Stanley Black & Decker, Inc. (SWK) Earnings Call Transcript & Summary

Good afternoon, everybody. I think it's afternoon. I'm Tim Wojs. I cover building products here at Baird, and we're delighted to have Stanley Black & Decker join us again this year at our Global Industrial Conference. Stanley Black & Decker is a global provider of power tools, hand tools, outdoor products and engineered fastening solutions. And the portfolio is highlighted by the DEWALT, STANLEY and CRAFTSMAN brands. From the company up here, we have President and CEO, Chris Nelson. He'll have a couple of just kind of prepared remarks, and then we'll hop into Q&A. So with that, I'll turn the floor to you.

Great. Thanks a lot, Tim, and nice to see everybody. We just wrapped up and announced our Q3, and we're excited about the progress we're making. We posted roughly 4% organic growth. And then even while backing out the results of tariff refunds, we hit an important milestone of of posting a 35% AGM, which was something we've been building to for a while. In addition to that, ahead of the game and looking good on cash flow. I think what that says to me and what's exciting about it is that we've been very consistent in our focus on our message of saying we need to control what we control and execute well and really focused in 3 areas. And that is making sure that we activate our brands and focus on our brands that are our core. And we're starting to see the proof points of -- we had 2 quarters in a row of organic growth in all 3 of our core brands. And then second, we've talked about making sure that we operate -- we drive operational excellence and operate with discipline. And I think that the continued progress that we see in our margin profile is encouraging there as well. And then lastly, we've talked about the importance of increasing the speed of our innovation cycle. And we've been able to take out 30% of our cycle time on our new product introductions over the past couple of years, and that's really manifested itself in being able to drive more new product introductions. And I'd just highlight there, the proof point and what we're seeing in CRAFTSMAN of this being the most active launch window we've had since we acquired the brand. So we feel good about staying consistent. We need to keep on. We still have a lot of work and a lot of opportunity ahead of us, but we're going to continue to focus on and control what we can control. And then as a part of that, the performance is certainly as well as a couple of key divestitures that have allowed us to get our balance sheet in great shape. And we completed a $500 million share buyback that we announced the completion of at the end of last quarter, and then the Board authorized another $1 billion program going forward, which will be opportunistic for us to buy as forward. But I think what it signals is we have more flexibility in our capital allocation, and we're excited about our value creation opportunities going forward.

Okay. Okay. Great. That's a good overview. Maybe just to start off, you kind of -- there's a lot going on tariffs, input costs, you guys have your internal programs, things like that. You're back to kind of mid-single-digit growth in tools. Just -- you're talking about margin expansion maybe next year. Can you just talk through kind of the key buckets or kind of moving parts that we should think about as you go into '27?

Yes. I think really, my goal is to make the story very similar. The things that I just talked about, we've been focused. And this has not been an overnight thing. It's been a 3-year cycle of getting aligned behind that focused portfolio, focused message in driving the brand growth. So we want to keep on driving consistency and execution. And we think -- we feel good about we're going to be targeting in the 34% to 35% gross margin range next year. We feel good about the progress we're making there. And what we saw in Q3 gives us good confidence that we're heading in the right direction. And then we were able to, this year, as a result of the tariff refunds, we were able to accelerate some investments in Feet on the Street and some of our advertising activation of our core brands, pull those forward a little bit from '27 into this year. Now looking to get back into more of that 23-ish percent run rate in SG&A going forward. So really, the key for next year is consistency, continuing to drive execution in what we think is going to be -- we would think that we're not seeing any big changes in the marketplace that we're looking forward to going next year.

Okay. Okay. And as you've come in, you've kind of refocused the business around kind of the brands as opposed to the products.

Yes.

I guess from the outside, that was something that we never really fully appreciated. And so, could you just talk about the progress there, what that gives you from a customer perspective, from a brand activation perspective versus maybe just concentrating on individual product lines?

