to double down and take 2 really well-established, highly capable executives, double down to grow in emerging markets.

So closing the book real quickly on the merger, you've seen all this. $500 million in cost synergies, which will exceed our $350 million objective by 43% by the end of this year. And if you think about it, just what we made in operating income in CDIY in 2012 exceeded the combined operating income of the entire Stanley Works and the entire Black & Decker Corporation a year before the merger. And CDIY is only 50% of our revenue now, you can do the math. We've got some revenue synergies projects that are yielding strong results. We've already passed the $300 million target, which was our mid-'13 objective.

Hand tools in Latin America, great example. You'll hear more about that later. I won't dwell on it. 1,500 new products, $800 million in organic growth via NPD in the last 3 years, just in our CDIY business alone. And SFS, which is in our DNA, was and will continue to be a competitive advantage for this company. Working capital turns, almost doubled. The working capital within the CDIY business, despite the business being bigger, it's 50% of what it was the day we combined these 2 companies. So a tremendous progress on that front.

And the merger's generating good returns. We have a target of 12% to 15%. We're there in 3 years. We have another $50 million of synergy to achieve this year to get to the $500 million number that we've talked about. Year 1 of the merger, 8.4%, cash return up to 12.2%, continuing to grow, driving clear value. We've said this before, but if you own Black & Decker stock the day before we announced the merger, you're up well over 100%, 110% to 115% including the value the dividend.

Organic growth initiatives, Jim's going to talk about them in more detail. But we expect to generate 2 to 3 points of incremental growth by 2015. That will be, as Kate said, $200 million in operating income, and that will be $1 a share in terms of earnings. It's going to require $100 million of investment in spending on an ongoing basis, primarily SG&A,brand support, feet on the street to achieve it, and $50 million in one-time CapEx. But again, that's a very high return when and if -- it's when, not if, we achieve that level of organic revenue growth, irrespective of what happens in the macroeconomic environment.

As I said, the 6 initiatives span all our businesses, all our regions, capitalize on recent acquisitions, not the least of which, of course, is Black & Decker, but CribMaster, AeroScout, Tong Lung manufacturing, CRC-Evans, Bajaj in India, Niscayah, GMT and powers. You'll hear more about those and how they fit, as the presentations unroll later this afternoon.

Importantly, we're managing this initiative like we do in acquisition integration: biweekly calls, ribbons [ph] the more senior executives, and that -- I mean, myself, Jim Loree, Don Allan. Each initiative has a finance leader, has a project leader, and that we're reporting on that on a biweekly basis. And while it doesn't guarantee success, it guarantees there aren't any surprises. And we can reallocate resources, double down if we find initiative falling behind, or finding a new if, in fact, is traction that ewwe sddgaining the if, in fact, one isn't gaining the traction that we expected, irrespective of the effort we put behind it.

And in emerging markets, an internal joint venture is what we're calling it. But it's quite formal. We're the board. It's not bureaucratic, but it's formal, where Jeff Ansell's team, CDIY, and JoAnna Sohovich's team, IAR, collaborating, because the lines, the channels of distribution, it's great. It's not clear in emerging markets. What's the CDIY customer versus what's an IAR customer? And we found, historically, that was a barrier to growing the way we needed to grow. We're spending very little time thinking about which organization it's in, who gets the credit. Jeff's team and JoAnna's team are collaborating beautifully with the help of Jaime, Jeff Chan, Ben Sihota, Grethel and others in the regions to achieve this kind of growth.

Our past success and future credibility, as well as our success, built around 5 core competencies within our company. You're going to hear more about them as the day progresses. I've talked about acquisition integration. I've got one slide to show you some examples in addition to Black & Decker, where we think we're pretty good at it. We actually think it's a core competency of our company. And it's a lever we continue -- will continue to use, and Jim is going to talk to you about that going forward.

We're in a short-to-intermediate-term hiatus for a lot of good reasons, one of which is just organizational capacity. Digest, absorb Black & Decker, Niscayah, Infastech. We are an acquisitive company. We have some very capable people centrally and in the regions to help with it. And it is an absolutely, for sure, an important part of our strategy going forward.

Operational excellence, be it SFS, profitable growth. Not just take cost out, but grow our business and grow them profitably. World-class brands, you're going to hear about that today. And I think, often overlooked with Stanley Black & Decker is this company's ability to consistently generate $1 billion or in excess of $1 billion of cash flow on an annual basis. Those competencies have been and will remain an important part of our future.

Just real quickly on a couple of those points. On the core competency and acquisition integration. This is the before and after of 4 security and 2 tools acquisitions, large ones over the last almost 10 years. Best was 2003. We got 1,300 basis points of operating margin to that, roughly $300 million mechanical locking business. FACOM very successful and profitable mid-teens operating margin business when we acquired it. We've got it 300 basis points nonetheless, despite a very difficult operating environment in Europe since we acquired it. Générale de Protection systems integration moderating business in France, 1,100 basis points since the acquisition.

Black & Decker, we've talked about. Pro forma, Black & Decker operating margin, to the extent it could be separated, 800 basis points higher than the acquisition. Tyco was the former ADT French business, was losing $1 million a month when we acquired it. In 6 months, it was breakeven. 18 months later, it was low double-digit operating margin and it continues to grow in conjunction -- integrated with GDP towards and above our line average for our Security business. And last but not least, Niscayah, low single-digit operating margin, billion-dollar business, 85% of it in Europe. It's now low double-digit operating margin. And Massimo Grassi and his team are driving that again towards our long-term line average expectation for our Electronic Security business with 15% to 20%.

SFS operational excellence. I'm going to defer to Steve Stafstrom, who would do a better job and deserves much of the credit for the emphasis leverage and the importance and the benefit that SFS has had to our company. Very quickly, it starts with the S&OP process, keep supply and demand in check, one forecast, one set of numbers, everybody's on the same page. It's almost as simple as that. Operational Lean, not just in the factories, but also in the back room in everything we do. Complexity Reduction, eliminate waste, keep it simple. Complexity is allowed, but only if the customers are willing to pay for it. Global Supply Management, very strong centrally driven process. And every time we make an acquisition, it reaffirms our belief that doing it in one place with local experts for various materials or components or geographies, funneling into a central organization is light years and dramatically better than doing it in 17 different places. And tremendous cost synergy every time we make in acquisition, this belief is reaffirmed. And last, but not least, over to cash. Keep surveys [ph] high, keep working capital turns up, generates a lot of free cash.

In terms of profitable growth, these are the 3-year numbers. CDIY, 5% compounded annual growth rate over the last 3 years despite a very, very weak construction market, and 570 basis points of operating margin improvement at same time. Engineered Fastening, 10% compounded annual growth, 1,000 basis points of margin improvement. And IAR, despite a lot of it being in Europe, 6% compounded annual growth over the last 3 years, 550 basis points of margin improvement. Those businesses represent 70% of our company. Now our focus is on Security to reinvigorate and reinstitute the organic growth that, that business has experienced in the past, and you'll see we'll continue to experience going forward.

Our brands, probably our most valuable assets beyond our people. Our global power brands, DeWalt, Stanley, Black & Decker and a lot of brands really, really well recognized in their space and their individual niches. FACOM as iconic mechanic tools -- mechanic's tool brand in Europe. If you're working on a Ferrari or an F1 car, you're using a FACOM tool. Proto, PORTER-CABLE, Bostitch, Mac Tools and the list goes on. More of that from Scott and Marc a little later.

And all that's been reflected in our performance. On the 10-year basis, we've performed roughly 75 basis points above the S&P 500. On a 5-year basis, it's roughly 55 basis points. And on a 3-year basis, it's roughly 15 basis points. Jim will talk to you very shortly about recent performance and what some of the drivers will be, so we can continue this track record of significant outperformance versus our -- versus the S&P 500 and versus our peer group.

Thanks for listening. I hope you enjoy this day as much as we're going to enjoy presenting it to you. And I'll be back at the end of the several hours for a few closing remarks.

Kathryn H. White Vanek

Next up is Jim Loree, President and COO.

James M. Loree

Thank you, John, thank you so much. John shared with you so many of the positive attributes associated with our company over the last couple of years. And I just want to share with you another way of thinking about it, which is we are a company that have built -- that has built world-class global franchises. #1 in tools and storage, the only company that has both power tools and hand tools with a meaningful scale. #1 in tools and storage. We also are the only company with construction and industrial and automotive repair market access. And we have the best global brands. John talked about that.

#2 in commercial Electronic Security. 10 years ago, we weren't even in the business. Here we are today, #2 in the world next to Tyco. Terrific coordinated global footprint, only company with mechanical, electromechanical and electronic products and integrated systems. Huge advantage in the emerging markets, huge advantage as we pursue verticals.

And #2 in Engineered Fastening with the addition of Infastech, a $1.4 billion enterprise. Engineered Fastening, terrific business model, Mike Tyll's going to tell you all about it. We love this business. Double-digit organic growth over the last couple of years. It's a real asset.

Some people say this company of yours has become so complex that we don't understand it. Well, I can simplify it for you. Those 3 businesses, those 3 world-class franchises comprise 90% of our revenues. The rest of it are basically investments in future growth. So think of it in very simple terms. It's also a company that has grown its revenues an average of 17% annually for the last 10 years. I would consider that a growth company. And that's a company that has averaged greater than 125% free cash flow conversion over the last 5 years and did quite well before that, too.

We extracted $1 billion plus of cash out of working capital since we implemented SFS, and returned a good portion of that cash to shareholders. And in fact, we've returned about 50% of the cash that we've generated to shareholders since the year 2000 in the form of dividends and repurchases. And we have really built a long-term track record of outperformance. And the way we think about the mission of this company is building world-class branded franchises with sustainable strategic characteristics that create exceptional shareholder value. Pretty simple. But every one of those businesses that I described did not exist in the form that they exist today or 10 years ago. We built them. We built that value.

Now John talked at length about the outperformance and all the positive characteristics. And he and I thought it would only be appropriate to be straight up with you about the performance over the last 2 years. And since we're company that is here to outperform, for us, it's disappointing that over the last 2 years, we have actually performed more or less on an in-line basis, a slight underperformance when you look at the absolute stock price appreciation. You can see the S&P up 13%, up 11% for us, 2 points of difference. Take the dividend into account, which the chart doesn't do, and we're very close. But for us, that's not good enough.

So why? Why have we not outperformed? I'd say, number one, we've consolidated our gains in the post-merger era. And there's always some of that following such a good run in the stock price. But that's behind us now. We've had a weak macroenvironment in construction until just recently, but that's behind us now at least in the U.S. And we've got some European concentration. At times, that was pretty good. In recent years, it's been challenging. We're at 27% versus 20% for the S&P 500. And we are somewhat underweight in emerging markets for a diversified industrial at 16%. We would prefer to be in the 25% to 30% kind of range, which most of the growth diversified industrials are.

And we set out financial objectives back in 2004 for this company that have been consistently tracked and reported to you over the years. I'd like to give you our latest report card. We told you that we would grow our top line 10% to 12% a year. We've done 17%. We told you that we would grow 4% to 6% organically. Let's come back to that because we did 4%, but I want to talk about that in more length. Financial performance, mid-teens earnings per share growth. We did well there. Free cash flow greater than net income, 125% plus cash conversion, pretty good.

Return on capital in the 12% to 15% range, have been at the lower end of that range. However, that is primarily a function of the quantity of acquisitions that were done in recent years. And as the vintages age of those acquisitions, we will do just fine. That will kind of move up over time naturally.

The dividend, continued growth, we've had some very nice increases over the last 1 or 2 years. I think you're pretty familiar with. And the credit rating, strong investment-grade has been retained. So all in all, pretty good record against the objectives that we've set out, but we want to talk more about organic growth.

I do think one misperception that exists in the investment community is that we are challenged when it comes to organic growth. You saw the numbers that John put up for some of our largest businesses, pretty impressive in the environment that we've been in. You can see here on this chart, shows the average for us, 4.3%, which is at the low end of our range, our peers, and I'll show you the peers in a minute; 4.9%, not great, but considering the environment, pretty good; and then the economy running around 3.3% clip over that time frame.

Now as I talk about the peers, the organic growth has been in the middle of the pack. This is a very respectable group of 14 companies that we're comparing against here. Tyco, Masco, SPX, UTC, ASSA, Newell, Siemens, IR, Honeywell, ITW, Danaher, Snap-on, Dover. We're right in the middle of the pack. But that's not good enough for us to generate the outperformance that we want to do. And that's really the message I want to get across. We're not challenged, we're just not great. And we are not very good, we're just okay. And that's not good enough for us.

So a year ago, we kicked off a major initiative to change the game as it relates to organic growth, 3 points of growth over a 3-year period, 1 point this year, 2 points cumulatively next year and a third point in 2015, cumulatively. This is designed to elevate the organic growth rate of the company regardless of what happens to the external environment. We can no longer rely on the external environment for the kind of growth that we would like. $850 million of growth initiatives well underway at this point in time, but the single largest one is emerging markets. We are doing very well with this. We have a total game-changing approach to emerging markets. We're going to share with you very shortly here at length, I think you'll be impressed. I don't think anybody else is doing it the way we're doing it. And frankly, I don't think anybody else has the scale to do with the way we're doing it. We are going to get $350 million and possibly more.

JoAnna Sohovich is going to talk about Advanced Industrial Solutions and how that's going. Brett Bontrager is going to talk about a vertical market approach that is going to change organic growth rate in Security. JoAnna is also going to talk about the government and how we are changing our approach to go out into the field and sell to the people that actually use the products, instead of trying to send a few people to Washington and do elephant hunting.

Then we have the offshore oil and gas business. Jim Cannon is here, he can talk more about it. We're the only company that has welding, coating and inspection at the spool base for offshore rigs that can actually drive the value creation in offshore. We've grown that business from $20 million to $100 million over the last 3 years. And we're going to grow it another $100 million over the next 3 years.

And the final chapter is the Black & Decker integration revenue synergies. That's just detail on the synergies. You'll see 2 major programs in retail this year, major retailers in the U.S. that will easily get us to the $50 million for a total of $850 million, drives $200 million of operating margin and enables strong performance against our targets.

Now why are we so obsessed with this? Well, this chart, if you follow it, shows what can be achieved here by elevating the organic growth rate of the company. The stock prices are all in cells at the middle of the chart. But it shows on the Y axis that if the organic growth gets to 5% to 6% and is perceived to be sustainable at that level on ongoing basis at a 15% to 16% operating margin, that the stock price for the company would be closer to what you see there, a range of $125 to $146 million -- or $146 a share. That is without one more acquisition. That's simply changing the organic growth rate and a little extra operating margin rate from the operating leverage that goes with that. Today, what's implicit in these numbers, and this was provided for us by McKinsey's Corporate Finance Group, and it's Stanley-specific, Stanley Black & Decker-specific. Today, the market is pricing us for 1% to 2% organic growth. That is not going to happen. This is a huge opportunity. Our strategy hasn't changed all that much through the years. We've tweaked it here and there. We've tweaked it again this time. We've added accelerated organic growth, keep pounding on that, but continue to mix in the higher-growth, higher-margin businesses, increase the relative weighting of emerging markets. Goal is 20% plus by mid-decade, we're at 16% today, as I mentioned.

And then where do we operate? Operate in areas where brand is meaningful. Where the value proposition is definable, understandable and communicated to the customer and sustainable through innovation, and areas where global cost leadership is achievable. Continue to pursue acquisitions. We will lead back in the acquisition hunt at some point. And when we come back, you will know that the organic growth initiatives are well on track. We will opportunistically consolidate the tool industry and strengthen our core franchises. We will build on our existing work platforms in Security and Engineered Fastening, and we will develop infrastructure out. Infrastructure today is in 2 areas, oil and gas and then all other infrastructure. Jim Cannon focuses on the oil and gas business development side, as he also runs CRC-Evans. And Barb Popoli, who runs the hydraulics business, also concentrates on business development in the non-oil and gas sector. We will do something in infrastructure at some point in the future. And finally, accelerate the progress through the Stanley Fulfillment System. The combination of these various elements of this strategy we believe will drive long-term shareholder value in the future, just as it has in the past.

A little bit more in acquisitions, tool consolidation, you can expect more of that. We are the consolidator of choice in the tool industry. You probably will see emerging markets transactions. I'm going to share one with you momentarily that we'll announce today. So you'll see some of that. You'll also see breakthroughs in abrasives and accessories, an area where we're underweight, which happens to be the most -- the highest profitable area of tools. So we're going to -- power tools, we're definitely going to do some acquisitions in that area.

In Security, it's going to to be all about verticals. And that's a theme that I will pound and pound and we will pound in today. But we really believe the future of organic growth in Security derives from really strong vertical solutions. And that includes proprietary solutions, proprietary technologies delivered by our breadth of our field force in Security. So that's where the acquisitions, there maybe some in emerging markets there, too.

Engineered Fastening, I mentioned we just completed that big acquisition. There's more to go. We got to get this one digested first, Infastech. But Mike Tyll has several others in his sights that may become actionable over the next years. And in infrastructure, there is a huge opportunity in infrastructure. The real challenge here is to find the right businesses that fit our model, are defensible and that we can drive growth in and defend over time and fit into our corporate hierarchy.

Then we have emerging markets, just kind of spans the whole area here. But I just want to emphasize that there's plenty of opportunities in emerging markets, and we're all over them and you'll see more there.

The 2016/2017 vision: $15 billion in revenue, greater than 20% from emerging markets, 10 working capital turns, greater than 15% operating margin and 12% to 15% cash flow return on investment. The portfolio you can see quite balanced. And we expect to take the cash flow from the Tool business generated over the coming years because the markets seem to be strengthening here as we speak. And reinvest it in diversifying the portfolio and recreating the diversified industrial of that we've been striving for over time.

And now it's my pleasure to announce an acquisition that we've been working on for 3 years. These emerging market acquisitions are challenging from an executional perspective. It's small, but it's incredibly strategic. It's a company called Guo Chaing. It is the #3 Chinese power tool company. It specializes in the mid-price point market. It is growing at a 20% annual rate, and it has in mid-teens operating margin. 70% of its volume is in China and 30% of it is export.

This little company is so important to the emerging market strategy because it enables us to accelerate virtually every aspect of our foray into MPP power tools. It adds an important brand. Lots of questions arise around how do you -- what's you're branding strategy in emerging markets? We now have a legitimate MPP power tool brand in our array. We got a distribution network, a really strong distribution network, which complements ours in China. We got a plant they just invested $10 million in. it's a modern, low-cost MPP plant. And we get ready-made product designs in the MPP market that are locally designed for the local market. This is enormously strategic for our emerging markets opportunity. I cannot overemphasize how important this is and how happy we are to have completed it. We got a 60% interest. We have a call option for the remaining 40%, exercisable in 3 to 5 years.

And I'll wrap it up here with comment on brand. And brands are at the essence of everything that we are and everything that we do in this company. And when you look at the 3 power brands of the company, Stanley, DeWalt and Black & Decker, we're in a pretty good place. But the important thing for us to do it to keep these brands fresh. And the Stanley brand has not evolved at the same time the company has evolved. And it needs a refresh every once a while, and now is the time. But that said, it has an incredibly important heritage. It stands for many important elements that our customers appreciate and strive to achieve from our products. So the trick here, and it was a tricky project, was to come up with a new brand architecture and logo and statement for the Stanley Brand and make it work. And I think we've done that.

