Stanley Black & Decker, Inc. (SWK)

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Stanley Black & Decker (SWK)

Q4 2010 Earnings Call

January 27, 2011 10:00 am ET

Executives

Kate Vanek -

Donald Allan - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

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

James Loree - Chief Operating Officer and Executive Vice President

Analysts

Daniel Oppenheim - Crédit Suisse AG

Michael Kim - Sandler O'Neill & Partners

James Lucas - Janney Montgomery Scott LLC

Peter Lisnic - Robert W. Baird & Co. Incorporated

Nicole Deblase - Deutsche Bank

William Wong

Dennis McGill - Zelman & Associates

Eric Bosshard - Cleveland Research

Sam Darkatsh - Raymond James & Associates

Presentation

Operator

Good morning. My name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stanley Black & Decker Fourth Quarter Full Year 2010 Results Conference Call. [Operator Instructions] Thank you. I'd now like to introduce and turn the call over to Ms. Kate Vanek, Director of Investor Relations. You may begin your conference.

Kate Vanek

Thanks, Tracy. Good morning, everybody, and thank you all for joining us for the Stanley Black & Decker Fourth Quarter and Full Year 2010 Conference Call. On the call, in addition to myself, is John Lundgren, President and CEO; Jim Loree, Executive Vice President and COO; and Don Allan, Senior Vice President and CFO.

I would like to point out that our fourth quarter earnings release, which was issued this morning, and a supplemental presentation, which we will refer to during the call, are available on the Investor Relations portion of our website, stanleyblackanddecker.com. This morning, John, Jim and Don will review Stanley's fourth quarter and full-year 2010 results and various other topical matters followed by a Q&A session. The entire call should last approximately an hour. The replay will begin at 2:00 p.m. today. The number and access code are in our press release.

As a reminder, you can download the earnings replay as a podcast from iTunes and set up subscription for future replays going forward. And as always, please feel free to contact me with any follow-up questions after today's call.

The necessary comments here, we will be making some forward-looking statements during this call. Such statements are based on assumptions of future events that may not prove to be accurate and as such, they involve risks and uncertainties. It is therefore possible that actual results may differ materially from any forward-looking statements that we might make today. And we direct you to the cautionary statements in the 8-K that we filed with today's press release and in our most recent '34 Act. With that, I will now turn the call over to our CEO, John Lundgren.

John Lundgren

Thanks, Kate, and thanks to everybody who's joined us this morning on another beautiful but very snowy morning for those of you who are calling in from the Northeast. Just to highlight fourth quarter and full year, the first slide, all of which was in our press release but I think important and worth repeating. Fourth quarter pro forma revenues, up 10% to $2.4 billion, 5% organic, with a modest adjustment in that number, which we think makes the most relevant comparison to adjust for the Black & Decker fiscal calendar moving in sync to the Stanley Works fiscal calendar. Fourth quarter diluted EPS of $1.05. On a GAAP basis, that's $0.81. The $1.05, of course, excluded the one-time charges primarily related to the merger, which was an impact of $0.24 or $39 million. Full year pro forma revenue increased 11%, and we are quite encouraged with organic growth of 7%. And full year diluted EPS, again excluding the merger-related charges, of $3.88, and on a GAAP basis, including all those charges, of $1.32.

So relative to our annual guidance and our implied fourth quarter guidance, volume was essentially flat. We achieved $10 million more in synergies in the fourth quarter, which accounted for about half of the overachievement and the other half of the overachievement was split between tax and lower restructuring costs. A few notes out early this morning attributed all of the overachievement to tax and that simply is not correct. Don will give you some more granularity on that. So about half of the overachievement due to synergies and half due to a combination of restructuring charges and taxes.

We were really encouraged with cash flow, $935 million. Jim's going to give you some granularity on that later in the presentation, and I think of tremendous importance to everybody, the integration's proceeding well. I'm going to talk a little bit more about it a little later. SFS is taking hold. Legacy Black & Decker working capital turns were up 12% in 2010, and we're only just beginning to embed this across the entire company. Cumulative synergies, we have now projected at $425 million by the end of 2012, which is a significant increase from our original estimate of $350 million by March 2013. So in excess of 20% more cost synergies, three months sooner than we predicted and projected when we put these two companies together a year ago. We've also given our first formal estimate on revenue synergies. We have identified $300 million to $400 million by 2013. More from Don a little later on the presentation on that. And next year, full year diluted EPS guidance between to $4.75 and $5, again excluding the one-time charges, and we're projecting cash flow to be $1.1 billion, or certainly in that neighborhood. So tremendous growth, both profit and volume growth opportunity going forward.

Let's look quickly at the geographies. Essentially, good solid growth in all but two markets, which accounted for only 8% of our combined revenue in total. First and foremost, at our largest market, the U.S., 3% growth in the fourth quarter, all on a pro forma basis, which we think is obviously the most helpful way for you to look at the progress as we put the two companies together relative to year ago. U.S. does account for 54% of our revenue, and it grew at 3% in the fourth quarter. Moving over to Europe, accounting for 26% of our revenue, it grew at 4%. A lot of mixed performances within Europe. You're going to hear more about that from Jim. Really strong performance in Latin America, up 26%. It now accounts for 7% of our total. Continued strength in Asia, up 15%, and it's now 5% of our total, with only two markets, Australia and Canada showing modest 1% or 2% organic revenue decline, respectively. Canada accounts for 6% and Australia about 2% of our combined revenue.

So growth driven primarily across all regions of the world, emerging markets represent now about 11% of our total. But that is still significantly underweighted versus many diversified industrials where we would estimate approximately 20%, and in some cases as high as 25% or 30% of revenues, would come from emerging markets. And as a consequence, it should come as no surprise that a lot of the growth initiatives we're going to talk about going forward will be focused on these emerging markets and our ability to capitalize on our very strong position in Latin America and our increasingly strong position throughout Asia.

Looking at fourth quarter results, earnings increased 15%, excluding the one-time cost consistent with our financial objectives. And the primary driver was $60 million of cost synergies realized during the quarter. That gave us $135 million of synergies for the year versus the $90 million that we originally projected, and as I've already said, fourth quarter was 10% higher than we had projected. And we simply couldn't be more grateful and more pleased with the synergy team leaders, the business heads and the functional heads who are working so hard to drive these synergies and who, up to this point in time, are executing so well against what we think are very aggressive objectives.

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