Yes. That was actually a -- to your point, while it may seem easy, it was a big change for the company. And that was 3-plus years ago, when I joined the company, we were organized very much by product line. And so as we had a drill team, an impact wrench team, a circular saw team. And we thought more about the products that we are going to develop in that -- in those silos. And then as we had expanded and acquired different brands, we then thought what brand can I put on those products that I develop. Which is very, very different from thinking about a brand, what its position is and then what product should I develop. And as I went out and talk to customers, what I heard was we rely on -- if we were going to partner with you, we rely on you to understand how you're going to continue to allow us to grow as a company. And if I'm an end user, you're going to continue to help me be productive and accomplish what I want. And it's really difficult to tell how that looks because I'm just hearing about product after product and kind of there's not a real story. So being able to then think about now we have a DEWALT General Manager, a CRAFTSMAN General Manager, a STANLEY General Manager, where we start with where we've positioned the brands, and I'll just use DEWALT, for example, on that professional and then what subverticals we're going to target. And then what products do we need in order to be successful in those verticals with those end users and those trades. How do we then focus our investments into those products that are a part of that brand story, and then how do we invest behind that for activating those with salespeople with promotion, et cetera. That was one big thing, and you think about just that's a big change onto itself. But then secondarily, as a part of that product organization, we had engineering integrated and associated with those product groups. So I talked about a drill team. You'd have drill product managers, and you'd have drill engineers. And you know what you get when you have that? You get a new drill every year, right? Whether or not you needed to drill, that's a whole different conversation. But the other thing that it drove was that we -- innovation is in the core, in the blood of what Stanley Black & Decker does, but those teams were designing and locally optimizing for a drill or an impact or whatever. And what we found was that the complexity and diversity of our componentry and our supply chain was exponential as a result. Because if you think about a power tool, it's going to be a battery, a controller, a transmission, a motor and a shell. Different shapes, different sizes, but similar componentry. We then focused on saying what is the output that we need for that end user, how can we commonize some of those -- that componentry to simplify our supply chain. And that is what's driven the speed to market because you don't have to requalify. And what you should be thinking about is what does my end users say I need from a performance perspective. They don't necessarily really care what type of motor controller you're using. They just care about what is it doing in the end. So those two things like really changed how we operate as a company and not only drove our focus on our brands, but some of the speed and efficiency that we've been driving as well.

And on the platforming approach, like -- where do you think you are in that kind of journey? Because I know you had an Analyst Day, and you've talked about that for a while, but then as you thinking next year, we're talking about a couple of hundred basis points maybe gross margin expansion. So kind of where are you in that kind of platforming kind of rhythm and progress?

It is -- I can say it's fully and truly embedded in our new product development process. I mean, there is not a product development -- a new product development program that goes through that is not required to be platformed. It's a part of, as you think of anybody who's been around industrials, stage gate product development processes, if you don't make it through the stage gates if you're not properly platformed. And that's great going forward. But now also what we've been able to accomplish, and we're starting to really see how we drive through and see the productivity is now we can look at the existing product line and say, how do we then take advantage of those components that have been platformed on and then take it through what is already launched in the field. So you may go from -- I'll make the numbers up. You go from 20 different motor controllers to 4 different motor controllers and say how do I now implement that and make sure I get the same performance. That is a big part of where we see and we think about the continued opportunities that we have for margin expansion. Our material productivity as a result of platforming allows us, we're able to have a very kind of clear pipeline and road map for how we're going to continue to drive that material productivity going forward. And that's a big part of our margin expansion story.

Okay. Okay. I guess, when you think about -- Chris, you talked about kind of accelerating investments into '26 versus '27. What exactly are you kind of accelerating? And how does the pipeline look over like maybe a 2-, 3-, 4-year time frame in terms of where you'd like to see those investments get to?