After I'm done, Scott Bannell is going to present. And then, we're going to have Marc Hohmann, from Lippincott, to talk about the branding, the old brand, the brand promotional activities that we have and then the new brand. And it's going to be really interesting and we're going to roll it out for you here today. So thank you very much.

Kathryn H. White Vanek

Our next speaker is Scott Bannell, VP, Corporate Brand Management.

Scott Bannell

Good afternoon, everyone. And now, let's talk a little bit about brands. John is right, by the way. I do bleed yellow and black. And even more so now because my 2 daughters and my son-in-law work with this great company, and I'm very proud of that. So needless to say, my company Stanley is very happily and heavily invested in Stanley Black & Decker.

Today, I'm going to talk to you about our brands. We have a great portfolio. I want to talk to you about how we're strengthening them, and in the case of Stanley, how we're evolving that brand to be something better and different for the future. Brands are valuable assets. They are, by far, our most important strategic competitive weapon. We work hard to protect them, to defend them, and to make them stronger every day. We manage them carefully. We're focused with our investments. We may not be big with what we invest in our brands, we spend about $30 million a year in the programs I'm about to share with you. But we invest in a very smart manner where we activate and leverage each one.

Let's start with what brands do. Strong brands work hard for us everyday. They simplify choice. They help trade-up demand, and they excite our customers and they excite our employees. We believe in brands. And as John and Jim have often said, we compete with brands that are meaningful. And there's a clear linkage between brand experience, the product, the advertising, the marketing, the trial and the loyalty that comes afterwards and then the financial impact. But what this is really about trust, building trust in these names and in these marks. And in some cases, it's taken us 170 years, and we will always protect that and make it stronger.

So let's take a look at what we're doing. We have a truly amazing portfolio of brands. And our teams around the world are leveraging them into new categories, new markets and new geographies. We track our brands. We manage them carefully. We have design systems. We have brand councils. But the thing that I think that we do the best is we have very passionate employees who know that a brand is promise. It's an expectation of performance and delivery, no matter what the brand. And we work hard to make sure that every touch point with that brand is a good experience to bring that consumer or that customer back.

And there are building blocks through this process. We focus first on awareness and familiarity of our brands. Our goal is to move everyone who buys our products toward loyalty. And you can see here in the U.S., our stores are very high, awareness of 95%, and the loyalty factor of 25% is actually very high when you compare it with other benchmark brands.

So what are we doing? We have an integrated approach between corporate brand marketing as well as individual, regional and product marketing. At the corporate level, we focus on mass reach and visibility. We touch all our brands in the investments we are make. And then each region or business will handle one-on-one marketing, advertising, as well as -- and print advertising. As you'll see, some of the corporate programs I'm about to share with you find their way into product marketing at the division level.

Let's take a look at some of our umbrella programs. We focus on sports marketing around the world. These are passion brands that our customers, of all types, in one way or the other, like, follow, are engaged with in a very active way. So how do we pick where to play? Here's our most major sports are indexed in the U.S. with our target customer. We invest in the yellow bars. And you can see that, for example, NASCAR fans are 125% more likely to purchase a Stanley Black & Decker-type products than the average consumer. You can see soccer, it may not be big in the U.S., but if you were to see this bar chart for soccer in Europe or Latin America, soccer would be all the way over to the left.

Within each sport, there are 5 common elements that we work on. These are brand exposure, billions of TV and online brand impressions. We surround the fan by way of engagement with things like websites and magazines. We have 15,000 tickets that we use for customers, prospects, contests, incentives and sweepstakes. We run hundreds of promotions, both B2B and B2C. And we research the fan's perception of Stanley and our brands' involvement in that sport each year.

Let's take a look at some of the key programs that we're currently running. The first is soccer, where we have over 100 billion brand impressions a year with 1.2 billion fans. And this is, by the way, covering all 3 brands in terms of LED signage. Many soccer matches will draw 600 million TV viewers. Think of that in comparison to the Super Bowl that gets about 200 million. We partner with 10 clubs with the official tools and, in some cases, security partner with Liverpool and with 3 or 4 other teams. And our teams around the world to do a very good job activating this asset. Last year, we ran soccer promotions of one type or another in 34 countries, including China and Thailand. We love the global reach and the power of soccer, and it's working very well for us.

Another global sport we activated is MotoGP. This is the premier class of high-speed motorcycle racing, not big in the U.S. These are crazy drivers, riders doing 190 miles an hour, and then they decide to turn left or right. 130 million tuned in for each one of these MotoGP races around the world. And 1 million will attend the races and then, see our products demonstrated by way of the village that you see here. We sponsored 2 riders. We placed signs in the turns. We activate with excellent retail and wholesale promotions, and we also entertain customers at each weekend event.

Moving on to the U.S. Here, NASCAR is, by far, the most loyal sport as far as fans go of any that we are involved in. 80 million fans follow NASCAR, and 4 million attend each race and watch that car go around in circles for 4 hours, which we're okay with because they're watching our brand for 4 hours. We run in 38 Sprint Cup races. We're affiliated with Richard Petty, the most famous driver in history. We host 1,500 VIP customers a year at race events. And we activate with 15 or 20 major promotions a year in special events.

Moving to America's favorite pastime, baseball. Here, we're the official tools and in some cases, security partner with 10 teams reaching 130 million fans during this wonderful 6-month season. We have field signage, home plate signage, 5,000 game day tickets, game day ads and we activate with over 50 regional promotions a year. And of course, we are with the Yankees and we are with the Red Sox. And the official team of Stanley Black & Decker are the Red Sox. And that's because John Lundgren, Jim Loree and Don Allan are avid Red Sox fans. So that was a pretty easy call.

But not everyone is a NASCAR or a baseball fan. So about 2 years ago we began investing in the PBR, not the beer, but Professional Bull Riders, one of the fastest growing sports in American history, with 44 million fans, most of whom are not NASCAR fans or baseball fans. We sponsor 6 riders, including the back-to-back world champions, Silvano Alves. We host customers. We have signage in both U.S. and Brazilian events, and we run a wide range of regional promotions. And these events are not held at county fairs. They're held in major venues, like they were here at Madison Square Garden in January or they'll soon be at Texas Stadium.

The last major program to share with you today is Walt Disney. Stanley Black & Decker is 1 of only 20 companies to be a Disney alliance partner. This is a great relationship. It's a 10-year deal with the most honored and respected brand in the world. The program includes construction signage. It includes track signage. We have access to the 5,000 technicians exclusively at their theme parks. And we also have a wide range of promotion and hospitality rights.

Before I wrap up, let me share 2 new programs for 2013. The first is we are stepping of our investment to the emerging markets. We'll be talking a lot about that later today. We've got several major programs underway. We're increasing our investment 10x in 2013 alone. We're doing in-store marketing. We're doing advertising in the districts that sell our product. We are involved in airport visibility and some sponsorships.

The other new program is a great cause, marketing effort. And we're a partner with the Wounded Warrior Project, a wonderful organization helping wounded warriors who need a helping hand. We've made a commitment to hire 100 veterans this year. Besides donations, we're working on in-store visibility for this great cause, where with the purchase of our product, we make a donation to the Wounded Warrior Project. We are also inviting wounded warriors to our baseball games and PBR events and NASCAR races. So we donate to a lot of great organizations, but this is a very special one, and we are very proud to help.

So that's a quick look at our brand story, and we're very pleased with the results. We earned 125 billion impressions last year, up 21% from 2011. Brand awareness is up 19% since 2009. Web traffic hit 36 million visits, up 27%. And we had 2 billion impressions from social media sites. And finally, last month in a Forbes report, Stanley Black & Decker was ranked the 17th Most Reputable Company in America. And that was a survey with 5,000 consumers done by the Reputation Institute, and that is a great endorsement of trust.

So our plan for the future are -- continue to be smart and focused with our investments and make sure we get the highest ROI out of everything that we do. These brands are very powerful, competitive weapons, and we plan to keep them that way. Thank you for your time today. Thank you.

Kathryn H. White Vanek

Our next presenter is Mark Holmann[ph], who is a partner at Lippincott.

Unknown Executive

Hello, everybody. My name is Mark Holmann. I am a partner at Lippincott. We are a global branding firm but our headquarters is here in the city.

About 1.5 years ago, we started working on the brand refresh for Stanley. We've teamed closely with the people at Stanley Black & Decker. When we say refresh, what we really mean by that is evolving the brand, maintaining its heritage and equities that the brand has, as well as making it relevant for today going forth into tomorrow. What's also very important here is to remember that the brand is far more than just a hand tools brand, so it needs to reflect all of its offerings and diverse businesses.

A few notes on the company that I work for, Lippincott. We actually just celebrated our 70th anniversary. We've been working with very, very high-profile brands over the last 70 years, most of them you come in contact with each and every day. We helped Starbucks to go beyond coffee. We created the new vision for Walmart, Save money. Live better. And last year, we actually repositioned eBay, making it more contemporary and more relevant for today.

When we started working on the Stanley mission. There were 3 key objectives that were extremely important to us: number one, how to make the Stanley brand work harder; number two, how to position the Stanley brand for the next 20 years; and number three, how to evolve the Stanley brand into a strong global brand. Now all of our positioning exercises really begin with extremely in-depth quantitative and qualitative research. We asked hundreds of consumers and users of the Stanley brand, what are the first words that come to mind when you hear the word Stanley? Trust, reliability and quality were the words that come to mind. Now this is really quite remarkable because from our experience, those are really attributes money really can't buy. Trust, reliability, quality, companies spend millions and millions of dollars on getting those attributes on their page, and Stanley has this built in. At the same time, we felt that some words performance, agility and flexibility should be words that should come more to the foreground to be a more relative brand, relevant brand today. But what's really our mission here, to elevate these words such as performance and bring them to the foreground in this word cloud.

Stanley is -- so not surprisingly, precedes many of the hand tools brands. Now that's not a surprise because most of the efforts over the last years in terms of promotion and advertising and such went into promoting the CDIY market. However, like I said earlier, Stanley has far more to offer and far more diverse businesses that it should represent. I cannot say it often enough, but this brand is at the peak of its success. It is extremely highly perceived and has a very, very great recognizability and it's a great -- has a great brand character. 63% of people would consider buying Stanley power tools. The brand had $12 billion in sales in 2012. So the brand, being at that position, at such great position right now, from our perspective as a branding firm, is the perfect situation for a refresh. You don't want to do a refresh when you're not doing well because it looks like an act of desperation. Most companies consider a refresh when they are on top of their game, and that's why it was a great opportunity for Stanley to do so.

If Stanley manages to represent all of its divisions and all of its different offerings, it can take, rightfully, its place behind the great powerful brands of the world. What we want to see here in this chart is GE, Bosch, Siemens, 3M, Stanley. So this was sort of our mission, is the new positioning. But what does it really mean, going from where they are now -- where Stanley is now to where Stanley wants to be? It means that we have to move from heritage orientation to future orientation. We have to move from quality product to quality outcome, and from individual tools to whole systems. So we have to think big and bigger. If we manage to get all of these things, make that leap from where they are now to where we want to go, we can become one of the big powerhouse brands. All of our efforts in terms of our research and our repositioning, all of our findings accumulated in this positioning statement, where we find our new brand essence, which we call performance in action. The performance in action really speaks to this concept of agility, dynamism and motion and being a brand that is not ganister but is moving forward. Brand attributes such as thoughtful, determined, agile and bold were the building blocks for our design initiative going forward. But this was really the molecule so that everything we looked at in terms of visual system logo, all of the collateral shape -- what's supposed to be shaped by these brand attributes. Also, what we had to consider looking at all of these collateral and all of these different sections of design, were the different divisions that Stanley features. Like I said, it's more than just hand tools, it's CDIY, Industrial, Security, all of these, our logo and our visual system had to be reflected in these divisions equally.

I mentioned this before and just to reemphasize this. Changing while you're strong means you are vibrant, fresh. You're opening yourself up to a new audience, maybe a younger audience. And it's very, very important for our brands to change while they're on top of their game. We use this chart quite a lot with our clients. And it shows you clearly that a lot of brands considered changing a refresh, doing a refresh when they were on top of their game. Refreshing also means considering where we are culturally. Right now we're looking at design which is simple, acceptable, we're not layering on -- we're not making things more complex. You want them to become simpler. You want to reach more people. You want to create less borders. You want to be more -- seasonally, too, and we create something that is easily being adapted by the public.

Finally, one thing that Stanley always is and always will be is yellow and black. Those were the equity colors. It's really what Stanley owns. And what was really clear for us from the start, that we needed to maintain that as our main element in our design exercise so that isn't going nowhere.

So how having said all this, where does it end up? It ends up in our new Stanley logo. It has been freed from its more traditional frame. It has been made more dynamic. It looks more flexible, more agile, it has still the same boldness, the same equities, yellow and black, but it's a confident step into the future. You've seen clearly that the logo now has an arrow that is hidden in the end, something to discover, which is always very, very important in the longevity of a logo. And it's clearly marking an upward movement in the forthright of this logo, speaking really for the more dynamic brand. Colors black and yellow are still maintained, same as it always was. And we also have a way to lock up all the different divisions and expanded businesses now into the Stanley -- next to the Stanley logo. We have a new visual system. We are using the arrow that's in that Stanley logo and creating a more visual system that is easy to recognize. Our idea really here is to say, you walk by this and you recognize immediately, that's a Stanley brochure. It had that motion of dynamics like I spoke to earlier. And they're very unified all together. All this comes together really nicely in our new advertising. It's more than a spike driver. It's an economy running on time. So again, it is more than just a tool. It is a big idea. It's a bigger dimension. Stanley, performance in action. This is a very dynamic brand and it's about reaching a larger audience and going forward. Stanley always had great advertising. And again, we're creating advertising here that lives in that tradition, powerful, strong advertising that is punchy and bold, easy to recognize. Also one thing has to be said, the logo now I think when it's freed on its shape can be 3x to 4x bigger, which again, makes a statement about confidence and brand trust. You'll see a few on the package there. Before, the logo was 3x to 4x smaller in the corner. Now the logo is very strong. You go into a Home Depot, you walk across the aisle, boom, you can spot that thing, Stanley, confident and strong. This is a brand that knows it's good, dynamic on the race track, very powerful tools, 3x to 4x bigger on the motorcycle as well.

This is what we call the 360. You see all of the collateral materials here, banners, packaging, website, then, all of them using the new Stanley logo and the new visual system, a very tight complete presentation.

Timing and next steps. There's going to be an early launch of materials starting in June. It's going to be a first U.S. and rollout of this new logo in late June. So you're going to start seeing it on products and we start going into manufacturing on tools with the new logo. The company will invest $5 million over the next 3 years, rolling out this change into phase in. And the corporate name will remain Stanley Black & Decker.

I have 30 more seconds, which I will use until the close. What have we accomplished? I think we have successfully accomplished to create a logo and a system that is very dynamic, that really speaks about evolving the brand, that is about the brand that is going places and that is not standing self-importantly in the past, something to be excited about and is very, very strong. Thank you.

Kathryn H. White Vanek

This concludes our Stanley Past, Present & Future section, which leads us to our first Q&A panel, which is made up of John, Jim, Don, Scott and Mark. We have microphones roaming around the audience, so go ahead and raise your hand and ask a question. Please say your name and the firm that you are with.

Question-and-Answer Session

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Appreciate all the information so far, and looks like a great day ahead. I appreciate the comments particularly around addressing the initiatives around growth. And I'm sorry, I didn't introduce myself, as the instructions -- it's Mike Rehaut from JPMorgan. The growth, the organic growth initiatives and the vision for the company. One thing -- and I didn't want to actually zero down on this too much, but in the past, you had presentations where you've said that $15 billion revenue company by mid-decade. I noticed that the time frame is 2016/2017. At the same time, you're reinvigorating your organic growth initiatives, which are core to value creation. So I just wanted to know if I'm thinking about that or if I'm noticing that detail correctly in terms of maybe shifting out a year or 2 with that overall revenue number? And if that has anything to do with the acquisitions that you see right now as a result of, perhaps, that difference?

John F. Lundgren

I'll start, Mike. It's a very fair question. Let me take it on 2 fronts. Always, our mid-decade vision, which Jim and I introduced what, 3 years ago, remains intact. And I'm not going to split hairs as this -- I would argue that '14 to '16 is mid-decade. Remember a couple of things. We will continue to grow by acquisition. To get there by '15 or '16, we needed the 4% to 6% organic growth, plus some acquisitions, roughly dollar for dollar of -- $1 dollar of investment capital per $1 dollar of revenue to get there. That math still works. I'll remind you of 2 things. We've divested a billion-dollar business during that period, so that's a pretty big headwind. And our organic growth objective of 4% to 6%, as Jim pointed out, has been more like 2% to 4%, partially due to our own performance and partially due to quite frankly, weak market conditions in Europe and in North American in construction. So nothing's really changed with the exception that our organic growth initiative is to ensure we get to the 4% to 6% with or without help from the market. And a very fair question would be, it's easy to say, "Everyone wants to do that. You wanted to do it. What's different?" Part of that is you're going to say, as the day goes on. But what I'll say, as a senior management team, one is Joe Voelker, our Head of Human Resources; Jim; myself who run the businesses, other than validating strategy and setting it, probably the most important thing I do day in, day out is allocate resources, human and financial. And we've done both. You'll see some of the folks here today that you haven't met and some of them you know are long-serving executives with our company. We've taken 5 or 6 of our 20 highest performing, most senior people dedicated them full time to the effort. That's the human resources. And you saw the number. 100 million a year is not insignificant. Some of that is brand support. Scott touched on that. A lot of it is feet on the street. And you'll see that, and we've talked about it, up to 800 people. And as we increase our presence particularly in the emerging markets to grow our business. So we've allocated the human resources in a way -- and focused them in a way we've never done before. We've funded it in a way that it's much more difficult to cut in times -- it's funded corporately in a way that's much more difficult to cut in times of unanticipated marketplace headwinds. Those 2 things, in and of themselves, are going to do a lot to drive that initiative and ensure that we achieve that objective.

James M. Loree

And the other thing I would say is the $15 billion is not some superordinate thing that we have to grow the company to $15 billion, or we fail. I mean, we are here to create shareholder value. If it makes more sense to divest a unit and we think that will create more shareholder value, we will do that. And so we have to kind of say that shareholder value is a superordinate goal creation of growth of, and that these other visions and missions and so forth are directional, and not something that is like a quarterly EPS goal or something like that.

Kathryn H. White Vanek


Sam Darkatsh - Raymond James & Associates, Inc., Research Division

Sam Darkatsh, Raymond James. About a year or 2 back, you were talking about an initiative called, I think, the pricing centers of excellence. What were the learnings from those initiatives? What were the effects of it? And how do you fit that in with the new branding and marketing initiatives we're hearing today?

John F. Lundgren

Sure. I'll start and Jim may want to chime in. Jim, Don and I are all very closely involved. The centers of excellence, we are in several areas, not the least of which was pricing, but several other areas. And that was required as part of our business transformation effort to ensure that we develop those core competencies, that we have the people who were subject, or in this case, process -- are process experts to help the businesses. The conclusion we came to is after these folks have provided a lot of good, I'll say, third-party or internal consulting advice, they were best utilized and most effective within the businesses. So while those centers still exist, what you do after spending a year or 2 in that center is you move to be the right-hand person of Jeff Ansell or Brett Bontrager or JoAnna Sohovich, and the CFO, to work with them. So they understand the process really well, they're process experts, and now they get plugged into a business where they understand the unique challenges of that business: the competitive set, the discounting structure, the things that people received at a value that they aren't being paid for. Everything between gross price and net realized price that obviously creates margin growth. So simply said, Sam, they're moving from a corporate staff function to directly within the businesses after, how do I say, confirming their value as process experts.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

I thought it was designed, however, to try and change the dynamic of pricing specific to power tools at least as I...

