Stanley Black & Decker, Inc. (SWK)

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Stanley Black & Decker (SWK)

Q3 2012 Earnings Call

October 17, 2012 8:00 am ET


Kathryn H. White Vanek - Vice President of Investor Relations

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

James M. Loree - Chief Operating Officer and Executive Vice President

Donald Allan - Chief Financial Officer and Senior Vice President


Jason Feldman - UBS Investment Bank, Research Division

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

Eric Bosshard - Cleveland Research Company

Daniel Oppenheim - Crédit Suisse AG, Research Division

Nicole DeBlase - Morgan Stanley, Research Division

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

Michael J. Wherley - Janney Montgomery Scott LLC, Research Division

Mike Wood - Macquarie Research

Dennis McGill - Zelman & Associates, Research Division

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

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

Michael Kim - Imperial Capital, LLC, Research Division

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



Welcome to the Q3 2012 Stanley Black & Decker, Inc. Earnings Conference Call. My name is Sandra, 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 Relations, Kate Vanek. Ms. Vanek, you may begin.

Kathryn H. White Vanek

Thank you, Sandra. Good morning, everyone. Thank you all for joining us today for Stanley Black & Decker's Third Quarter 2012 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.

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

This morning, John, Jim and Don will review Stanley's 2012 third quarter results and various other topical matters, followed by a Q&A session. [Operator Instructions] And as always, please feel free to contact me with any follow-up questions after the call.

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 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 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 call over to our CEO, John Lundgren.

John F. Lundgren

Thanks, Kate. Good morning, everybody. And for those of you have been able to read the press release this morning, hopefully, you've taken away from it that our focus does remain on driving long-term growth and achieving our mid-decade vision of being a $15 billion-revenue company with 15% operating margins, irrespective of the macroeconomic backdrop. What we're going to try to cover this morning is what we're doing to counter some of the headwinds in the marketplace in an effort to essentially determine our own destiny, drive organic growth in the face of relatively flat developed markets through, among other things, an increased focus in emerging markets and some, I think, very, very exciting programs in well-developed markets.

Revenues in the third quarter did increase 6% year-on-year to $2.8 billion. Organic revenues were flat. CDIY grew 4% organically with an operating margin rate, excluding charges, of 15.8%. That is the highest operating margin rate we've been able to achieve since the merger of Stanley Black & Decker almost 3 years ago.

Industrial and Security were both pressured by certain weak end markets and particularly, Europe. And to counter some of those, you're going to hear a lot from Jim a little later on in his presentation about some of the investments and organic growth initiatives that have already begun and will carry on throughout the next 12 to 24 months.

Our third quarter diluted earnings per share was $1.40. Again, that's excluding charge of $0.69 GAAP EPS, including all the charges we do in the appendix of this presentation have a detailed definition and explanation of what's in the charges.

The Niscayah integration continues to go well, operating margins to exceed 12% this year when it's finished. That's up 500 basis points from fiscal year '11, shortly less than -- exactly 1 year after closing that deal.

Importantly, we've reached definitive agreement to divest our Hardware & Home Improvement business, which marked another key step in the continued transformation of our portfolio. We've discussed this a lot over the last 2 to 3 years. This is a good business with a capable management team, and it's been under review from day 1 of the merger. And our conclusion was that while it may not be the best business long-term given our strategic objectives and geographical portfolio, we needed to fix it first. It's a much more profitable business than it was 3 years ago. And we believe we've accomplished the major strategic milestone in placing that business in the hands of new owners. It brings our U.S. home center exposure, not down to too low a level, but back to the pre-merger Black & Decker levels in the low teens. It does retain, nonetheless, the upside to the U.S. housing rebound, and that our CDIY business, which is still over $5 billion, is $1.5 billion below the revenue, a pro forma revenue, from peak. That's simply the pro forma Stanley Black & Decker revenue 2009, '10, prior to the more recent decline. And as a consequence, HHI never factored into that calculation.

And finally, Don will give you some more detail on this in his forward look, but when considering Infastech, some of the smaller acquisitions we've completed in 2012, this divestiture -- and this divestiture, the revenue splits geographically around the country will be -- around the world will be approximately 46% U.S., 27% Europe, 16% emerging markets. And again, to reemphasize, Jim is going to talk to you about some of the programs designed to drive that 16% to and beyond our 20% objective by mid-decade.

Moving on to our -- the global footprint versus prior year. Organic sales, as I said, were flat as strength in U.S. and emerging markets was offset by weakness in Europe and some of the smaller developed markets. You'll hear a lot about this in the segments. But quickly looking at the U.S., which still accounts for 53% of our business in the third quarter, we grew 1%. Europe, overall, was down 3% organically but with a lot of moving pieces. Excluding CDIY, Europe was down about 8%. That's primarily IAR and Security. Jim will talk about this in the segment detail. Including Niscayah, Niscayah is down but actually slightly less than our model at the acquisition time. And operating margin, as previously mentioned, for Niscayah is up almost 500 basis points. Importantly, our high-growth emerging markets, Asia, up 15%; Latin America, up 12%, continue to be strong points, growing well, albeit at a slightly slower pace; and last but not least, some of the smaller developed markets, such as Canada, Australia and Japan, down low to mid-single digits.

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