Stanley Black & Decker, Inc. (SWK)

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Stanley Black & Decker (SWK)

Q4 2012 Earnings Call

January 24, 2013 8:00 am ET

Executives

Kathryn H. White Vanek - Vice President of Investor Relations

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

James M. Loree - President and Chief Operating Officer

Donald Allan - Chief Financial Officer and Senior Vice President

Analysts

Daniel Oppenheim - Crédit Suisse AG, Research Division

Stephen Kim - Barclays Capital, Research Division

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

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Joshua Wilson

Dennis McGill - Zelman & Associates, LLC

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

Mike Wood - Macquarie Research

Jason Feldman - UBS Investment Bank, Research Division

Eric Bosshard - Cleveland Research Company

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

Liam D. Burke - Janney Montgomery Scott LLC, Research Division

Presentation

Operator

Welcome to the Q4 and Full Year 2012 Stanley Black & Decker, Inc., Earnings Conference Call. My name is Lorraine, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to Vice President of Investor and Government Relations, Kate Vanek. Ms. Vanek, you may begin.

Kathryn H. White Vanek

Thanks, Lorraine. Good morning, everybody. Thank you so much for joining us for the Stanley Black & Decker Fourth Quarter and Full Year 2012 Conference Call. On the call, in addition to myself, is John Lundgren, CEO; Jim Loree, President and COO; and Don Allan, Senior Vice President and CFO.

Our earnings release, which was issued this morning, and a supplemental presentation, which we will refer to during the call, are available on the IR portion of our website as well as our newly revamped iPhone and iPad app and mobile website. A replay of the call will begin today at 2:00 p.m. The replay number and access code are in our release.

This morning, John, Jim and Don will review Stanley's 2012 fourth quarter and full year results and various other topical matters, followed by a Q&A session. [Operator Instructions] As always, please feel free to contact me with any sort of follow-up questions.

And as I normally have to do: We will be making some forward-looking statements during this call. Such statements are based on assumptions of future events that may or may not prove to be accurate, and as such, they involve risk and uncertainty. It is therefore possible that actual results may differ materially from any forward-looking statements that we might make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent '34 Act.

With that, I will now turn the -- our call over to our CEO, John Lundgren.

John F. Lundgren

Thanks, Kate. Good morning, everybody. Listen, this morning, beyond reporting our fourth quarter '12 results and providing our 2013 guidance, which I know everyone on the call is interested in, a couple of other objectives of this morning's call are to essentially close the books on the Black & Decker merger and, of equal or even greater importance, lay the groundwork for what we believe is a series of really exciting organic growth initiatives. So thanks for joining us early this morning.

Quickly, on the fourth quarter. Revenues were up 4%, to $2.7 billion. Half of that was organic growth, up 2%. And very interesting, on the organic growth, 6% in CDIY and Engineered Fastening, 2 of our strategic businesses performing really well, and those were -- that growth was offset by declines in Europe due primarily to market conditions in IAR as well as Security. A little more on that later.

Diluted EPS of $1.37, combination of strong operations and a favorable tax rate. That was up 12% versus same period a year ago. GAAP earnings of 70 -- were $0.79. Full year revenues, up 8%, 2% organically. And 2012 EPS of $4.67, x charges, was flat versus prior year. But if you normalize the tax rate, i.e., equal -- 2012, make it equal to 2011, diluted EPS GAAP was $2.70 but, with a normalized tax rate, would have been a 12% increase year-on-year. And Don is going to provide a lot more granularity on tax and its progression '11, '12 to '13 when he gives you some more detail on the outlook.

Strong year in cash flow, $1.1 billion, x charges, for the year. Working capital turns of 7.5, a 42% increase since the pro forma pre-merger levels.

2013 guidance for diluted earnings of $5.40 to $5.65 a share. That's a 16% to 21% increase versus 2012, driven by organic growth in the range of 2% to 3%, 100 basis points of which we believe will be driven by the early returns on some of the organic growth initiatives that Jim is going to walk you through a little later on this morning.

And finally, March 2013 marks the 3-year anniversary of the merger between Stanley and Black & Decker. It's an important milestone. It came with a few notable executive management changes, and those were announced in a press release on January 14 and they're taking effect during the first quarter of this year.

So let's turn to the final chapter of the merger. And I guess it's both a pleasure and my good fortune to be able to talk about it at least on this call this morning and it's probably the last time we'll talk about it in any particular detail. But let's wrap it up.

We did really well on cost synergies. By the end of 2013, we will have achieved $500 million in cost synergies, significantly exceeding our target and commitment of $350 million. We've exceeded that target by 43%.

As you all know, CDIY right now represents about 50% of our revenue. The $760 million in CDIY of operating margin in 2012 exceeded the entire 2009 operating margin of the entire company, legacy Stanley and legacy Black & Decker combined. That's the impact of cost and revenue synergies, a prolific new product development activity in process and exceptionally strong execution by the CDIY team led by Jeff Ansell and comprised of really the best athletes from each of the 2 legacy organizations. So it was just a terrific opportunity, and thankfully, in retrospect, we were able to take advantage of it.

Revenue energy projects continue to yield strong results. We've surpassed $300 million in revenue synergies versus a goal of $300 million to $400 million. And probably the simple example, just to refresh everyone's memory, Stanley Hand Tools are up $25 million in Latin America -- or will be by the end of 2013. Business was virtually nonexistent but -- as we were able to sell premium-branded Stanley products through a well-established Black & Decker distribution network. It's just one of many, many examples of how the -- of the power of the combination of these 2 companies.

The cultures, driven by world-class innovation, have resulted in more than 1,500 new products and $1 billion of organic growth over the last 3 years. And probably one of the greatest achievements in terms of results from the combination is the degree to which the Stanley Fulfillment System has been initially embraced and fully embedded across the 2 companies. Working capital turns were 7.5, up from 5.3 pro forma pre-merger levels. And within CDIY, which is where the majority of the integration activity went on, working capital is down 50% from the 2009 pre-merger levels. That is a lot of freed-up cash to reinvest in our businesses.

So by all measures, we truly believe the merger to date has been a resounding success.

Let's move on to the quarter. In terms of sources of growth, as you saw in our earnings release this morning, Stanley grew 4% in the fourth quarter, 8% for the year. Of the 4% in the fourth quarter, it was 2% organic, which was 2% volume and flat on price. Acquisitions added 3%. Currency was a 100-basis-point headwind, for a total of 4%. Quite similar to how it played out for the year, where volume was up 2%, price was flat, leading to 2% organic growth. Acquisitions added 8%. Currency was a 200-basis-point headwind, and that yields the 8% total growth.

Looking quickly by business, to give everyone a flavor for the fourth quarter and the year. Exceptional performance of Professional Power Tools in the quarter and on the year, driven by the 18- and 20-volt lithium-ion DeWalt product introductions, just tremendously well accepted across our customer base.

The Consumer Products Group also had a terrific fourth quarter and a great year. The fourth quarter 9% was driven primarily by new products, Gyro and Matrix, as well as some really good acceptance of some of the smaller products in Japan, which is a small but important market where that business continues to perform well.

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