John F. Lundgren

It has and it does, and you'll hear from Jeff.

Jeffery D. Ansell


John F. Lundgren

We didn't grow 570 basis points of operating margin in a CDIY business that's 2/3 power tools by not improving, not completely redesigning, but by not improving the breadth and dynamics in the Power Tools business.

James M. Loree

Yes. And the pricing centers of excellence had been around since 2003 and had been incredibly -- we're very successful in the CDIY business, and other businesses prior to the merger. When the merger came along, it was our hope that we could install some sanity into the pricing in power tools, in the highly competitive power tools. And I think what we've done is install some sanity into our own pricing. And now it remains to be seen whether that will carry out into the competitive field. But I think we're into pricing margin optimization, and we are pretty good at it. So we'll see how that goes.

Kathryn H. White Vanek

Great. Ken?

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Ken Zener with KeyBanc. Of the slide where you had your peers, on Page 6, I thought was very constructive. And I wonder if you could just make a collective comment because I think your focus on organic growth is very important. But it also seems to me when I look at that broad peer group, is there something, perhaps, structurally different about the portfolios of the peers, the higher growth rate companies to lower, as it relates to, perhaps, more commoditized products, whether it's power tools or more highly engineered fasteners? And if you think that, perhaps, might be a governor of organic growth, both volume as well as your pricing ability perhaps, to distinguish yourself from your peers?

John F. Lundgren

First of all, very little of that we have, if anything, left in our portfolio was commoditized. Our power tools arguably somewhere in the quasi-commodity world maybe. So I think when you think about the portfolio of what we have, the power tools and the tools in general, including hand tools and storage, which you could argue are perhaps, even more down the continuum of commoditized and power tools, grew at 5%. That would have been an outperformance in that peer group. So I don't think that's the argument that works. I think it's more a function of what I put on that page, which was a little bit overweight Europe and a little bit under -- a significantly underweight emerging markets. Our emerging markets, and it's not atypical for these diversified industrials, have been growing at 20%. 20% of 16% for us is 3 points of organic growth right there. If you have 25% or 30%, say, if 30% of your volume, that's 6 points of organic growth for the portfolio before you can even get started with the non-emerging markets part of the portfolio. So my belief is that the delta in performance is driven primarily by the portfolio composition, especially as it relates to emerging markets. And that's why we're hell bent on changing it.

Kathryn H. White Vanek

I think we have time for one more within this panel. Cliff?

Clifford F. Ransom - Ransom Research, Inc.

Cliff Ransom, Ransom Research. I have been a big fan of this transition in terms of -- let's take a broad cut across a lot of things not just SFS, but operational excellence. But I'm curious on your order-to-cash. Because ideation and new product is so important to you and because the aftermarket is so important to you, why isn't that value stream defined more broadly?

John F. Lundgren

Don, you want to take it?

Donald Allan

Sure. Actually, Cliff...

John F. Lundgren

It is. Let me start. I'm asking Don to take it. I did not do it justice. Steve will do it a little more justice. But let's have Don take a crack at it now.

Donald Allan

It is a big part of or it is a major tenet of SFS within our company. And we do have a great deal of focus around order-to-cash. And it does differ depending on the business in our portfolio. In some businesses such as CDIY, you're dealing with large customers and transactions that are very significant level in certain pieces of that business. And then, in other businesses like IAR, very small transactions that you're dealing with thousands and thousands of customers. And then, ultimately, in the Security business, where you're dealing with hundreds of thousands of customers and how to interact with those different customers and through collections, processes and procedures, we've done a great deal of effort over the last 5 years to really streamline that process, which is why when you look at our results in working capital, you do see a significant improvement in receivables. It's really being driven by the improvements in order-to-cash. That being said, there's still a lot of opportunity for us to continue to enhance that going forward, especially in our Security business, which is a very complicated when you're dealing with those types of customers. And so when I look at it, it's a great track record so far in that area, and then, more opportunity to go after additional working capital benefit.

Clifford F. Ransom - Ransom Research, Inc.

John, if you're going to go into the whole ideation before order and the whole aftermarket after cash later, I'll defer the question. Otherwise, it still stands.

John F. Lundgren

Okay. Or we'll take it offline and when Steve's finished, you don't have to...

Kathryn H. White Vanek

Great. So we're out of time for this panel. But again, there's 3 more and then, the cocktails. We're putting more Q&A in a casual setting. So we'll move on with our agenda. Thank you.

To begin our next section, emerging markets, a model for hypergrowth. We start with 2 videos that were featured in our 2012 year-end review and can be found online. These videos highlight the tested and proven management team and our world-class approach to successful profitable growth in these areas. These 2 videos, The Promise of Emerging Markets and Design and Build speak to the huge growth opportunity ahead of us as we continue to grow in the emerging markets, as well as our approach to success which is, in part, built upon in-region local design and manufacturing.


Kathryn H. White Vanek

Now you'll hear from Jaime Ramirez, President, emerging Markets, who will give you his view from the ground.

Jamie A. Ramirez

Good afternoon. It's really my pleasure to present to you what we're doing in emerging markets. These are very exciting times for us in the company. We're really taking a completely different approach in how we do our business in emerging markets. So you heard from John in the end that emerging markets is, by far, the single largest organic growth opportunity that we have in the company. The potential that we have in these markets is huge. And we're taking a totally different approach on how we do business in emerging markets. As you just heard from Jim we've been successful running the business in emerging markets. We are growing the business 20% in the majority of the geographies. And you will see in my presentation our success story in Latin America, where we have done pretty good. But the different approach is what I'm going to show you. The reality of emerging markets, I mean, you got to be able to develop noise. Every single day, you got noise in these markets. One day, it's the currency, other days it's strikes. Think about everything in emerging markets. It is really funny. It is like one of the very funny stories is when you're trying to have a million emerging markets and you have a Brazilian, and you have a Chinese, you have an Indian and you have a Latin person all talking in English, that's kind of tough. But that's what I've experienced while doing business in emerging markets.

So what is different about what we're doing in this company? What's different about our approach? So first of all, infrastructure. And as you heard in the video, we are changing, we're shifting the center of gravity of our business from the LBUs to the regions. And by doing this, we're going to be closer to the customers, to the end users. But also, we're going to be closer to our people and we're going to give to our people the resources they need to deliver better results for the company. We're supporting this by the joint venture that John mentioned in his presentation. And this joint venture is all about the split, it's not about bureaucracy. So we won't be talking about selling CDIY products, which is what we did in the past. We're going to be talking about selling tools, selling power tools, selling hand tools to our customer. And we're going to be talking about giving the best service to our customers. So we're very excited about this because this is going to change the way we operate the business.

The second area we're focused is on product. And we have put together 3 LBUs for global emerging markets, where we're going to develop products for all of the regions in emerging markets. One LBU for Power Tools. That is based in China, in Shanghai. One LBU for Hand Tools that is based in Taiwan. And one LBU for Commercial Hardware that is based in Singapore. As I said before, these people are working with the marketing teams in all the regions. They are collecting information and they are developing the right product that we need across other geographies. These products will be focused in the MPP segment of the business. The MPP segment of the business represents 70% of the Tool business. That's the biggest segment and that's where the business is growing. This probably will be developed taking up the right price to be competitive in the market, meeting the right customer needs and of course, the cost that we need to be competitive.

In terms of commercial resources, and this is a growth initiative for us, over the next 3 years, we're going to double the size of our sales reps across emerging markets. Right now our plan is to hire almost 800 people in 3 years. So far this year in 2013, we have hired almost 280 people. That's 35% up what we had before at the beginning of the year. So we're going to have more people calling the customers, calling the end users. There's been a tremendous effort across the whole organization, hiring almost 300 people in 5 months. It's a tremendous effort. We've been working on very efficient processes in hiring, training, on-boarding. So we feel very good about this. Hiring people in the emerging markets is basically easy. And we've been very focused on quality instead of quantity. But a lot of companies are doing the same thing across these regions.

The second initiative is operations. And in operations, we are very focused on 2 areas: manufacturing; and the whole supply chain process, that Steve is going to cover after this presentation. In terms of manufacturing, we know we have to expand our manufacturing footprint. We know we have to manufacture products in emerging markets. We know we have to be closer to the markets and the customers. So right now, we manufacture products in Brazil. We have -- manufacture -- a power tools and hand tools facility in Brazil. We have manufacturing facility in India. And you just heard from Jim that we just acquired 60% of the company, GQ, in China to manufacture products for China and for global emerging markets. And we also have more plans to expand our manufacturing footprint across the emerging markets.

In terms of preparations, a key critical area that we have to work and we're developing the discipline is -- we're developing that culture in -- regarding S&P, distribution and transportation, manufacturing, of course, warehousing and distribution. But based on the foundation for operations, would be SFS. And you heard how important SFS is for the company. SFS is going to help us to deal with something that is critical in the emerging markets and that's a complexity that you got here. You've got more than 100 countries. You've got thousands of customers. We've got too many SKUs. From just 1 SKU in emerging market, you got to develop different executions in terms of voltages, in terms of plugs, in terms of packaging. So the complexity for us is huge, and SFS will be the foundation to deal with that complexity.

I'm going to give you some examples of what we're doing in manufacturing. And John talked about Bajaj, this is an acquisition that we did in India. This is -- actually, a Black & Decker joint venture with more than 140 employees, where we are manufacturing today power tools, chop saws, drills, grinders, hammers. These are core categories for our business in emerging markets. The idea with these facilities is to expand into manufacturing hand tools -- you'll see that's engineering held for MPP products and also, to use the vendor base that we can have in India.

Another very good example of what we're doing in manufacturing is the acquisition of Tong Lung, a security company that we acquired last year with more than 400 employees. And they focus in manufacturing cylindrical locks in commercial products. And you see -- this is how you -- the strategic rationale of these. I mean, the portfolio we have now to go after the Security business in emerging markets is huge.

And the last, and I won't go into detail with this, is GQ. Jim covered this. What I would like to highlight is 2 things, is that products that we manufacture in GQ, again, core products for emerging markets, concrete products, die cutter, chop saw and then, the burn -- power that we're going to have with GQ, with DeWalt, Black & Decker, Stanley and now, GQ. I mean, there is no other company in the business with these brands, with this power to go after the business in power tools.

In terms of business development, and Jim mentioned this, we're going to be very active on acquisitions. Acquisitions is a key part of our strategy. And the good thing is, this company, that's excellent in terms of the acquisitions and how we integrate acquisitions into our business. So we're going to take the experience that we have in developed markets, and use it and adapt it to what we have to do in Emerging Markets. And that's going to be a key part of our strategy, as I mentioned before. And by doing this, we're going to grow the business, we're going to acquire local brands, we're going to acquire local distribution, we're going to have access to different channels.

Okay, I mentioned at the beginning of my presentation that we've been successful running the business in Emerging Markets, and I ran the Latin American business from 2007 until last year. And in that period, we were able to double the size of the business. We put together a great team, and we did it with a -- not only resources that we're having now, we have some issues. So we're completely confident that with the resources and the support we have right now, we're going to be able to do this across all the emerging markets. I want to highlight 2 things about this, because this is important. Everybody talks about the noise in Emerging Markets. Did you see that chart? We had that noise in 2009, in Latin America. It was a tough year. We didn't grow the business, but then what happened after that in 2010? We kept the focus, and we worked on the same strategies, we had the same objectives and the business started growing again, that's #1. And the second one is, what is really good about this business is that we grow the -- this business, we doubled the size of the business, and our profitability was excellent. We have 20% OM in Latin America, with these kind of numbers, which is a [indiscernible] about Emerging Markets.

So I went into the opportunity, I wanted to do what we're doing different. I showed you some manufacturing facilities that we have now in Emerging Markets. We talked about Latin America. And this is what this is all about. It's the incremental growth opportunity that we're going to have in Emerging Markets. That's $350 million that John mentioned, that Jim mentioned, and we keep talking about this, the $250 million every single day in the company. That's on top of the regular organic growth that we have to deliver year after year in Emerging Markets. So we're very confident that we're going to deliver these numbers. We have the support, we have the resources, we have the people, we have the brands. Now, we have to execute it, and we got to do it, and we know we will do it. Thank you very much.

Kathryn H. White Vanek

We'll now show you 2 additional videos to give you even more insight in our Emerging Markets strategy. First, global reach and second, global distribution and global DNA, which will touch on our routes to market in these regions, as well as the role that SFS plays in our plan to grow seamlessly in these countries.

[Video Presentation]

Kathryn H. White Vanek

To continue to discuss SFS and the role it plays in not only the Emerging Markets, but around the globe, and for the entire company, is Steve Stafstrom, VP Operations, CDIY and Emerging Markets.

Stephen J. Stafstrom

The Stanley Fulfillment System, SFS, is our competitive advantage. Today, I'm going to explain why SFS differentiates us from our peers and our competitors. I'm going to explain how SFS has enabled great success in our mature markets, and I'm also going to discuss how SFS will enable us to grow in the emerging markets.

The Stanley Fulfillment System is a customer-first approach. Our peer groups tend to have production systems, business systems, operational excellence systems. The Stanley Fulfillment System is not internally focused, it is externally focused. We focus on innovating how all our work gets done to bring exceptional customer value. We breed in culture of an external viewpoint, and we back this culture with processes, systems and tools to involve all our employees. SFS starts and ends with the customer.

Now, let me explain the nuts and bolts of the Stanley Fulfillment System. Sales and operating planning. We have tools that we anticipate what our customer wants and when he or she is going to want those products. We turn this into one number, one version of the truth, and we share that data across our entire supply chain end to end.

Operational Lean. Operational Lean is where we synchronize today's factory output with what our customer took in delivery yesterday. It's like an electronic CONBON. You'll see 2 programs up there: One, is Sell 1, Replenish 1, where we actually focus on every time our customer takes a product, we replenish that product. And Every A, Every Day, which is where all our A products are made everyday in our factories to enable us to have much smaller lot sizes and much better lead times than our competitors. Time is a very good indicator of competitiveness.

Complexity Reduction. It's all about SKU efficiency. Not SKU efficiency for us, SKU efficiency for our customer. Platforming, reduced part counts, and then simplifying the way we transact. SFS focuses on that as well. We want to be easier to do business with than our competitors.

Global Supply Management, strong supplier relationships, social accountability and then at order-to-cash, which really focuses on our receivables. When those 5 principles work in concert, we create breakthrough customer value.

Now here's the proof that the Stanley Fulfillment System works. Up here you'll see a 6-year journey. In the first 3 years, you'll see that we've been able to -- we're able to improve working capital turns 50%. Subsequent 3 years, post the Black & Decker deal, we've since gotten an additional 27% working capital turns improvement. But in addition to that, you'll also notice that our service levels have continued to improve to world-class levels. Along that line, we've been able to enable the growth, double the business, and now we're in the rhythm of generating $1 billion in free cash every year. So what does this tell you? When you get closer to the customer, you become more service oriented, more cost-efficient, you grow and you can generate a lot of cash.

Now I've proven to you that Stanley Fulfillment System works in mature markets, let me demonstrate to you how the Stanley Fulfillment System is going to work in the Emerging Markets. The key for Emerging Markets is to take these global, proven processes and apply them in a customized approach to the geographical and channel differences that we find in these markets. We plan to grow the SFS culture in every market that we participate in, country by country, channel by channel. The Emerging Markets represent an incremental $350 million opportunity. Through the Stanley Fulfillment System, we're positioned to seize this opportunity. The fundamentals from the mature markets, leveraged properly, create a fantastic advantage for us in the emerging markets. Now let me talk about the application of these global learnings.

Clearly, when it comes to sales and operations planning, the way we look at a big box customer in Europe or in the United States, there's a lot of collaboration, a lot of data that gets shared back and forth. Now we look forward to where we are in China, where we're signing up 100 new dealers a month. We still feel like we have the tools and techniques to shape that demand.

Operational Lean. This is important. We produce more tools than any other company in the world. We have great expertise and a very global footprint. We believe that we can leverage that expertise and that global footprint to be in a position to build where we sell, localization. And we believe we can do that more efficiently than anybody else in the world. We're adding global sourcing and supply chain professionals in every market, not centrally. In 3 years, 50% of our supply chain professionals would be working in Emerging Markets. And we're continually evaluating our distribution points and our spare parts networks to make sure that we're doing the best we can to satisfy our customers.

Finally, I'll share with you, an Emerging Markets SFS success story, one based in Latin America. So here we can demonstrate that what we've done with the Stanley Fulfillment System has been -- given us the opportunity to enable rapid growth. In the background here, you'll see our applications of global systems principles and processes. In the bold, You'll see the results in that region. We've been able to forecast -- forecast accuracy has doubled on the way to world-class levels. We've seen a 500-basis point improvement in service levels. We've had huge gains in inventory quality and inventory efficiency, and it's no coincidence, we're growing double digits in those markets. That progress has been achieved in -- a little over 24 months. So then again, when you get closer to the customer, when you eliminate waste, when you improve service, you have a great opportunity to grow and you will generate a lot of cash. Sounds familiar. So to me, SFS works in mature markets. The Stanley Fulfillment System will work in Emerging Markets.

So hopefully by now, you have a keen understanding as to why the Stanley Fulfillment System sets us apart from our competition. And also, you must know that Stanley Black & Decker will continue to embrace our cultural fundamentals of executing to the voice of the customer everywhere in the world. SFS is the way we do business. Thank you.

Kathryn H. White Vanek

To close our Emerging Markets, a model for hypergrowth section, we've created a great panel for you, which includes Jim, Don, Jaime and Steve, as well as Ben Sihota, President, Emerging Markets group; Jeff Chen, VP and President, Asia Tools; Grethel Kunkel, President, Latin America; JoAnna Sohovich, President, IAR; and Jeff Ansell, Senior Vice President and Group Executive, CDIY. Growing profitability in Emerging Markets takes incredible focus, and an ability to manage complexities and we have assembled a leadership team with the tenure, experience and track record of performance to work together to aggressively pursue the growth opportunities that we have at hand.

Kathryn H. White Vanek

Step by that, hands up if you have any questions. There's a ton of expertise and -- right here at the table. Take one right there.

Eric Bosshard - Cleveland Research Company

Eric Bosshard, Cleveland Research. Can you talk a little bit about what the assumed organic growth rate is with your Emerging Market portfolio, we should think about over the next 2 or 3 years?

John F. Lundgren

Don, why don't you take that?

Donald Allan

Yes, these are from Jaime's presentation. The base growth before the organic growth initiatives over the next 3 years is probably going to be in the range between 10% and 20%, depending on the region of the world of the country we're referring to. Then above and beyond that, we're really going after this additional incremental $350 million of revenue over that horizon, which is quite significant. So in some countries, you could be talking about growth rates of 20% to 30%, depending on the country and the situation. It's a very significant opportunity, as you saw, and the growth rates are quite significant. But that's really how you're going to make a shift in our company, and how we really could take Emerging Markets from 16% of our total revenue to something that's hopefully greater than 20%.

Kathryn H. White Vanek

Next question? [indiscernible] ?