Yes. So I think it differs by brand. So when I look at what we -- where we've seen our success and really the core of what we're doing on the DEWALT brand, it has been really making sure that we continue -- we've seen great success in driving good ROI and good lift with that brand as we bring out the products by having the right people in the field. As simple as that sounds. When you think about wanting to make sure that we're strong in mechanical, carpentry, electrical, plumbing, concrete, you need to have the end user specialists out there with those contractors, with those end users, with those tradespeople, making sure that they're not only working with them to introduce them to our products and our technology, but then they're hearing back from their pain points to make sure that we're driving the right product development. So we've seen great success there, and we're continuing to double down there. In addition, that as we have really been much more clear and crisp on how we want to round out our portfolio for individual trades, having the right people to support those channels because the mechanical channel is different than the electrical channel, and it's different than the general construction channel, making sure that we have the right salespeople and channel support people calling on those distributors is key as well. Because we not only need to have the product, we need to have the end user engagement for the poll, and then we need to have the presence on the shelves at our barriers. So that's been -- that, and then really getting active on engaging the younger professional with DEWALT. So through activations and donations and presence in trade schools, as well as more investment in social media. Because I want to go to -- when I go to a trade schools and talk to the people who are coming up through there, I've yet to find a single one that is influenced whatsoever by traditional media. They learn not only about the tools, but the application of the tools and how to do their job through influencers and through social media. So we've been present there. In CRAFTSMAN, it's been really a product development story, making sure that we're getting the right product with the right DIY specifications now that we're -- now that we've focused that as a DIY brand and really driving rapid introduction to round out the places where we want to compete: in the garage, in the garden, in the home renovation area. And STANLEY has been a lot about really doing two things. Refreshing the product line, it had been kind of ignored for a while. And then given that it's a very hand tool-based business, especially in Europe, putting dedicated people to support the hand tool -- like hand tools in Europe and rest of the world are -- go through fairly specialized wholesalers and making sure that you have the right people working with wholesalers so that they are present on the wall. You've all gone and you've seen the accessories and hand tools on the wall. If you don't have somebody working to maintain that, you lose that kind of vending machine, if you will.

Okay. Okay. That's good. I mean on the DEWALT side, I mean, you've been back to growth there really for kind of 2-plus years now. How much of that is just kind of the pro mix versus some of the initiatives that you're doing in terms of maybe filling out that toolkit and making sure you have the right product?

Yes. I mean, it's a combination of both. And certainly, we believe we're growing above market. So it's not just the market, but it is a robust market. if you look at -- it's easiest to measure as we look at our U.S., it's a pure view of our U.S. construction and industrial channel. And we've been seeing double-digit growth there. Now we know the market is not growing double digit, but you look at -- that's where a lot of the data center build-out is coming -- is being sourced from a tools perspective. But in general, that professional channel that services that professional tradesperson is doing very well. Why? Because there's a heck of a lot of construction activity, whether it's data centers or elsewhere. And I don't think this is a data center phenomenon for us because what you're seeing is more tradespeople coming in needing to be trained, meaning it now. When or whatever happens with data centers, those tradespeople, there's a backlog of other construction jobs that have not been fulfilled yet. So we feel good about that. But certainly, if I look around everywhere and every end market we serve in every channel we go through, when I look at where our biggest share opportunity is, it is in that professional world and through those professional channels. So we believe that it's a part as well as we've gotten more focused in supporting those channels better with better products and better activation and support, we believe that we're growing above the channel as well. So I think it's a combination of things, for sure.

Okay. And is that channel more intensive in terms of investments that you need to make? Or do you think it's pretty similar to other channels themselves?

It's different. It's different. When you think about -- I would just -- the two ends of the spectrum would be thinking about how you invest to be successful with big box and how you invest to be successful with this channels is that with big box, we need to make sure -- we've got great partners there. We need to make sure that we're very aligned on how we want to grow together, how we're planning together. And that is more of a working with their category managers, making sure from a business perspective, we're aligned with what we're launching with where they want to take the business, how we're thinking -- how they're thinking about technology, et cetera. When it comes to professional channels, we need to be there. You need to be on the ground and helping to make sure that you're driving people, the end users, those contractors that you're driving them into those distribution locations. That they know that they're coming in, they're asking for DEWALT. They know what new launches are coming out. They understand the products. They understand how it's going to help them in their productivity. And you do that with the -- we call them our end user specialists who are working on job sites. It's just -- it's a different mix. Both are really important, but it is just a little bit different.