Unknown Shareholder

[indiscernible]. We're investors in Stanley Works. So the question I have is, how applicable is the Latin American example that you had presented just now, given that it is one geographic block versus Asia or Russia and on, which kind of spread out a lot more. And so what are the specific pitfalls that one has to consider to apply SFS to that more disparate set of regions?

James M. Loree

Well, Jaime has put a lot of miles, he's logged a lot of miles in the last couple of quarters after running Latin America for those years and meeting with Ben, and Jeff, Ben Sihota and Jeff Chen. And really trying to understand their local markets and then getting into the countries, even below the regional level and so forth. He's been on the ground. I've made a lot of those trips with him, but I think Jaime, you would be best positioned to answer that question.

Jamie A. Ramirez

Well, the reality that we've seen in all the visits is, the needs are exactly the same. The customers are looking for tools that perform, for a company that gives good service. So that complexity of geographies, it's really world -- I mean, and Steve covered a bit of that in his presentation. That's what we're working on with SFS, on how we can be the best provider to all of these customers.

James M. Loree

The products themselves really aren't that different, it's another way to say it, in the developing markets. There are nuances of differences. In some geographies, like India, there's more dust, so dust becomes an issue, but it's really about durability. The ergonomics and the design, the industrial design of the products is not nearly as important as the performance. There's fewer bells and whistles, because these folks want a lower cost performance, they're using these tools 24/7. They have to be durable. They can't have some of the features that developed markets have, like automatic shutoff when the tools reaches a certain temperature. In this case, the tool has to perform at a certain temperature. So it's dramatically different between the developed markets and the developing, but within the developing, it's quite similar.

Unknown Shareholder

Yes, I actually meant the mechanics of dealing with that SFS, when you must be having quite a bit of stress on the procurement system to deal with. Maybe political dynamics in different countries, or, as you said, strikes and the other noise that comes in the way of getting the products to the market. That's a...

John F. Lundgren

Well, I think the first recognition is, is we know one size does not fit all. And as Jaime said, as we go market by market, you start with, what are those CTQs? What's critical to quality, right? So we understand the products. We understand how the customer has to receive the product. We look at whether we grow through a distribution model or we go through a direct model. We have a tremendous manufacturing footprint between the IR business and then the CDIY business. We have over 40 factories globally, where we felt we were runnable and we didn't have a factory as you've seen in some of the previous presentations. We have been acquisitive in India. We have been acquisitive recently in China. So we think the structure of understanding what the customer needs, having the right product for the customer, localize the manufacturing of that product for the customer, setting up the right distribution points and the right distribution model, and looking at that geography by geography, channel by channel, region by region, that's how we're going to win.

The one common theme is, you have to have product in market, in a distribution set there locally to serve that market. I mean, that's a no-brainer. In some markets you need plants, in other markets you can export from, let's say China to Russia, it's not a problem. So it does vary, but the one common theme is physical distribution must be there.

Kathryn H. White Vanek

Next question? Somebody over here, Jeremie?

Jeremie Capron - Credit Agricole Securities (USA) Inc., Research Division

Jeremie Capron, CLSA. A question on your Asian Tools business, because it comes down to profitability relative to major markets, can you talk about the profitability of your business in Emerging Markets in general, in Asia in particular?

John F. Lundgren

Okay, you can start, and I will let Jeff join in.

Donald Allan

So I'll start with the answer. We look at our Emerging Market business today around the world, our profitability is very close to 20% in many of those regions. Jaime touched on Latin America being at 20%. Some of our other regions are a little bit lower than that, but overall, we're very close to that number. Asia is an example of that. And we think, as time goes on and we continue to penetrate deeper into these markets, to these growth initiatives and rolling out some of these MPP, for mid price point products, we're going to continue to be able to maintain that level of profitability, even though many of those products will have a lower price point because of the lower -- the manufacturing of it was locally. As well as, some of those products will have a little less functionality associated with -- compared to products in mature markets, the manufacturing cost will be less and we'll be able to maintain the type of gross margins that we're used to, in our, both our CDIY and IAR business. Anything to add, John?

Jeff H. Chen

Yes. And in Asia, particularly, with the Stanley brand, we have very successfully positioned Stanley as an industrial and traditional construction brand. It's not a CDIY requirement. So in that sector, we are very profitable. As Don mentioned, we are around 20% margin over there. So we are continuing positioning our product in MPP and HPP sectors, which is very profitable in that market.

James M. Loree

I think also, what is somewhat of a misunderstanding, is it's going to be MPP segment -- is relatively profitable. And we studied a number of companies over in China, and I think that the power tool companies make more money in the MPP segment than they do in the HPP. And the reason being that you have Makita and Bosch and ourselves kind of in a food fight here for the very small portion of the market that isn't growing as fast as the MPP, which is much bigger and growing quite faster. So it's something that's somewhat kind of counterintuitive, and you would think that because it's a lower-cost, lower-price kind of a market, that maybe the profit would be lower. But this company, we just acquired 60% of. It's 15% operating margin, lower gross margin than we have in the HPP segment, but a very decent operating margin.

Kathryn H. White Vanek

We have time for about one more, or we really might double that. Oh, it's a good one.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Mike Rehaut, JPMorgan. The CAGRs that you laid out in Jaime's presentation, the -- in Latin America, Russia, Turkey, Asia, and then the $350 million, I was wondering if it's possible, and I don't know if you've kind of broken this down internally, but when you think about those numbers, how much is from like, say, share gains versus market growth in and of itself? Is that something that you kind of think of in terms of your planning? And from the share gain perspective, obviously, the MPP is kind of a new product strategy, but also how much might come from broader distribution penetration?

James M. Loree

Well, Don, you take the numbers part of it, and then if there's anything else that Jaime and I can add, we will.

Donald Allan

All right. So I guess the good way to look at it, Michael, would be that when you look at that slide that Jaime presented, the top part of it was really kind of our expectation. If we do business the way we're doing it today, and we didn't do the incremental growth programs, we would grow that -- a lot of those business is at 10% to 20%. And that tends to be, depending on the country, anywhere from 2x to 5x the market growth in that country. So what that says, is that anything above 1x is really market share gains. And now it's really expanding in the market further and taking share. And so when you look at the incremental fees above and beyond that, it's definitely going after market share gains.

Kathryn H. White Vanek

Well, that concludes our panel. It's now time for a break. I ask that everyone enjoys the rest and then I'll see you at 2:15.


Kathryn H. White Vanek

If I could ask everybody to take their seats. We're getting ready to get started. Welcome back. To continue our day, our next section is Acquisitive Growth Platform. Our first speaker will be Brett Bontrager, SVP and Group Executive, Stanley Security.

D. Brett Bontrager

Good afternoon, everybody. I'm excited to talk about the Stanley Security story and two, to share a lot of the profitable organic growth initiatives we have as we go forward. During an abnormally slow growth period for the security industry and with many of our competitors going through major restructurings, spinoffs, et cetera, we've been able to gain market share and build a very globally scaled, differentiated and profitable security group. The group is built with recurring revenue across our comprehensive solutions, and we're positioned, uniquely positioned, to drive some differentiated initiatives into the marketplace to drive our organic growth. And a lot of these initiatives are already up and in place, and we're seeing the benefits of them today. We're very proud of the accomplishments that we've had over the last 10 years. We have acquired over 35 companies. We have expanded our presence to over 25 countries. We've been able to extract the economic value out of the deals that we've done. But probably the most important thing on this page is the $60 million of recurring revenue that has been built within this business.

Every month, we have $60 million of recurring revenue. It's a very profitable part of the business and it's what has allowed us to be able to grow at the pace that we've been able to grow. This performance has driven the best in industry profitable growth. And when you look at the fact that we've had 12x revenue growth, 8x OM growth, I think one of the important things on this page is our profitable growth has been very calculated. When you look at the acquisitions, we've done -- we've tried to be focused and do they deliver the characteristics that we're looking for? There's been a lot of big players that have come in to the security business in the last 10 years, and a lot of them that have left the security business in the last 10 years. And there's a lot of talk about creation multiples, or how much does it cost to create $1 dollar of recurring revenue or steady-state cash flow? What does it cost on an annual basis to replace attrition, if you were to just let the business flow out? And what's unique and very different about our business is the fact that we generate recurring revenue while making money on our install business. So it doesn't cost us money to add recurring revenue. We're actually making money as we're converting our backlog and installing those jobs and building the recurring revenue.

Our acquisition strategy has delivered a very unique platform in the industry. It's a full security platform with recurring revenue, and this value proposition is not a vision, it's a reality that is being executed today. We see the benefits from it everyday, with our -- as our installed base migrates up the security complexity spectrum. And an example of this would be a K-12 school, which historically, has been very focused on Mechanical Access that is now finding new ways to bring in electronic security, video, biometrics, in some cases, to be able to identify and track the students and keep the staff and the students safer in the school environment. And this diversity that we've built is important for a couple of different reasons. Our customers appreciate our diversity from a geographic standpoint and they appreciate it from a solution standpoint. So an example, Microsoft has been a long-time customer of ours in the Electronic Security side. They have been asking for years for us to build the scale to be able to meet their needs on a global basis. And we're able to do that as we built the scale. And they're in over 25 countries, over the last couple of years. We now handle their installation and service throughout the globe.

A company that uses our diversity from a solution standpoint, would be Kohl's, who uses our automatic doors, uses our Mechanical Access, uses our intruder monitoring, Electronic Security. So they have partnered with us to make the best retail vertical solutions that we can, but they like the diversity of the solutions that we offer.

There's much discussion in the industry about the growth that's been in place for the last couple of years. When you look at this chart, the systems integration, electronic service business is a global number. The mechanical business is a North America number, but you can see the industry has been relatively flat over the last couple of years. A little bit of growth on the electronics side, and I think it's for a couple of reasons: number one, and obviously, is commercial construction has been depressed; but number two, and probably more importantly, is institutional spending has been slow and a lot of the spend in the past has been with -- in the government with higher education, government-funded projects, and that's what's caused a lot of the slowdown. We're obviously seeing that pick back up and in particular, on the commercial side of business, that segment has continued to be very strong.

We break our competitors into a couple of different buckets: number one, we look at it globally with systems integration and monitoring, where we are the #2 player with best-in-industry operating margins; and then we look at it on the other side, on the mechanical side, again, these are North America numbers, where we're #3; but a new go-to-market strategy that we'll talk about a little bit more here in a minute, is really helping to drive our growth, is in the first quarter, both of our primary customers, organically strong, and we were able to show a 4% growth.

But our mission is clear as we go forward. Our platform has not had the type of growth, organic growth dynamics, that we'd like for it to have. But this is an interesting chart, you see the organic growth running across from 2007 to 2012, and it's been depressed, in particular, in years where we've been in the middle of a large integration and focused on synergies and bringing companies together. But even during those difficult years, we're able to drive profit, we're able to build our profit base, and that's because of the differentiated, recurring revenue base that we built in the business, which is differentiated.

Our vision for our business units are very clear. At CSS, it's all about execution. That's our Electronic Security business. We are very focused on vertical solutions, bringing a differentiated solution into the verticals that we think is unmatched. In our hardware mechanical lock business, it's all about how we're going to market and moving ourselves earlier in the construction cycle, so we're not just focused at the end of the construction cycle and aftermarket business. And with our industry-leading automatic door business, there's a huge opportunity to convert verticals that have never used automatic doors before. You walk into your Starbucks or Dunkin' Donuts for your coffee in the morning, and we're focused on a sell to those customers, not about productivity, but about a customer experience, which is something they're very focused on, but automation would greatly enhance that customer experience for those customers.

So we're focused on 4 growth areas: vertical solutions, new product development, Emerging Markets and this mechanical business transformation that we've been talking about. The largest opportunity for us is in the vertical space, and we're focused on 5 verticals in North America, with an addressable market of about $8 billion. We're delivering solutions to meet the specific needs of those verticals and a couple of examples will help. We're working with a couple of our customers to create a keyless bank branch. So if you envision an employee base going into a local branch wherever it is, in North America, using iris recognition on the front of that branch to get in, using iris recognition to get into the vault, at the time that the vaults are to be opened, using it to get into the front were the tellers sit, but an absolute authentication identification certainty that they don't have, right now, where cards can't be passed around, because it's biometrics. It's a huge opportunity for us and one that we're well down the path on, with a couple of customers.

Another one is the AeroScout product that you have sitting in front of you today. That's an opportunity to help healthcare facilities, even in hospitality, to be able to get more productivity, but of equal importance, keep their staff very safe. So when you think about hospital and healthcare, the folks that are around the facility trying to be able to find people when you need them quickly, being able to use this technology, greatly enhances their productivity. So bringing these differentiated solutions integrated with the whole package, is something a lot of our competitors can't do today.

The last thing here is we've been very focused on building our go-to-market, our installed base, our direct customers, and we've been very focused on field service excellence, install excellence. And we now have an opportunity to start driving our products through this pipe that we've built. And new product innovation is going to be critical for us to be able to support what we're doing with our vertical solutions strategy, what we're trying to do and -- to be agile in the Emerging Markets, and what we're trying to do with our new go-to-market with a mechanical base. Product innovation is going to make a difference.

In the last 6 months, we've introduced 27 new products that are going to generate about $41 million in revenue over the next 36 months. This is a large focus for us and we expect to expand it in the upcoming years. But of equal importance is to the new product innovation, is how you bring that product to market differently than the rest of the industry. It's our obligation to advise our customers on their security gaps and consult them their security roadmaps. It's critical that we deliver our customers' proprietary and industry-standard technologies, integrated together so that it works as soon as it goes in. An example of this, and you'll see it in some demonstrations we have later, is a school is looking for Mechanical Access, electronic access, video, intrusion, biometrics, communications system, mustering systems, fire systems. All of those technologies have to work together. It's our job to bring the best-in-class technologies, proprietary and industry-standard, and make sure that those things work together, day one, and serve the needs that the customer's looking for. That's what it means to bundle and be able to deliver a differentiated solution. And when we do that, what we found to this point, is we're getting about a 10% improvement in margin with those types of solutions when we're able to bundle and sell the full solution to the end user.

The Emerging Markets. We have been focused on this for the last 12 months in a very dedicated way. We've added a lot of local sales, product managers, engineering. In fact, 46% of our engineering work is done outside of North America, with 36% of that being done in the Asia-Pacific region. We're building out our dealer network.

Our automatic doors business, which is a huge opportunity in the Emerging Markets is up significantly through the first 5 months of this year. But of equal interest is, we've launched 2 new product lines that we haven't had in the past: number one, is a European hardware product line; and the glass hardware product line. Another opportunity for us to differentiate ourselves from our competitors and be able to offer our dealer network, a broader solution than what they're getting from other providers.

The last opportunity is our new go-to-market strategy within the mechanical business. We have, historically, always been direct aftermarket providers, primarily of locks. This allows us to attack the commercial segment. It expands our addressable market in North America by $2 billion alone. It gets us earlier in the construction cycle and one the biggest opportunities is we were driving locks into the marketplace. We struggled getting other products out, exit devices, closers, et cetera. When we get our rightful market share of those product lines, we expect the halo effect to be very large, up to $75 million, as we run these new products through the channel. Year-to-date, the growth in those product families, the non-lock product families, is already up 13% and we expect to see more out of it as we go forward.

Now SFS, for us, is as important as the tools business, the other product businesses, and we break it into 2 different categories. We have a very large order-to-cash project going on in our field organization. When you look in North America alone, we have over 600 salespeople. We have almost 1,000 technicians. We have 61 offices out in the field. We closed 4,000 to 5,000 jobs a month. We take over 1 million calls a month. Making that pipeline without any leaks in the middle of it, centralizing the various processes that should be centralized, is critical to our success as we go forward. This is a project that's been up and running, that we're already seeing very, very positive benefits from.

The second one is obviously on the product side. Our global manufacturing footprint, we've got the great opportunity with Tong Lung facility, which not only allows us to be competitive with the products that we're delivering, but the product innovation, the engineering, the mechanical engineering that exists in that facility has already paid benefits for us. The tooling that we're able to get from that facility with great speed has been very successful to this point. So the same SFS tools that Steve talked about, and others have talked about today, are critical for the Security group as well.

So in summary, we built this differentiated Security business and has been able to gain market share in a difficult environment over the last couple of years. We're completely focused on execution and expansion as we move forward, and I think we're harnessing all the resources that have been focused on acquisitions, integration, 35x over, and putting all those resources on our growth as we move forward. Thank you very much.

Kathryn H. White Vanek

Taking this a step further is Massimo Grassi, President, Stanley Security, Europe, to focus on our efforts in that region and in particular, the Niscayah acquisition.

Massimo Grassi

Thank you, Kate. Good afternoon. I'm here to talk to you on how we're going to make Stanley a truly fine European-trusted partner. And I will be starting from how we get here, Niscayah and its integration, where we are today, and where we're heading tomorrow.

Stanley Security in Europe is a result of 4 acquisitions: starting in 2004 with Bleak in the U.K.; followed by 2 acquisitions in France, Générale de Protection and ADT France; and in 2011, with Niscayah, based in Sweden, headquartered in Stockholm.

So today, we have about $1 billion sales in Europe. We have a very strong geographical presence, over 6,000 associates that everyday, try to serve our 200,000 accounts. So we are in a very good position. We are proud about our product offering that goes from intrusion protection down to hosted solution and full integration solutions. So we are in a growth position in Europe, and we are glad to have Niscayah as part of our growth.

Niscayah was -- the acquisition of Niscayah was closed back in September 2011, and offers a very strong strategic rationale. First of all, today, we have together an excellent geographic reach in Europe. We are present in 14 countries and we can cover the needs of our international key account virtually everywhere they operate in Europe.

Together, we have a more balanced portfolio mix between small and medium enterprises and key accounts, so this put us in position -- good position to supply all kinds of customers, from small to big international key account. We have acquired, in Niscayah, high-end integration skills, and there we see definitely scale that helped us to deliver synergies. So we've built upon our skills and experiences, together with Stanley Fulfillment System disciplines and lean processes to drive an effective integration process. And we are very glad that our synergy targets was moved from $80 million to $95 million, so we are in a very good position.

So definitely, a strategically attractive opportunity, but not without challenges. We had to reverse, as you can see from the right portion of the slide, a negative trend in terms of performances from Niscayah in these last few years. We inherited the company with a very poor service rate. We made a survey in October 2011, and the Net Promoter Score was negative, minus 17%. So a lot of what to do in terms of customer satisfaction, different system, different model. Stanley usually operates with a centrally processed and system-driven organization, and Niscayah was extremely decentralized. So definitely, a lot of challenges and last but not least, a few weeks after the closing in Europe, several countries from South of Europe, declared being in recession. So certainly, a very challenging integration, but we are very pleased after the first full year as a combined company, to have improved customer satisfaction. As you can see, we ran another customer survey in October 2012, and the Net Promoter Score moved from negative 17% to positive 18%, which is not where we want to be, our target is to exceed 30%, but definitely in 12 months, a lot of good progresses.

And this has been the result of an initiative that we launched within European organization that is called, together we go for 100% TRUST, because in this business, it's really all about trust. We need to gain the trust of our customer to be able to have profitable growth. So we had our over 6,000 employees signing, symbolically, a service charter to commit in delivering best-class service to all our customers and this is the result.

We have a more effective and efficient European presence today. As I mentioned, we can serve all the needs on all our international key account, everywhere in Europe, in the 14 countries where we have operations, or in Eastern Europe through partnership, as we're already doing it for some of our key accounts. And we have reversed the performance trend. As you can see here in blue, this is the Niscayah portion, we had it right in both and dropping volume, which was planned. We knew that in Niscayah, we had a lot of very unhappy customers, but we had been able to deliver synergies and improve productivity and in our first year together, we are at 2-digit operating margin. So still a lot to do, but definitely, a good result after the first year together.

Let's have a look at the markets where we operate today. It's a very sizable market. It's almost $18 billion. We do not operate in residential, with very little exceptions. So we operate in commercial, industrial, and government and institutional. And we benefit of about 6% market share, which is a different position if you consider that this market is extremely fragmented. If you take the first 5 players in the market, they account for about 25% to 30% of the entire market, so very fragmented, and Stanley benefit of 6% and definitely, a leadership position in France and in all the Nordics.

So the overall dynamics of the security market in Europe are not that bad. They problem we have in Europe is really about the overall economy, which is stagnate and get best. And this forces us to be more productive, to develop new value proposition and help our customers to be more productive in protecting their assets. And we have this value proposition that we'll present to you in a minute, but every value proposition needs to be based on an excellent service. So for us, our profitable growth machine needs to start from a world-class service to our customers. This is the #1 value proposition for us. So we want to delight our customers around the 5 customer touch points: installation, service, monitoring, billing and account management. So we are investing a lot in this. We have a new advanced tool for field mobility and sales force management. And as you have seen, we are improving Net Promoter Score month after month.

So an example of value proposition where we support our customers in improving productivity is Stanley Assure. Stanley Assure is a subscription-based agreement offering end-to-end security solution for every business. Basically, it's a package that we are financing with an internal financing model. So we offer bundled solution that includes latest products and technology available in the market, a package with installation service and monitoring, regular payments, agreed in advance, and extremely important, a one-on-one relationship in terms of financing. And this creates accountability with -- between us and the customers. So if the customers are not happy about our service, they don't pay the bill and we know why. So Stanley Assure has been very successfully launched a couple of months ago in some major European markets, and we plan to complete the launch across Europe by the end of the year. Very successful so far, so we are very pleased.

So we support our customer with internal financing with this package solution. This is for all customers, but mainly for small and medium enterprises. And our core business, the former Niscayah legacy core business is key accounts, is about verticals and international key account. And definitely, we don't want to really focus on this. We have specific materials and engineers and sales force that are dedicated to specific verticals.

The most important verticals where we operate is financial services, banking, and retail. And I'd like to spend 1 minute on an example of retail where we have customers that are faced with -- it's about the same challenges. With them, we are talking about fakings or fraud, so it goes from customer thief to protection of property. So our value proposition is about packaged solutions that offers product, and financing and service, and monitoring, including our new EAS, Electronic Article Surveillance, for a range. Again here, this is part of the Stanley Assure package. We launched this together with Stanley Assure, so a couple of months ago, and we are very, very pleased.

So we have a Stanley range, which include both technologies available in the market today, which are radio frequency and acoustic magnetic technology. And we offer our customer the solution that best fits their need. We don't offer one or the other because this is what we have available, so we have the flexibility to offer the best possible solution to all our customers. So we are very pleased about what we have in supporting our customers to be more productive to protect their assets.

In conclusion, in order to reach our future state goal, we focus on 3 priorities: first of all, customer satisfaction, then profitable growth; and business transformation. As mentioned several times, customer satisfaction is definitely the target #1 for us. We strive everyday to delight our customer on the 5 customer touch points and we have tools, advanced tools, available to our field technicians that allow us to drive this continuous improvement of our performances. As an example, all technicians by the end of this summer will have available a tool to allow each one of our customers to rate our service at the end of every visit. So we'll have a, I would say, realtime Net Promoter Score and we can then drive improvement on a daily basis.

Profitable growth. This is an extremely exciting opportunity. So first of all, we spend the first year of the integration on Niscayah to protect the core. This has been a necessity. As you have seen, we had a lot of unhappy customers, so we wanted to protect the core, our B customers in banking and retail, and this is what we have been doing in the first year. So now, we want to leverage this with the international key account, offering a truly fine European support everywhere they decide to operate. We won't definitely shift the mix from installation to recover revenue, and how do we do this? The example is Stanley Assure, so we try to push as much as we can to recover revenue, together with some targeted bolt-on acquisition that we are considering for Europe in terms of opportunity for profitable growth is the mechanical security and electromechanical locks. So we are working with Brett to really leverage the huge product portfolio we have in North America and the other region of the world to have a unique value proposition to propose to all our vertical customers.

And business transformation, we cannot have a good cost to serve and be productive if we don't have common system and processes. So we started already at the closing of Niscayah integration. This is a 3-year process because it's extremely complex scenario. But we are moving well and we are confident that day after day, we can improve our operations, our productivity and the cost to serve. Our future state goal is clear, we want to grow profitably to improve top line while improving operating margin and go back to the level of Stanley through Niscayah, so 15% plus. This is our future state goal. So we are definitely positioned for success in a challenged microeconomic. But we are extremely confident after a first period of stabilization of Niscayah to really now build the ground for future profitable growth. With this, I thank you very much for your attention. Thank you.

Kathryn H. White Vanek

Our final speaker in this section is Mike Tyll, President, Engineered Fastening.

Michael A. Tyll

Thank you, Kate. As both John and Jim mentioned earlier in their remarks, Stanley Engineered Fastening is a growth platform. And much of what I'm going to talk about centers around growth, especially how we drive organic growth to the execution of our business model.

I'll also provide you with an update on the Infastech acquisition and the impact that, that acquisition has had on our business. Now Engineered Fastening is a balanced global business and we think that, that balance has positioned us very well for accelerated growth.

Global balance is also important for us because it's a risk mitigator. In as much as we're not overly dependent upon the market condition in any one region at any given point in time. Now we've always been fairly well-balanced geographically. If we go back to 2009 when we were a $600 million business, about 40% of our revenues generated in Europe, 34% in the Americas, 26% in Asia.

Now with the double-digit organic growth that we posted every year since 2009, along with the addition of Infastech, we're now at $1.5 billion but still very well balanced globally. The percentages have shifted a little bit but the balance is still there. And while we found that this global geographic balance is important, it's also important to have balance in the end-user market served.

Now one of our key objectives has been to diversify our business in terms of the end-user markets that we serve. If we go back to 2009, almost 2/3 of our business was generated in the automotive market and the remaining 36% in other industrials. Now with the addition of Infastech, about half of our business is coming out of automotive. But most importantly, 15% of our total revenue is now being derived from high-growth segments within the electronics market and then the remainder, in the other high-growth industrial verticals. And this diversity has really positioned us well, along with our balance, to maintain the growth and profitability trends that have really become a hallmark of the Engineered Fastening business. Double-digit organic growth since 2009. In fact, we have now posted 14 consecutive quarters of organic growth while continuously improving profitability. Of course, you see here the real step change in our business has been the addition of Infastech. We closed on this deal in February and the integration of the business in the Stanley Black & Decker is going extremely well, meeting or exceeding virtually all of our expectations. Because of the impact that Infastech has had, I want to take just a minute to give you a flavor for what this business is all about. And I'll start up in the right-hand corner. Again, this is a global business with more than half of the revenues generated in Asia. It's a well-diversified business, 30% coming out of the electronics market, almost 30% out of automotive and then the remaining 40% out of other targeted industrial markets, a blue-chip customer base such as when you look at these well-recognized names in automotive and electronics. The business model. Employed by Infastech, especially the focus on engineered solutions and systems, identical to the legacy Engineered Fastening business. As I mentioned earlier, the integration, going extremely well. That's due in large part to the fact that we were able to retain every single key business leader from the Infastech business when we closed and they're transitioning into the Stanley Black & Decker culture quite easily. Now when we look at the products, systems, technologies, that Infastech has, we combine that with the legacy Engineered Fastening business and we are very well-positioned to take advantage of all of the opportunities that are presented to us in the Engineered Fastening arena.

The global fastener market, estimated at $65 billion, with the 2 largest segments, automotive and electronic, being our 2 primary target markets. Now much of the engineered or much of the global fastener market centers around commodity-type products, standard knots and bolts and screws and washers where the primary basis for competition is price and more often than not, low price. We do not participate in this segment. Instead, we focus on engineered solutions. Every single fastening product we have was initially originally designed to solve a unique fastening or assembly problem. These are highly designed products that command premium prices. Now we do have competitors. Others that have targeted this same market niche. Some fairly well-recognized names in the industrial space. We have competitors that focus on fasteners, some that focus on installation tools and then some like us that are involved in both tools and fasteners. It is a fragmented market and we clearly have the broadest range of technologies, of solutions and products.

So how do we take advantage of these extended capabilities? Well, first up, our value proposition is exactly what our customers are looking for from us. They want an engineered solution that improves their productivity, reduces their costs or supports their other manufacturing initiatives.

Our business model is really our go-to-market strategy. Again, we focus on highly engineered solutions. We look to globalize every opportunity, every new product, every new technology regardless of where it originates. The Stanley Fulfillment System is really the common framework that we use to run our business every day. Now not only does SFS eliminate waste, but it also allows us to transfer technology seamlessly and share best practices quickly, which is critical given in the global nature of our business.

And we're a global business because we have to be. We serve an increasingly global customer base, we follow them wherever they go and with 27 manufacturing locations around the world, we are well positioned to support our global customers regardless of what technology or what application they're working on anywhere in the world fairly quickly.

Now some of these technologies include stud welding systems, blind fastening systems, engineered plastic fasteners, self-piercing rivetting, precision nut running systems, and then miniature or micro fasteners, especially for electronics. We have a stable of well-recognized and highly regarded brand names, now further augmented by the addition of the Infastech brand names. So I just want to give you a couple of examples as to not only how we apply this technology to a customer issue or problem, but also how we use these technologies and our business model to generate organic growth. The first one is the 2013 Range Rover. This is an all-aluminum vehicle, which means that it cannot be spot-welded, the traditional method of fastening and assembly of an all-steel vehicle. Instead it's held together by 3,500 self-piercing rivets.

And in addition to supplying all of these rivets, we also supplied all the installation tools and systems that are used to insert or install these rivets. Now by getting our technology adopted by the customer here, we've been able to increase our vehicle content, or our revenues per vehicle, by 10x what we enjoyed on the previous all-steel version. In fact, our total content on this vehicle is over $100 per vehicle. Now this process, this business model is not limited to automotive. We use the same business process, the same business model to grow our business everywhere.

Another example, the iPhone 5. By focusing on engineered solutions, on new applications, new products, we've been able to increase our content on the new iPhone 5 3x of what it was on the previous version, the iPhone 4. In fact, we're now supplying over $1 worth of content on every iPhone 5 produced. And at 100 million units, you can see the growth from this program being quite impressive. And this process where we look to increase our content on every new model whether it's electronics, whether it's another industrial market, whether it's automotive, is really how we drive organic growth. It's one of the thing -- it's one of the biggest reasons why our growth has far outpaced the increase in global automotive production over the last several years.

Now this business model, of course, is not limited to our traditional markets or customers. We've been focused on emerging markets for more than 10 years. And our organic growth in these markets since 2009 has actually outpaced our fleet average. But once again, if you look at the impact of the Infastech business in 2012, that's really where the step change comes in our business in this important metric and objective. Fully 25% of the Engineered Fastening revenues now coming out of the emerging markets. Our strategy in emerging markets, really no different than it is anywhere else: We support our global customers as they establish manufacturing or other operations in these markets; we provide commercial support; and if necessary, we'll provide manufacturing support also within these countries. And once we're established, we look to other local customers in those markets, see what customers there may have global potential and then we look to develop those. So our business model really is the biggest driver of the performance metrics that we've tracked over the last 3 years and these are the numbers: Since 2009, revenues up $900 million; revenues from emerging markets now 25% of our total revenues, an eightfold increase from where we were in 2009; organic growth, nearly $350 million since '09, an important metric for us; dollar content per light vehicle, in other words, our revenues per vehicle produced, up 30% since 2009, so if we look at the 30% increase in global automotive production since 2009, this is on top of that 30% increase in global automotive production; working capital turns, primarily driven by the implementation of the SFS principals, up 66% over the last 3 years; and then, finally, operating margin, up $200 million or 1,000 basis points since 2009.

So in summary, the Stanley Engineered Fastening business provides technology-based solutions. We have a solid track record for organic growth and now with the Infastech acquisition, we've seen immediate diversification, new organic growth opportunities and it's clearly enhanced our position in the emerging markets. Thank you.

Kathryn H. White Vanek

We put together a video focused on Stanley Oil and Gas or as you would know it, CRC-Evans, an acquisition we did in July of 2010. This business is a key part of our infrastructure growth platform with revenues of approximately $250 million and powerful growth opportunities in on and offshore pipeline tools and services. This video gives a great sense of the depth and breadth of this business' global value proposition.


Kathryn H. White Vanek

Our next video is engineered to help you get a good feel of Stanley healthcare. The business is around 170 million in size with compelling growth potential.


Kathryn H. White Vanek

To conclude our acquisitive growth platform section, we've assembled a Q&A panel, which will include John; Jim; Don; Brett; Massimo; and Mike, as well as Jim Cannon, President of Stanley Oil and Gas; and Barb Popoli, President, Infrastructure.

Kathryn H. White Vanek

Who wants to ask our first question? We have over there. Jason?

Jason Feldman - UBS Investment Bank, Research Division

Jason Feldman from UBS. On the STANLEY ASSURE subscription model and Security, 2 questions. First, do you see the potential to be able to roll that out in the United States as well? Or is that purely for Europe? And also, can you comment on how the balance sheet intensity and the risk associated with providing the finance relative those products?

John F. Lundgren

Brett, why don't you handle the first part, which is does it have application or applicability in the U.S. And then, Don, you handle the other question about the capital intensity.

D. Brett Bontrager

Does what have it?

John F. Lundgren


D. Brett Bontrager

STANLEY ASSURE is -- we have done a program very similar to STANLEY ASSURE in North America. It's called Security Plus, it's been rolled out for a couple of years. It was very excellent in particular in 2009, 2010. Just as Massimo described it, it was focused on small-, mid-size enterprises and through a difficult period of time, helped the business to continue to grow. So absolutely.

Donald Allan

And the balance sheet impact is -- it's been going over the last 4 or 5 years as we roll out this program, as Brett said, in the United States and then it's now expanding to Europe. But it's about $40 million to $50 million of capital, which is a reasonable level based on the size of business we're talking about.

Kathryn H. White Vanek

Next question? There's something in the back?

John F. Lundgren

Walter over there.

Kathryn H. White Vanek

Great, great.

John F. Lundgren

A couple over on the left.

Kathryn H. White Vanek

All right, we'll grab Walter first, and then, Rich, you're next.

Walter D. Scully - Great-West Funds, Inc. - Great-West Putnam Equity Income Fund

Walter Scully from Putnam. Just a question on Security, industry demand in the U.S. and Europe. What does it take for that to improve? Is it more bigger GDP? Is it construction? Is it something else separate from your company actions?

John F. Lundgren

Yes. It's certainly both of those for sure, obviously. And Brett and Massimo can jump in. But the last couple of years with the complete lack of commercial construction, our margins have been flattered by mix. Meaning, we've been doing less install and systems and X systems integration without losing too many customers. So more recurring revenue at higher margin and it flatters our mix. But over time, we absolutely need a pickup, first of all, in commercial construction, both in the U.S. and Europe, to provide more opportunity for Brett's and Massimo's team to do the installations, to lay the foundation for the future recurring revenues. So without a doubt and GDP plays right into that. I think beyond that, as they say, Security is certainly part of the organic growth initiative, working hard on it irrespective of what goes on. And that's with product, that's with solutions, that's with innovative solution. But you have the 2 most important macroeconomic factors for you to write them in.

And the upgrades are driven to a large extent by CapEx. So follow CapEx. When CapEx improves, so do the upgrades. And then there's the whole government municipality sector, which drives a lot of demand as well. And as we know, that's not exactly been robust in the United States at any level, quite a while.

D. Brett Bontrager

I think as new technologies get more accepted in the industry, like iris identification is a perfect one. And customers, installed customers, go for more secured solution, a more authenticated, dual authentication solution for people to gain access. As those technologies are accepted, there will be more opportunity in the industry and it will expand.

John F. Lundgren

It's interesting, too, with the affordable health care act, I believe it's called. That's more politically correct than Jim usually is, so I'm really proud of him. But the fact that, that drives significant increases in the cost of labor for the guarding companies means that the substitution possibilities for Electronic Security are stronger than ever. And one way to get the CapEx to improve is to get the return on investment case modeled out. And so I think that could be maybe a slight hidden source of demand in the U.S. And, Massimo, I don't know, if you have anything to add. Oh, you're over here. Anything to add in Europe?

Massimo Grassi

No. We've been having a phase similar to what you mentioned, Jim, is extremely important. So when we can offer solutions that help our customer to be more productive in protecting their asset without having capital investments is extremely appreciated. That's why after only a couple of months with STANLEY ASSURE in the market, we are very pleased about the outcome.

John F. Lundgren


Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Rich Kwas, Wells Fargo Securities. Just a follow-up on that question, John or Jim, how much of the 4% to 6% organic growth target is going to come from the macro? Should we assume it's like 2% to 3%, if 2% to 3% coming from various initiatives?

John F. Lundgren

Yes, I think, it's fair. Don can give you even more precision. But we're -- we don't spend -- we read Wells Fargo among others research on GDP and things of that nature, figure 2.5%, if that's the number that's going to be. But we maintain market share, that's GDP growth. We're going to add a minimum maintain share. So we're going to get 2% to 2.5% of our organic growth from GDP growth overtime and the other 3.5% from our own initiatives.

Donald Allan

And if you focused on the presentation earlier on the organic growth initiative, over the next 3 years, they contribute an incremental 1% this year, incremental 2% next year and an incremental 3% in the third year. So it's certainly a large part of that additional number that John is describing.

John F. Lundgren

That's pretty much a closed loop math, at least on a simple...

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

And that applies to Security specifically, right?

John F. Lundgren

That applies to the entire business.

Donald Allan

Entire company.

John F. Lundgren

Security historically and Brett is obviously our -- not just our historian, but he's got a long -- a lot of experience in a variety of different markets. Up until about 2007 or '08, security was growing much faster than GDP. That has not been the case from a macro perspective of late. That being said, we expected it to be in established markets. We would expect it to be at least a GDP growth kind of business going forward, excluding any of our own initiatives.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

All right. Okay. And then just a question on margins. In Massimo's presentation, he talked about a 15% margin in Europe or close to. It looked like close to 15% by 2015. So that slice of bread [ph] of the business needs to be at 20% or a little bit better to get to kind of high-teens if that's the target for the entire segment. Is that the right way to think about it? And then, if it is, what are the risks that you can't get to that high-teens or 20% margin target?

John F. Lundgren

Don, you want to talk to it? What I will say, we've been there before, Rich. The North American business has been at 20%. So the risk is that we don't execute and get there. But Don has given a lot of granularity. So I want to be sure he's -- we're consistent with what's in the public domain.

Donald Allan

Exactly right. I mean, I think when you look at our business before in Niscayah, we had a business that very much approached 20% operating margin, and occasionally, in a quarter, it actually went over 20%. And we believe that, that business in North America will continue to be in the high-teens and occasionally, approaching 20%. Massimo's business will get to 15% in that horizon, but that's not necessarily where we want it to be after 2015. We believe it's a business that ultimately can push its way up into the higher teens. It's more of a staging over the next 3 years, which we think is very reasonable to get to 15%. But after that, it just continue to move towards 16%, 17%, and then we'll see where it goes beyond that.

Kathryn H. White Vanek

Next up, it looks like -- close to you, Mark.

Unknown Analyst

Tom Brickman [ph] with [indiscernible] & Company. Just curious how the return on invested capital profile for the Security business compares to the other business segments. Just considering the initial capital costs to install hardware, electronics, at your customers' location in order to lock in recurring revenue stream with contracts with the customer?

Let me just jump in and then turn it over to you. I think there is a little bit of a misperception about our Electronic Monitoring business. And there's a lot of confusion sometimes between residential monitoring and commercial monitoring. Where in residential monitoring, frequently, the supplier gives away, or at least at a heavily discounted price, the equipment and then in exchange for a recurring revenue stream. In commercial, the supplier actually sells the equipment at a margin, in our case, typically in the 30% kind of zone, and makes a profit on that. And there is no capital investment per se. The capital investment is made by the customer. And so that's why the market happens to be CapEx-sensitive. And that's why financing programs and things like that in the middle of a recession are helpful. But it's a really important distinction. Because if you look at a company like ADT in its standalone state, it's a very capital-intensive company. And it requires a different kind of balance sheet than a commercial security company. But I think it's important just to make that distinction for everybody. And Don, you might want to just address the other part of the question.

Donald Allan

Yes. And actually, in my presentation later, I will walk through a little detail by segment for what we have for our returns for our company in total and by each segment. And security is a bit -- it's a little lower than the line average for the company. And we'll walk through a little bit more detail in that. It's right now sitting at 8% CFROI. And when you factor in the integrations we're doing related to Niscayah and AeroScout, which are in the middle of an integration process and exclude the effect of that, the CFROI is about 10% to 11% for security. But I'll provide a little more granularity in about 1/2 an hour or so.

Kathryn H. White Vanek

Great. Well, thank you, all. This concludes this Q&A panel.

Our next section is entitled Global Leadership and Tools, CDIY and IAR. The Q&A portion panel for this portion will follow Don's presentation. To kick it off, we have JoAnna Sohovich, President of Industrial & Automotive Repair.

JoAnna Sohovich

Good afternoon, everyone. As you heard earlier, my name is JoAnna Sohovich, and I joined Stanley Black & Decker just under 2 years ago. And if there was one thing I was certain of in joining this industry is that there would never be a line for the ladies room. John, I'm just kidding. Anybody who's been through a museum knows that since the beginning of mankind, we've had tools. After about 2 years in the industry talking to thousands of end-users, channel partners, industry experts and people whose been in our industry for along time I've come to conclude that since the beginning of mankind, we have been misplacing our tools.

So I'm here to tell you about Stanley Black & Decker's Industrial & Automotive Repair business and how we've begun infusing technology into products that have essentially been around since the beginning of man.

We are the only business who can provide the entire solution from end-to-end, and we are creating new markets as we do so. I'll describe that end-to-end solution for you today. I'll tell you who we are, what our competitive advantage is, the technology behind that competitive advantage, and how we're the only one who can provide a complete solution well beyond that of just a basic tool.

So first, I want to tell you about what IAR is and how we've come together. Industrial & Automotive Repair tools business is a collection of several businesses and brands within Stanley Black & Decker, as well as 3 recent acquisitions focused exclusively on tools, tool storage, tool tracking and then beginning to move into the tracking technology of RTLS with our AeroScout Industrial business. Let's take a closer look at the slide. We have about a $1.3 billion global portfolio that represents over 14 global brands. And you may not recognize all of these brands, but each of them are as well-recognized and as well-known in their respective geographies or industries as the DeWalt or Stanley is in the North America tools business. But if there's just one thing that you take away with you today, it's the realization that while each of these businesses and brands are strong in their individual hand tools, power tools, Engineered Storage, smart tools domain, together, they can create an end-to-end solution that no other global provider can touch.

So in the last 2 years, Stanley Industrial & Automotive Repair has greatly advanced our smart tools and systems objective through the advent of 3 key acquisitions, particularly in North America. But during that same period of time, want to draw your attention to the fact that we have significantly grown organically in the emerging market. And you'll see in a few slides that we've gone from 3% to 18% in emerging markets and we intend for that to continue to be a focus for Stanley Black & Decker. So beyond just technology, it's really about the geography and creating new markets for the Industrial & Automotive Repair business, which is extremely compelling as we move forward.

Let's take a look at some of the vital statistics. As a rapidly evolving platform within Stanley Black & Decker, we're a pretty good growth business, but we're also a highly profitable business. And you'll see, if you look at the growth, it's about 50% organic, 50% through acquisition. But what's important to note is that the acquisitions that we've made are not just bolt-on acquisitions to add to its full portfolio, the RFID and RTLS technology that I'll talk to you about in depth in future slides is the glue that brings the entire offering together. It makes the Industrial & Automotive Repair portfolio make sense and turns us into a systems and solutions business rather than just a wrench and a catalog.

Simultaneously, we do focus on SFS. And you'll see that our working capital turns have improved significantly, as well as, I referenced earlier, the growth in emerging market for us. Exclusively in the high price point area and then, as we move forward, with much greater focus on the mid-price point industrial customer in emerging market.

So over that same 3 years horizon, we've laid the groundwork through both organic and inorganic investment to pursue even more of the Industrial & Automotive Repair marketplace than before. We do this through a combination of: first, innovative technology; second, end-market focus; and then in the case of smart tools and systems, the creation of intelligent solutions never before seen in the industry. I'll simplify it at its best. This is location technology. Think about your cellphone and the GPS chip in your cell phone, the amount of applications and the number of applications that have branched out from the GPS chip and its original intended use has been incredible. All the way to being able to find where you parked your car. Now think about having that location technology and the information that it can provide in an industrial environment all through an existing WiFi network, an investment that's already largely been made to many of our customers sites. And many of the customer sites that we already visit today for our industrial technologies.

If you break up our landscape by product only, you'll see that nobody else in the landscape can meet the same end-to-end solutions. We have a lot of worthy competitors out there, but really focused on different areas of technology and our product landscape. What's most important though is that area off to the right. The RTLS, real-time location sensing, and RFID smart tools and systems. In and of themselves, very compelling acquisitions and high growth businesses within our portfolio. But as we bring it all together, it really creates a compelling story for us to be able to create intelligent solutions for many of our customers.

Here's just an example of what I'm referring to. Not only can Stanley Black & Decker provide world-class Power Tools, Hand Tools, Engineered Storage, all foamed and kitted out in a mobile cart. So we can tell you over the WiFi network where that cart is in the production facility, when it's time for preventive maintenance, whether that cart is in service and whether all of the tools are intact. And if the inventory is not complete, we can tell you, with just a glance, what's missing and who checked it out. That is way better than the clipboard and chip system of the past.

And I'll tell you, our aerospace customers are really excited about that. Because, let me tell you, when a tool goes missing, the next thing that goes missing is the chip. Whoever checked it out, make sure that, that chip disappears. And guess what, those chips, these little coins or medallions that identify who took the tool out, are one of the biggest sources of foreign object debris that they find when they're doing their checks in aero space manufacturing facilities. So being to provide a tool with an embedded RFID chip is the next landscape in aerospace manufacturing.

Here's more about our AeroScout Industrial business. You heard about AeroScout during the health care and the security section. It came with a very attractive piece in the industrial part of the acquisition. Not only do they have RTLS and RFID technologies that we can use in the tool industry, but also these technologies are very compelling from a worker tracking and worker safety standpoint. Again, in the same industries that we go-to-market here today. This is something that our customers have really, really been excited, customers like Caterpillar and other industrial production customers, it's about 80% complete solution.

Admittedly, AeroScout was focused exclusively on health care when we acquired them. But they had a very, very interesting and compelling industrial business that we brought over into our side of the organization and have really focused on commercializing these solutions, helping the customers understand what value we bring. And in terms of value, these are solutions that can pay for themselves within 6 to 9 months and can provide 3x the ROI within a 3-year horizon. So us being able to help them gain access to industrial customers, us being able to help them commercialize the solution in an industrial manner and Stanley Black & Decker gaining the capability to sell solutions and customize highly integrated solutions are really the key behind the growth in this AeroScout industrial business.

Another acquisition that we've made recently that has really been a gem in our crown as the CribMaster business. Now CribMaster is a software high-tech company that's woven its RFID solutions around tool tracking, tool control and materials management. Really, there's 2 big branches for the CribMaster business. First is the vending solutions. You see those there on the left? And our vending solutions business had absolutely taken off. We've been chosen by some of the largest distributors in the world to be their vending provider as the ideal way to dispense and distribute high usage consumables at their customer sites. And that's just taking off in the U.S., we can barely keep up with that. It's an incredible growth story. In Europe, that's the next wave. We've been chosen by some great distributors in Europe and we are at the forefront of that vending boom coming up next.

The next piece is the RFID tool, both in the AeroScout for active RFID and CribMaster for passive RFID. That's something that really is developing as we move forward. And again, gain the capability to commercialize this technology.

So let's transition into government. In times of sequestration, I know that a lot of people who sell to the U.S. government, and to U.S. Military in particular, have really chosen to hunker down and weather the storm. However, Stanley's IAR business has taken a lot more offensive approach. And for several different reasons. First off, we're subscale with the U.S. government. We've really gone to market in many different ways as discrete separate businesses and so the government has had to deal with the several different sales teams and several different cases of Stanley's IAR business. But then the second piece, it's been a collateral duty for just about every business. Because if you think about our portfolio, there's some other channels that's primary. And then a secondary channel, as U.S. government sales may answer the phone. And so we really have a very small percentage of U.S. government. They're less than 15% of the existing market. We know we can do a much better job.

On the collateral duty, we really have been focusing on sales resources, some of which have military service and are really good at understanding what the government wants and some of which are -- have nothing to do with the military and no real knowledge of how to go market with the government as a customer. So we've invested in a team, a U.S. government team, of channel matter experts. People who have come out of military services that are quartermasters in the Army, supply officers in the Navy, who have really relevant experience and understand how the government replies in this new environment. And in many cases, have tapped the courses of how the government has bought in this new environment.

The third piece is about geography. In the past, many companies tempted to say that salespeople can live anywhere because they're on the road all the time. But for U.S. government sales, that's really not the case. You can chart that fleet concentration areas in the United States, and that's where our sales teams need to be. And they need to be active military, retirees or they need to have some sort of an ID card to be able to get on base, because there's so many different places and locations that you can sell to and so many different ways that you can specify solutions.

So all of these are critical facets in our go-to-market strategy for the government. And why do we think we'll be successful given that the money is not flowing. A couple of reasons. First off, our tools are about productivity, durability, and quality, and technology. We know that the durability and the quality and the technology provides the added peace of mind of to a government customer. But let's talk about productivity.

I'm an academy grad and a veteran. And I'm the first to tell you that the military is not known for its productivity initiatives. However, the force is drawing down significantly. You can't afford a grunt and a clipboard for any single operation. As are the contractors. The contractors are departing and they're taking their tools with them. And so the government, and the military in particular, is going to need to rely increasingly on productivity solutions to get more done with less and that's what our tools and systems enable.

The second piece is a little capital spending for major pieces of equipment that's going down. The maintenance piece is going up. You're going to have to maintain what you have for a lot longer. And again, our solutions are uniquely suited for maintenance, ongoing maintenance, particularly as the contractors exit and take their tools with them. So with a compelling go-to-market strategy, the solutions that we have and the needs of the government as a unified customer, we have a very good outlook for our go-to-market strategy. And I dare say that we're probably one of the only people whose government sales have not dropped year-over-year.

Our industrial distribution business. This is another business that we put a significant investment in over the last 2 years. This industrial distribution business goes to market exclusively through MRO distributors or value-added distributors. What we've changed is we've had a much more significant end-user focus. We've developed technologies and products with specific end-user verticals and applications in mind to make our distributors more competitive in their spaces. And then by the end of next year, you will see more than 500 SKUs launched from this business to our industrial distribution customers.

So talk about redefining new businesses. At the beginning of last year, we acquired a business list in North America. And what that did is it took the top 2 players in Engineered Storage and redirected their focus from trying to keep up with each other to going with where they're strong in their respective markets and their respective channels. Vidmar, very strong with heavy duty government applications or equipment repair. Lista, very strong with institutional lab, manufacturing and through distribution. We've taken each one of those businesses, focused them on their respective strengths and have an outstanding outlook for our Engineered Storage business.

Mac Tools. This is a great success story of organic growth. Since they have redefined their business model to make their success and alignment with their mobile distributor success, they have been able to grow 7% in 2012. Their distributor route average, talk about their success, has grown 9% and profitability has grown 18%. We're extremely proud of this business and you signed [ph] first quarter of 2013 are still on track for more growth.

IAR Europe. We know what's going on in Europe. This is a very profitable business for us historically and so it hurts to have the Euro-crisis well underway. But we do have an outstanding strategy for this business. First off, we've transferred our Mac Tools business to the U.K. and that has been extremely successful. It's the same business model and it's been working well. Second of all, we've really worked on redefining what are our geographies of strength, what are our channels of strength and what our differentiated solutions, specifically RFID, vending and complete tool kitted sales. And recently, we've been awarded a $4 million order for over 1,200 completely outfitted toolkits.

And while Europe's been down for us, emerging market has been up significantly. And in fact, this team has developed so much credibility with their success in the high price point industrial market that we've recently invested in a joint venture with CDIY to infuse more mid-price point market target products, targeted specifically to this market to make them successful and drive incremental hyper-growth on top of an already very compelling growth market for us.

So in summary, IAR has the entire solution. We're the only ones in the world who can provide world-class storage solutions, a complete line of industry-leading tools and top tool control technology, as well as MRO vending, which provides compelling growth opportunities for us well into the future. If you take these badges and wear them to the product showcase at the end, over here to your right, you can get a really good tangible understanding of how the location and tracking technology works for both AeroScout and CribMaster. Thank you very much.

Kathryn H. White Vanek

Continuing our discussion on Tools is John Wyatt, President CDIY Europe & ANZ.

John H. Wyatt

Thank you, Kate, and good afternoon, everybody. So I expect many of you have in this room are very concerned about Europe. I expect that most of you are anxious about the economic backdrop in which we operate today. But in Stanley Black & Decker CDIY, we see Europe as a growth opportunity. A smart, focused, new product growth engine.

So how so, given the economic backdrop? Well, first of all, Europe is the biggest tool market on the planet. 600 million people, $15 trillion worth of GDP and an $8 billion tool category. Now we are very strong. We have great leading shares in Europe. We sold over $1 billion worth of tools last year. But here's the crucial thing. There is an amazing and enormous market for us to grow into and take market share from. As you can see, the available market for us to grow and take share for Stanley is over $1.5 billion. For Black & Decker, $1 billion and for the DeWalt brand, $2.5 billion worth of opportunity.

So how have we positioned ourselves to take that opportunity forward? The first thing is that we have established a world-class operating system since the 2 companies came together. We put the SAP system into every single one of our markets across the geography. We've closed 9 facilities and opened up -- sorry, commissioned, built and opened a new DC in Belgium that services the entire European continent, enabling us to deliver all of our brands from 1 truck with 1 invoice. That's enabled us to reduce inventory, duplicate inventory, focus on the reduction and also reducing our SKU count. So we've been able to improve working capital turns by over 40%. The culture of SFS in Europe is well and truly ingrained in what we do.

So how have we taken this operating system and start to grow the company? Well, we've been developing new product specifically for the European market. And you can see some examples here. The first one is the world's first cordless framing nailer. A seeming mailer that uses a battery as its energy source. Our competitors use gas. The end user, therefore, has to spend more money to buy gas canisters to power the machine. With ours, it's a recyclable battery, a rechargeable battery. We've also launched the DeWalt alligator Saw. Now in Europe, there are specific building materials that are legislated, and you can see here our products on block. This tool is really the only tool that can cut that block. And with the consumable blade and with the saw itself, we can increase our margins versus the fleet average by around 600 basis points.

The Black & Decker steam category. Vacuum cleaners in Europe is about an 18% penetration. Steam cleaners, it's below 1% penetration. And more and more floors hard surface-designed. This particular product uses also select technology, so you can dial in for the surface that you're cleaning, whether it's wood, laminate, stone, marble or tiles even. So these new tools, specifically designed for Europe, enable us to grow and they have a higher-margin in our existing product portfolio. And it's not just new tools. It's actually taking our brands and moving them into new the categories that would enable us to grow.

This is what we're doing in 2013, taking the DeWalt brand and putting it behind new storage systems, a higher margin. Taking the Black & Decker brand and putting it behind pencils. The Stanley FatMax power tool brand, behind a new range of tradesmen power tools. The Stanley brand behind a new range of power tool accessories. All incremental to our business, around about $80 million or more for this year in terms of new incremental sales. So new products, taking our brands into new categories, but also take our brands into new territories and geographies.

Here's an example in Scandinavia, where we have relatively low shares on our Hand Tool business. But working with our major customers like the co-op, Max Bauer [ph], Europrice [ph], Wolseley, we moved that portfolio into new customers and new geographies in the Scandinavian market. We've grown the business by 14% compound and taken 3 market share points for the last 3 years. So growth again.

Now that's about growth but we also need to retain our flexibility given the market backdrop. We have 1,000 sales associates helping us drive market share be it with traditional trade customers, working with our construction partners like Meer's Group [ph], BG [ph], B6 [ph]. Demonstrating products in-store and merchandising those products in-store, 1,000 sales associates. We've made a flexible model. So for example, in southern Europe, in Spain specifically this year, we've launched an agent model. So go variable versus fixed. And taking some of that fixed cost and move it into northern Europe, where we have stronger economies.

So how have we been successful? What's sort of the score card for some of our markets. Well, here is the United Kingdom. Last year, we grew 15% in this particular market. We grew every single brand, DeWalt, Black & Decker and Stanley as you can see. With all of our major customers, we took market share in every channel.

I'm just going to introduce you now to a video, where 2 of our customers are explaining how we've done and what they're looking for in the future for us to grow further. The first one is B&Q, part of the Kingfisher group, our biggest customer in Europe, operating across the U.K., France, Poland, Turkey and Russia. And the second Homebase, a domestic U.K. customer that have a bricks and mortar operation, but also a catalog and Internet.


[indiscernible] he's with our existing brands and building distribution in new geographies. But we're also taking the opportunity to leverage the brand equity platforms that you saw earlier from Scott. So the Premiership football program, the MotoGP program, motorcycle racing, and also the Black & Decker television advertising. We take each of those properties and execute them in-store. We build theater to encourage our end-users to come to our displays and buy more of our products. The proof of this is that our equity is enabling us to improve our margins. Over the life of this particular program, we've improved our operating margin by 260 basis points.

Through our little score card for Europe, we've improved our sales by 4% organically. We put $220 million worth of new product into the market in the last 3 years, we've improved our operating margin, as I said, by 260 basis points. We've improved our quality by reducing our warranty costs by 27%. We've improved our working capital turns by over 40% and we've taken market share 100 basis points.

The proof of this is that our equity has been aiding us to improve our margins. Over the life of this particular program, we've improved our operating margin by 260 basis points.

To talk about the scorecard for Europe, we've improved our sales by 4% organically. We put $220 million worth of new product into the market over the last 3 years. We've improved our operating margin, as I've said, by 260 basis points. We've improved our quality by reducing our warranty costs by 27%. We've improved our working capital turns by over 40%, and we've taken market share 100 basis points.

So in summary, this is a tremendously exciting market. It's the biggest tool market on the planet. We've got the strategies and the execution and the programs to go after that opportunity, with new products, taking the brands into new categories and new distribution in the marketplace. So we genuinely are poised for more growth in the future. Thank you.

Kathryn H. White Vanek

To close this section is Jeff Ansell, SVP and Group Executive, CDIY.

Jeffery D. Ansell

Good afternoon. I know we've been at this nearly 4 hours now. A lot of really good information has been shared with you. It's approaching the end of the business day on the East Coast. You have messages coming in that you're tempted to respond to. I ask and I plead for 20 minutes of your undivided attention. I promise you, you won't be disappointed. If you ask a question that's been covered, I will remind you of that before I answer the question in the end.

I'll begin today's presentation with the results merger-to-date through year-end 2012. The second portion of my presentation will be the go-forward strategies and plans to continue to accelerate going forward. The reason that I'd like to cover the results through year-end 2012, the merger results to date, twofold. One, I think it is an inflection point for the company and clearly the segment. I also think this venue provides as a very unique opportunity to dig into not just what happened but how it happened, which I think will be important for you in terms of modeling going forward. Second would be historical results being a leading indicator of future performance.

So with that said, by year-end 2012, the Construction & DIY business totaled about $5.2 billion in revenues, comprised of 4 strategic business units, each greater than $1 billion in revenues. Starting with the Professional Power Tools, driven by progress in both corded and cordless platforms, this business grew 42% or over $540 million, clearly market-leading position, clearly market-leading growth. But then the second SBU, Hand Tools & Storage, 13% total growth or over $100 million in revenue growth, driven by growth in the legacy Stanley Hand Tools & Storage business that was accelerated and augmented with growth in our hand tools portfolio for use of our power tool brands, namely Black & Decker Bostitch and DeWalt.

In the consumer products space, growth of 9% or $110 million driven by growth in all 3 portions of the SBU, outdoor products, home products and consumer power tools. And then finally, fastening and accessories, growth of 2% or $20 million, which looks to be anemic as compared to the other 3. Important point to note is while the other 3 SBUs were in play for the entire 3-year period, this fourth SBU came about as a result of the acquisition of powers fastening, which is not included in these results because it's inorganic. That growth occurred in about a 4-month period. So we have very high prospects for both organic and acquisitive growth in that SBU over time. Overall, CDIY grew $1 billion, 20% in total, $800 million or 6% compounded average annual growth rates.

The lifeblood of any consumer durables is innovation. Clearly, that was the driving force behind our progress with over 1,000 new products launched in the 3-year period, 350 world's firsts, things that have never been done in the history of the world within tools. Our view has always been and remains to succeed in total, we must succeed in cordless.

We exceeded like no time in modern history in cordless. In fact, by year-end 2012, we were continued and continue to be the world's largest in cordless products. We were at an all-time high. By year-end 2012, we had achieved levels that had never been attained even during the boom years of 2004, '05, '06, et cetera. Only 2 things were at their peak in 2012, in my view, the national debt and our cordless business, but we'll take the good with the bad. And we grew at 2x the market. So we are the market leader, growing at 2x the market, which means we are taking share as rapidly as we can manufacture the products.

New product development was the hallmark in each of the 4 SBUs. Hand Tools & Storage, I said growth in all of our brands. A key component that you should take with you is Stanley Hand Tools & Storage business is a group concurrent with growth in these power tool brands. Those power tool branded platforms were comprised of the new product development, not a paint job, not a lick and stick, whatever you want a call it. It was new ground-up product that fit the industrial design and application in every one of those product lines.

Within fastening and accessories, we continue to innovate in our accessories business and bonded abrasives, linear edge products, compressors and pneumatics. And while we sit here today as the 1-year anniversary of the Powers acquisition, you will see new product development, significant new product development in the marketplaces around the world as early as the second half of this year.

Within consumer products, growth in our outdoor business, where we gave the user a cordless alternative to gas with performance that rivaled gas. We also had advances in products like the matrix system, which was one power source with 11 different application heads. Meaning the user bought the base product once, could turn that into 11 different functioning power tools for great flexibly and value. We also introduced the world's first gyroscopic screwdriver that followed the motion of the user's hands, forward and reverse or left and right, as well as the speed of the user's hand, making it completely intuitive. And we have continued advancement in our lithium-ion range of cordless products that are built PORTER CABLE and Stanley FatMax brands. You see the migration from a premerger position of 60% NiCad, 40% lithium to today where it's the inverse, 65% lithium, 35% NiCad.

And then finally, Professional Power Tools. Continued advancement there, as I indicated before. Corded and cordless products are both up in the period, a tremendous migration from 90% NiCad, 10% lithium at the time of the merger to 55%-45% as we stand today. So bigger in lithium for the first time in our history than we are in NiCad and increasing.

20 CDIY products are sold every second of every day of every year around the world, just to give you a sheer magnitude of what we're talking about. And for the math majors in the audience, that's 24,000 products that will be sold while I present to you today. And before you ask, yes, it's factored into our full year guidance.

Globalization has been another key focus area for this business. At the time we came together as one company, about 80% of our global revenues were done in the United States and Western Europe. Fast forward to year-end 2012, about 70% of our global revenues occurred in the U.S. and Western Europe. Our emerging markets business doubled from 9% of our revenues to 18%. So that sounds interesting. And had you shrunk in the other markets, it's easy to double your emerging markets' content. But in reality, we grew at every market of the world, including Western Europe and double digits in the U.S.

Revenue synergies were a driving force behind this growth, $300 million during the 3-year period comprised of key launches like Black & Decker hand tools, DeWalt hand tools and storage and FatMax mid-priced point power tools. And in fact, by receiving permission to play from the end user before we did those things, not only did we grow our brands, we strengthened the position of every one of those brands in the marketplace supported by the results Scott shared with you earlier today, 300 billion brand impressions over the 3-year period.

SFS was what galvanized the success. We were able to reduce our footprint from a manufacturing and distribution perspective by 20%, eliminating redundancies between legacy Stanley and legacy Black & Decker. While making a concerted and significant investment in manufacturing through in-sourcing and ground-up manufacturing in our facilities to where we today take 80% of what we take the market is manufactured inside the 4 walls of our company, the highest content since the 1960s.

Service levels improved by 500 basis points as our supply chain became more reliable and agile to the delight of our customers and our end users. Working capital turns improved by 75%, while service levels increased to prove once and for all that SFS is -- starts and ends with the customer. We put 90% of our global revenues on the 1 system over the 3-year period without any customer disruption.

And finally, in our view, and John has shared with us for a long time, a healthy or a safe plant is a productive plant. We continue to live from an EH&S perspective, the world's total recordable incident rate, our rates at 4x better than the industry average. So all those things contributed nicely to our success.

How did that translate into the market? What happened to our share? Starting with Hand Tools & Storage, the share was flat in 2012 really with tremendous growth in North America through use of these power tool brands in the hand tools space and legacy Stanley branded hand tool growth in the emerging markets, offset to a great degree by macro pressures in Europe where we have extraordinarily high share.

Two things we are proud of here. One, even with flat performance in 2012, we maintained our 800 basis point advantage over the next closest competitor. Secondly, over the 3-year period, we've clearly grown our share here.

Moving to the center of the page, Power Tools shares continued to increase for the third consecutive year from a market-leading position to a greater market-leading position. That is a DeWalt and a Black & Decker statement combined. And in total, market shares globally improved for the third consecutive year between 50 and 100 basis points per year over 3-year period.

So to close the scorecard on 2012, $1 billion in growth, $800 million organic, $500 million annual new products placed into the market, $2 billion merger-to-date. Something we didn't talk a lot about, but we don't take for granted, that is quality. We moved during the 3-year period from a market-leading quality position to a dominant market position in quality. We are best in the world by a tremendous amount at this point in time. We've always made the world's best product. Now it's world's best product plus a huge delta to our competitors. That means that the products we put in place, the new products were better than what they replaced, and we improved the ongoing quality of our existing products at the same time.

Working capital turn improvement, I referenced earlier. OM improvement, referenced by John, 570 basis points over the 3-year period, and market share gain of about 200 basis points during that time frame.

So i thought this will be an impactful statement until I realized that John had read my slides in advance and will take this and share it with you as in his opening comments. By year-end 2012, CDIY profitability was greater than the totality of all of Stanley and all of Black & Decker premerger. So as we sit here, about half of the size of the total company, quite pleased with that result and all the results we've shared with you. Pleased, never satisfied. We know the pride comes just before the fall, and what is great today is average tomorrow. So where do we go from here?

Well, as with the previous 3-year period, it will start and end with innovation. If we are not the most innovative company in the world, we will not lead. We have over 2,500 new products in the pipeline. Our engineering and product development teams never putting the pencil down in innovation. 250 additional world's firsts, which would bring us to about 600 world's first products over a 6-year period, clearly a market-leading quantity and quality in innovation. So you'll hear a lot of noise, we lead.

Globalization. We will continue to grow in every market of the world globally. We will accelerate growth in every market with even greater growth in the emerging markets. So you've heard quite a bit about that today or around that today. How will this all fit together, trying to bring this home for you from a tools perspective. It will start with an SBU focus.

Strategic business units have been a core competency and a strategic advantage for us for a very long time. We have augmented those 4 legacy strategic business units with 2 additional SBUs, 1 in emerging markets power tools, 1 in the emerging market hand tools. Those new SBUs will draw from the resource, capability, experience, et cetera, of the existing SBUs, but will be laser-focused on the emerging markets in terms of prioritization of products, execution, timing, et cetera, combine that with the commitment to manufacture 70% to 80% of what we take the market in the emerging markets -- in those emerging markets in the 4 walls of our company. These products will be defined, designed, developed and manufactured in region for a region. They would be enveloped in our world-class stable of brands.

We will pursue bolt-ons, strategic acquisitions where available to us. Jim did a very fine job of outlining the benefits of GQ, so I don't feel compelled to explain more of it, but very excited by the prospects of this opportunity. We will bring all of these, these 5 attributes, that I've covered at this point, to life through 800 commercial resources in the emerging markets. That is an enormous commitment, investment, I would say, a sign of confidence of what we can do here. So I'm very pleased with that. All of that will lead to a doubling of our emerging markets business concurrent with growing in the emerged markets.

So in summary, it will all start and end with the voice of the customer. More than ever, the voice of the customer comes in various languages, various points of view, things that we have to see in person to understand and to react to. That user will never tell us what they need. They will tell us what frustrations they have, what issues they can't solve. We will take that input, bring it to life by innovation. And with that innovation, execute within our world-class stable of brands, globalize this broadly across the emerging and emerged markets, bringing it reliably to our customers on time, on cost, on quality by SFS. So in the first 3 years as 1 we have faced a macroeconomic environment that has been less than robust. We have faced violent, vigilant and capable competitors, consolidation in our emerged markets, increased competition in the emerging markets, and done all of those things while integrating what was 2 really good companies into 1 great company. And emerged from that process as the largest, most global, most innovative, fastest-growing, most sufficient and therefore, most profitable tool manufacturer in the world. We have every belief into the foreseeable future that we cannot only maintain those incredibly important advantages but accelerate from here. Thank you very much.

Kathryn H. White Vanek

For our final section, financials and a roadmap to 2016, '17, we have Don Allan, SVP and CFO. We're passing out Don's presentation at present, and you should be receiving one shortly.

Donald Allan

Thank you, Kate. Good afternoon, everybody. So I'd like to spend about 15 minutes and walk through a few, financial matters, an update on our capital allocation strategy, and then walk you through our rationale for why we think swift [indiscernible] is the best way to evaluate the returns of our company.

But first, I'd like to start with a reiteration of our 2013 outlook. This is the exact same page that was presented by me in our April earnings call about a few months ago. And it equates to the EPS of $5.40 up to $5.65 for 2013, which is 16% to 21% EPS growth versus the prior year and 2% to 3% organic growth, with the end result of a significant cash flow performance, free cash flow of approximately $1 billion. So no changes there, just a reiteration that we feel like we're on track to achieve those objectives for 2013.

So when we take those objectives and we achieve them this year, and we look back at the 5-year period starting in 2009 to the end of 2013, you see that our performance will be quite significant. And the Black & Decker merger, Niscayah and a few other smaller acquisitions have really been step changes for this company in the 5-year period that you see here on the page, with the revenue CAGR over the 5-year horizon being 22% and the EPS CAGR being 13% over that 5-year horizon. It's either outperforming or in line with our long-term financial objectives. Remember what you saw earlier today from Jim Loree, our long-term revenue growth objective of 10% to 12%. This would be 22%. Mid-teens, EPS expectation over the long term, 13%, in line with that expectation. We feel like we continue to perform or outperform against those long-term expectations.

But one of the core competencies that John talked about earlier today was cash flow and the power of the cash flow in this particular company. And again, looking at the 5-year horizon through the end of 2013, and this is a little bit different as far as the inclusion or exclusion of HHI. Now in the previous page, everything on those numbers excluded HHI. This particular page, because of the uniqueness of the accounting in 2011 and '12 and part of 2010, we have the impact of the positive cash flow that HHI contributed to our company in that time frame, which was roughly $200 million of annual cash flow benefit. So when you see a decline from 2012 to 2013, a large part of that is contributed by that $200 million of cash flow being removed from the company, partially being offset by some positive Infastech cash flow coming in from that acquisition, it's continually more than 9 months of activity. And then our continued focus on driving working capital turn improvement will be a positive for us again in 2013, which gets us to that approximate $1 billion in free cash flow.

The last thing to think about on this page, the CAGR over the 5-year horizon, 19% for free cash flow, exceeding the earnings per share CAGR on the previous page of 13%. And really, what's driving that is our continued improvement in working capital turns and the impact of the Stanley Fulfillment System. John showed you a slide earlier today, where back in 2010, our working capital turns were 5.9. At the end of 2012, they were 7.5. And by the end of 2013, they'll be approaching 8, and if we're lucky, actually achieve 8 turns by the end of this year, a continued demonstration of the power of the cash flow of Stanley Black & Decker.

But that's fine to look at it in that particular fashion. But how does it compare to our peers? You can see on this chart that free cash flow conversion, which is basically taking your free cash flow divided in your net income. This significantly outpaced our peers over the last 3 years. And Jim showed a slide earlier today that said that this cash flow, free cash flow conversion was 125% over the last 5 years, a very significant performance. But look at how this performance outpaced its peers, our peers. Our peers are defined in the same group that you saw in previous charts today, 151% cash flow conversion in 2010, 115% and then 121%, significantly outpacing each year our peer group. ;

Now one thing to keep in mind when you do this comparison is that we do have a fair amount of intangible amortization in our P&L. It's about $1 of EPS for us in 2012 and in 2013. That's quite significant. But when you adjust that number to our peers, we also have some level of intangible amortization. We're still outpacing them dramatically in this particular metric.

So the point to take here is that this company generates a lot of cash flow. How many times have you heard today from different presenters the ability to generate on an annual basis more than $1 billion of free cash flow, which is great when you look at the balance sheet because the balance sheet continues to be healthy. We continue to generate the cash. Since the merger, we've been in the modest deleveraging mode of taking our debt-to-EBITDA ratio down closer to 2. It was 2.5 in 2011, 2.3 in 2012 and will be very close to 2 by the end of this year. But a lot of that deleveraging actually has been coming from our ability to continue to expand our EBITDA through the execution of cost synergies, revenue synergies, et cetera, as well as some organic growth over that time horizon. It didn't really have to do with us really dramatically lowering our debt levels. It was more due to the expansion of EBITDA over that time frame.

As a result, we are considered a strong investment credit grade, which is one of our tenets of our financial objectives, as all of you know. And you can see on the right side of the page that our credit rating for the 3 agencies that follow us are A, A- and equivalent of BBB+ for Moody's.

So I want to spend a few minutes on this slide, long-term capital allocation strategy. For a long time, we've been talking about our capital allocation strategy being 2/3 of our free cash flow will go to acquisitions and 1/3 back to the shareholders, either through a dividend or the occasional opportunistic share repurchase. And that's really what we've been doing for the last decade or so. And you can see the results in that first box in the upper left. When you look at the performance since 2003, 56% of our cash flow, free cash flow, when you include the M&A charges, has been returned to the shareholders. Now if you want to exclude the M&A charges and normalize the free cash flow, which is the way that we look at it, even that way, 45% of that free cash flow has been returned back to the shareholders. So that's been our history.

Going forward, as you see over the next few slides, we actually believe that a 50-50 split is more appropriate for the future going forward. But we're shifting our capital allocation strategy from 2/3, 1/3 to 50-50. And it still allows us to achieve the objectives that we want to achieve by 2016 and 2017 in that vision that was communicated earlier by Jim Loree.

The dividend policy, very important to us that we're committed to continued dividend growth of the company. It's something that we've demonstrated. Past few years, we've had 20% dividend increases to really reflect the magnitude of change in our company post-merger. We're not expecting that to be an annual 20% increase, but we do expect to have continual dividend growth as our company continues to grow. And we target dividend yield, they're the premium to the S&P 500 yield. That's been the case for a while, and we expect that to continue going forward. Additionally, the target payout ratio for dividend should be 30% to 35%.

What this really says, and you heard this a few times earlier today, is that we view ourselves as a bit of a hybrid company in the sense that we are a growth company. We've demonstrated growth today in both top line and EPS over the last 5 and 10 years, 22% revenue growth for the last 5 years, 13% earnings per share growth over the last 5 years, 17% revenue growth over the last 10 years, and an EPS growth number of approximately 14% over the last 10 years. That is a growth company. Those are growth-oriented numbers. But we also believe in providing value beyond that to our shareholders. And so we continue to increase our dividend. And when we see an opportunity to repurchase some shares, we take advantage of it when we can. And that's why we believe we're a hybrid company from that perspective.

Now one of the dynamics that we have to deal with, which is the last item to touch on, on this page, is our overseas cash dynamic. 80% of our cash flow is generated outside the United States. The cash in our balance sheet is all outside of the United States. That's the dynamic we've been working through for many years. It's something that we'll continue as long as the current form of our company exists the way that it is today.

The good news from my perspective is when I look at the next 5 years, I see enough ability through various tax structures that we've created to bring funds home at a relatively low, if not 0 tax cost, to give us the flexibility to continue to increase our dividend, as well as occasionally do a share repurchase when the opportunity arises and potentially do maybe a small to mid-sized acquisition here in the United States. We have that flexibility for the next 5 years. Beyond 5 years, we'll see what that brings. It's difficult to predict what happens after 5 years. But as a result, we do assess various strategic options that we might have as a company to deal with potential corporate tax reform if that does not occur, how we might respond. There are no specific plans for that, but certainly that's something we have to consider over time and contemplate potential action. The reality is for the next 5 years, we don't have a concern about this, and so that's what our focus is.

So the last area to touch on before I get to summary was looking at our returns as a company. And we started by looking at, this is a first from Capital IQ called adjusted return on invested capital. Really what this is, is looking at your net operating profit and dividing it by your net operating assets. So it's really taking -- really looking at your operating performance and how well are you leveraging your operating assets. And you could see in this particular metric, it shows up in the top quartile for returns, which is a great result. The thing that doesn't though, included in its denominator is goodwill and intangibles. So from our perspective, it didn't necessarily seem that it was giving us -- it was really giving the whole picture. But frankly, it's a great metric to look at how effective we are acquiring companies, integrating them, driving cost synergies, getting revenue synergies and really leveraging the existing operating assets we have on the company.

But we think a better way to look at returns would be CFROI, a new approach for us. In the past, we pretty much have been focused on return on capital employed or ROCE. The problem with that for us though is that because of that dollar EPS I mentioned related to intangible amortizations -- amortization that goes through our P&L, it really dramatically mutes the returns. It doesn't reflect the true cash value that we are creating in this company by driving over $1 billion of free cash flow every year on an annual basis, which will continue to grow beyond that number as the company grows. It doesn't -- ROCE doesn't also reflect the benefits of SFS and all of the other things that we do in our company. And if you look at ROCE compared to the numbers that you see on the right, it lowers those numbers by anywhere from 1 point to 1.5 points below which you see there. Cash flow is what this company does. It's a big net result of all the activities from our strategic focus, organic growth, acquisitions, working capital, Stanley Fulfillment System. It's the net result of all of that, which is why this is the right metric to look at for our company.

So what does that mean for the numbers? You can see on the right, for 2012, we're at 10.7%, calculating CFROI this way. Our objective is for that to be between 12% and 15% over the long term. So we have some work to do to make that happen. So let me talk to about how we're going to get that moving in the right directions.

Looking at the 3 segments, I touched on this in one of the Q&As earlier. Our CDIY and Industrial businesses are at 14%, respectively, for CFROI. Really solid performance at the high end of that range. And frankly, what you're seeing in their is the successful completion of the BDK integration, and how it's really starting to translate into the results and the returns of those 2 particular segments.

In Security, at 8%, have more work to do. Now it's being muted by 2 acquisitions, one very significant, Niscayah, that is really right in the middle of the integration phase still executing on cost synergies. And as a result, once the Niscayah and AeroScout begins to really get the effects of those cost synergies and into the revenue synergies from AeroScout, it will improve that by about 2 points. So the legacy business is at low double digits right now. So not exactly where we wanted to be because most of you know that when we look at our financial acquisition hurdles, that we want by year 3 or year 5 our returns to be between 12% and 15% for strategic a acquisition that we do. For bolt-ons that have a high level of cost synergies, we would expect that return to be greater than 17%. The good news from my perspective is that when we continue to execute on the integration of Niscayah and complete that over the next 1.5 years to 2 years, we continue to drive the revenue synergies from AeroScout across different platforms and health care, security and industrial, that these returns will continue to improve, and security will move its way much closer to that objective of 12% to 15% over the next 2 to 3 years.

So the next question you probably have is, "Okay. that's great. But how does the company going to get 12% to 15%?" Well, the way that I look at it is the following. We have a vision for 2016 and 2017 to achieve that type, which is one of the objectives that we want to achieve. And you've heard a lot of the organic growth initiatives today, hundreds of millions of dollars in various areas. We believe it is positioning us so that we can start to achieve our long-term organic growth initiative of 4% to 6%, which means we can achieve 5% organic growth over the next 4 to 5 years, beyond 2013. We feel that is reasonable. We feel that, that is achievable. Operating margin rate will continue to expand by 200 basis points to be over 15%, which by the way is part of our vision as well, as we continue to leverage the benefits of the different acquisitions we're integrating like Niscayah. We also get the leverage effect of the residential housing recovery in our CDIY business, having a positive impact on operating margin rates and we continue to move the rest of the business forward to the organic growth initiative that will also have a positive leverage effect as well. You heard about 20% operating margins in emerging markets. That's going to continue to push that number up.

And of course, working capital turns, half a turn improvement getting us to 10 turns by that time horizon. Now, we will most likely do more acquisitions. And we touched on that a little bit earlier as we begin to move out of our hiatus phase and start to focus on larger acquisitions and later this year maybe or 2014 time frame. That will have a bit of a modest dilution or partially offset some of these positives. But even with that, we believe we will be able to achieve this range of 12% to 15%, which will be well above our 9% cost of capital number.

So, acquisitions. Everybody wants to know about acquisitions. Well, I thought it will be helpful not only to put a little bit of a roadmap together for CFROI for getting the 12% to 15% but also, how do we get to this $15 billion number? As mentioned earlier, business is not set in stone. Things change and things happen. But right now, our objective is to move towards this vision. And if you think about it from what I just said around organic growth, 5%, we'll start with 2013 base of $11 billion in revenue, 5% organic growth CAGR over that time horizon either to 2016 or '17. That doesn't get us all the way to $15 billion. We will need to do some acquisitions roughly depending on the year, $1.6 billion to $2.3 billion of acquisitions on top of that organic growth would get us to $15 billion of revenue. Not a huge number, what's even more interesting though when you look at it, for the free cash flow that we would generate in that time horizon, those pie charts that are below there, if we were to do it in 2016, 2/3 of the free cash flow will need to go towards acquisitions. If we did it in 2017, 1/3 of the free cash flow cumulative in that time frame would need to go to acquisitions. Blaming [ph] that in the middle, ironically, it gets to a number of 50%, which is why we really believe our capital allocation strategy historically for the last 10 years has been 50% roughly. And we believe it's going to be roughly 50% for the next 5 years. Again, these are guidelines. It's not going to be exactly 50% every single year. But over the long term, we think that 50% split makes a lot of sense.

My last slide is to reinforce the vision that Jim showed earlier today. We believe that we continue to move forward and diversifying portfolio. We are a company that can achieve $15 billion of revenue. It's this next evolution, the next step moving forward. Greater than 20% of revenues should come from emerging markets. There might be a little confusion out there about emerging market revenues, so let me clarify that. Today, our total emerging market revenue is $1.6 billion. That's what it was in 2012. You saw some numbers around base organic growth CAGRs over the next 3 years if we didn't do any of the organic growth initiatives, which will get you somewhere between 10% to 20% growth depending on the region. That's about $800 million of growth over that 3-year period. And then we have another $350 million that we're going over that same year -- that same 3-year horizon. It's over $1 billion of revenue opportunity that we see in emerging markets in that 3-year period. That is going to get us to very close to being 20% of total revenue by 2015. And then by '16 and '17, with continual growth, we will be in excess of 20%. Working capital turns will be 10% as we talked about. Greater than 15% operating margin, I walked you through that logic a little earlier. And then the CFROI, I walked you through how we get to 12% to 15% in this time horizon. Truly beginning to stay focused on our journey of becoming a global industry leader, we think today has really laid that out. And hopefully, some of these road maps provide a little more clarity about how we can achieve those numbers. Thank you.

Kathryn H. White Vanek

To end this section, we have a Q&A panel, which includes John, Jim, Don, JoAnna, John Wyatt and Jeff.

Kathryn H. White Vanek


Unknown Attendee

Hi. Stephanie Henderson. Why -- can you talk a little bit about why a top-down approach to revenues from M&A is the right approach? Do you then run the risk of either missing a revenue target by 2016 and disappointing investors from that standpoint and/or overpaying because you have to hit $15 billion in revenue?

John F. Lundgren

You understand the question?

Donald Allan

Yes. We said earlier that this $15 billion target is not a superordinate objective. It's helpful to the organization. I think it's helpful to the external world to kind of put a direction out there, a growth rate. We have 10% to 12% growth rate in our long-term financial objectives. That pairs up with the mid-teens earnings per share growth that generally outperforms when it comes to shareholder value creation. That's sort of the formula we follow, works well with the 50-50 allocation of cash return to the shareholders versus investment in M&A. And it's served us quite well over the last decade. There's no magic to that formula, and it is not a rigid formula as Don pointed out, and as we said earlier. So it's only out there because it gives us something to aspire to, a logical way to get -- a path to get to where we want to go, assuming all else equal. But if circumstances change, we're agile and we're flexible.

Kathryn H. White Vanek


Clifford F. Ransom - Ransom Research, Inc.

Stanley is now 100 and how many years old?

John F. Lundgren


Clifford F. Ransom - Ransom Research, Inc.

173 years old. And I want to just commend you for having developed in the last 6 or 7 years finally a disciplined attitude toward capital allocation, because it's been a profound change and a welcomed one. I figured out the other day, I said to John that I've now followed on a cumulative basis with these 2 companies, this company for 74 years. And it's never been in better shape. How are you going to respond to my thought that I hope you don't meet your existing goals, because I want to see you get back in the acquisition business because I think you've also proven that you know how to integrate these things. I'm concerned that you feel you have a management constraint to do anything until you have more of the Black & Decker deal under your belt. But if you continue to do acquisitions, typically, those are dilutive because you'll fix them with SFS. Do you kind of have a sense to set up legitimate concern on my part or not?

John F. Lundgren

I think it's a fair question, Cliff. I honestly think it's not a legitimate concern and we shouldn't root for us to fail on the organic growth initiatives. You know well it's 3 things we look at. And Jim, who led our business development effort when I arrived at Stanley, and I led business development for a $35 billion company, and we were very much in sync on the things we looked at. First and foremost, it was an acquisition target strategic, and initially, that was a big-box centric or North American big-box centric. We were over-concentrated there. So obviously, it wasn't. We've clearly identified the 4 strategic growth platforms. So is it strategic in an area, a business or geography where we want to grow, number one? Number two, can it achieve our financial objectives? I think Don's been pretty clear they really haven't changed in 10 years depending on if it's a bolt-on or if it's strategic, how long it gets to its operating margin. And it used to be ROCE, now it's cash flow return on investment until it can get to those objectives. And I think that's been quite clear and we'll model that and we're very disciplined and I think you touched on it. If we can't get there with our own actions and with synergies as opposed to doing what happened to the telecoms years ago, have to put in a lot of crazy revenue synergies to get to the numbers, that doesn't touch our model. And trust me, I haven't had to shoot very much down because with these 2 guys in our business development department, that financial model -- the rigor of the financial modeling is there. But you can say, "Okay. Well, everybody does that." The third thing you touched on but if it's of equal or greater performance, we walked away from or not participated in many acquisitions due to organizational capacity, i.e., we felt that the target didn't come with enough management that would either would sit well within our culture or would adopt accordingly. And as a consequence, we didn't feel we have the bandwidth to absorb it. And in those cases we've walked away, and I'll give you 2 distinct examples. Most recently, we're at full capacity in absorbing in Niscayah. It was a great opportunity for us. We aren't looking back. We knew the company. But in candor, a far less operating management came with that company than we anticipated when we bought the company. It was $1 billion in revenue. We didn't do our normal due diligence because we were essentially the white knight in responding to an unsolicited and unwelcome takeover offers from the former owner. So while we knew the company, we didn't have our normal 90 to 120 days of due diligence, getting to understand the management. So when we bought the company, one of the things we realized is we had to backfill a lot more management positions, which quite frankly, depleted our bench and we had to backfill our bench and life goes on, which is what we did. But as a consequence, we were spread a little thin. You can say that we've gone forward with Infastech as Mike Tyll pointed out in his presentation. Not only was it strategic and a good business and we'll meet our objectives but essentially, the entire highly capable Infastech management team, a, has joined our Engineered Fastening business and b, they're assuming many different but critical roles within that business. So we were very comfortable taking that on. So simply said, as we look at target in the next 6 to 12 to 18 months, if we feel it comes with the management and that's management interested in continuing with us, and we think now that Black & Decker is digesting, we're not declaring victory. But we have closed the book 3 years later on that acquisition. We will get back into that business because, thank you for your compliment, I think the numbers speak for themselves. We think we're pretty good at it. But the hiatus has been due to not so much balance sheet constraints but organizational capacity constraints. In Brett's team and Massimo's team are at full capacity right now. And so the target that Jim mentioned or the potential targets, probably in the next 3, 6, 9, 12 months aren't in Security for that reason, not because we don't love the business but because of organizational capacity. Mike?

Kathryn H. White Vanek


Unknown Attendee

Thanks. And this one, actually, my question might be right on your last couple of remarks there, John. In comparing the 2016, '17 revenue vision in terms of by Tools, Engineered Fastening, Infrastructure and Security and Healthcare, in the Security/Healthcare bucket, you have a goal of $3.5 billion to $4 billion. And I think on your most recent or previous investor presentation, you had Healthcare of $1 billion to $2 billion and you had Security of over $3 billion. So that would be, combined $4 million to $5 million and here, you have $3.5 million to $4 million. So I was just wondering if you could kind of elaborate on that change? And, I think, on the Security side is at full capacity, I don't know if there was -- that to be an actual commentary.

John F. Lundgren

[indiscernible], that's your turn. I mean, the Security's $2.5 billion now. It will grow and obviously, we've reported -- Healthcare, remember it's growing from $170 million base. So even at astronomical organic growth rates, it's going to be all be by acquisition.

Donald Allan

But it's a good question because there is a change there, where Healthcare wasn't acquisitive growth platform until today. I mean, we've changed it a little, a couple months ago, but announced it today. It's a mini growth platform now. It's a health care IT kinds of companies and the kinds of health care types of companies that we might buy, typically trade for 4 or, 5, 6x revenue. That's just not in our sweet spot, and as we've become...

John F. Lundgren

20 to 30x EBITDA.

Donald Allan

Yes. And as we've become more and more familiar with the space, we've realized that the real opportunity for that particular business and the post-AeroScout era is organic and not so much acquisitive. I don't think anybody here would be supportive of us going out and spending significant capital at those kind of multiples when there's so many other opportunities in the core of what we do.

Kathryn H. White Vanek

Other question at the back?

Unknown Analyst

Tom Brickman, Langerberg and Company [ph]. Congratulations on completing the GQ Tools acquisition. You noted here that there are $44 million in 2012 revenue for that company. I'm just curious what the EBITDA margins look like, and what your price was to acquire the 60% stake?

James M. Loree

Yes. The price was approximately $50 million, and the EBITDA margins right now are in kind of the mid-teens.

John F. Lundgren

And importantly, Jim pointed out EBITDA on the mid-teens, not a lot of SG&A compared to a western company. So, good operating margins despite -- healthy, but below line average EBITDA margins as we speak.

Kathryn H. White Vanek

Another one in the back. Mike?

Unknown Attendee

This one's for John Wyatt. Just a question on the market opportunities you talked about in CDIY Europe. It looks like the DeWalt opportunity you laid out is equal to the entire opportunity for Stanley and Black & Decker. A lot of the other conversations that's been around to focus on mid-price points. I guess, what are you seeing that makes it different in Europe?

John H. Wyatt

Well, we're starting from different positions in the various markets. So we have a much bigger opportunity with DeWalt given the share position we have today versus the Stanley hand tool, Black & Decker power tool business. And that's principally because the DeWalt was launched just about a decade ago, where the other businesses has been around for a lot longer. So we have an opportunity therefore to grow into that space in a much bigger way because of the size of the share we have today. But what I'd also add is given the innovation which I started to allude to and the lithium program that we have, the expansion tools we have, there's a lot of traction behind DeWalt to gain in the professional space.

Donald Allan

And just for clarity, the mid-price point thrust is entirely in the emerging markets. So just so there's no confusion on that.

Kathryn H. White Vanek

We have time for 1 more question. All right. I see we have some shy folks today.

John F. Lundgren

And everyone understands their question stands between the ending this [indiscernible] and cocktail.

Kathryn H. White Vanek

And getting into the product. So I hope you take advantage of the amazing management depth and breadth that we have here today during our cocktail. And I will turn it over to the John Lundgren for our closing comments.

John F. Lundgren

I'll be brief. First of all, I hope you appreciate some, if not all, of what you heard today as much as I and the management team appreciate the opportunity of sharing what Kate, I think, very appropriately classified as past, present and future. I'm going to ended the same way we started. If I could have my wish that you'd take 5 or 6 things away from today, recognizing that while we are without question the most powerful and reputable branded tool manufacturer, both in CDIY and Industrial, that walking down the aisle of Home Depot or simply running spreadsheet on that business, you're missing a whole lot of what's going on in this company and the fact that we are continuing to grow and transform and to become a global diversified company, and as Jim stated in that slide, with the mission of building a world-class brand of franchises with sustainable strategic characteristics that ultimately create exceptional shareholder value. The organic growth initiatives real. We've only been at it about 6 months. As I've indicated the Q&A, we've allocated the people, we've allocated the funds, and we've allocated the time to drive this initiative. We think it's going to result in $800-plus million in operating -- excuse me, in revenue, beyond normal market growth, $200 million in operating income. It's going to translate into $1 a share in the next 3 years.

We hope you're convinced. We don't normally bring as many people from all over the world. But this is a very important event for us, and it's a very important opportunity for you to be exposed to the people who do the real work. We have a lot of exposure to myself and to Jim and to Don and to Kate. Some of the folks you've seen today and you're going to have the opportunity to interact with -- on a less formal basis. The other folks making it happen and as I said, I couldn't be prouder of what they've accomplished. I also couldn't be more confident in what they're going to accomplish in the next 3 to 5 years.

We also have processes that we think are working. SFS, I hope between Steve's presentation and the emphasis on it, it's not just an operating platform kind of thing. I think you saw from every business leader's presentation, it is in our DNA. It is a competitive advantage. And it will continue to generate cash to this company just the way it has for the last 5 years, for the next 3 to 4 years.

If you took nothing away from Jeff's presentation and JoAnna's presentation, we have some innovative products and processes that are going to drive market share gains. And we have customized go-to-market strategies and commercialization capabilities that we think are formidable and we think are significantly improved.

I'll go way back in history. 10 years ago, when I arrived at Stanley, I saw lots of golden hammers, which were awards for innovation and I saw a flat top line between $2.2 billion and $2.4 billion for 7 years. And in really probing with the team and Jeff and his team, we have tremendous innovation. We -- really didn't have even a adequate commercialization process. So great product innovation, not great commercialization, the dog didn't eat the dog food. That has been revolutionized over the past 5 or 6 years. And it takes the 2 to go hand in hand to grow the market share the way we have been growing. It will continue to grow in the future.

Don presented or clarified our capital allocation strategy. And I really appreciate the way it's been described and I think it's just a great way to think about it. It's a hybrid company. It's a growth strategy. It's a growth company, that returns a significant amount of cash to its shareholders. Some pretty good opportunity. And Jim presented or in fact, reintroduced, if you will, a slightly modified but presented, and the Don, reinforced our vision for 2016 and 2017, which I think is fairly compelling.

So before the break, I just got 1 -- and I'll ask you to see if -- short organizational announcement that's appropriate for this audience. It's with mixed emotions that I say that Kate Vanek, who you know, orchestrated and organized this entire day and has spent 5 years with us really elevating the Investor Relations function of Stanley, has accepted an offer. She's allowed me to say it's with AC Nielsen, world-class company for a whole lot of money, probably more than she's worth. Also, 15 minutes from her house in New York and as I say, it's bittersweet. Kate's been with us for 5 years. She's been a tremendous addition to our team. The fact that she likes her husband and lives in New York and is now 15 minutes from home, it's win-win. That's the bad news.

The good news is we've been planning this transition and many of you who followed us a long time know that Greg Waybright, who's currently our Vice President of Internal Audit, actually did this role temporarily before Kate joined us full time. You've interacted with him. Greg has acted as a CFO for some of our businesses and integration leader who led the internal audit function, has a pervasive knowledge of our company, has interacted with many of you as well as tremendous financial acumen. So our wish and hope and expectation, this will be a seamless transition between Kate and Greg. Greg is here, as is Kate, and you'll have a chance to speak with both of them during the cocktail hour.

So let's finish with a short video, after which I would really encourage you to interact with the management team that's here as well as about 20 more of our product and business specialists. Yes, there we have tremendous product displays on both sides. Let's run the video.


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