Kate
White
The
Stanley Works - Director of IR
John
Lundgren
The
Stanley Works - Chairman and CEO
Nolan
Archibald
Black
& Decker - Chairman, President and CEO
Jim
Loree
The
Stanley Works - EVP and COO
Don
Allan
The
Stanley Works - VP and CFO
CONFERENCE CALL PARTICIPANTS
Jim
Lucas
Janney
Montgomery Scott - Analyst
Peter
Lisnic
Robert
W. Baird & Company - Analyst
Megan
McGrath
Barclays
Capital - Analyst
Eric
Bosshard
Cleveland
Research Company - Analyst
Dan
Oppenheim
Credit
Suisse - Analyst
PRESENTATION
Good
morning, and welcome to The Stanley Works and Black & Decker announcement
conference call. (Operator Instructions). At this time, I would like to hand the
call over to Kate White, Stanley's Director of Investor Relations. Please go
ahead.
Kate
White - The Stanley Works -
Director of IR
Good
morning, everyone. Thank you all for joining us on The Stanley Works and Black
& Decker transaction announcement conference call this
morning.
On the
call with me is John Lundgren, Stanley's Chairman and CEO; Nolan Archibald,
Black & Decker's Chairman, President and CEO; Jim Loree, Stanley's Executive
Vice President and COO; and Don Allan, Stanley's Vice President and
CFO.
I would
like to point out the transaction press release, which was issued early
yesterday evening, and the supplemental presentation, which we will refer to
during the call, are available on stanleyBlackandDecker.com as well as our
individual homepages, StanleyWorks.com and BlackandDecker.com.
This
morning, John, Nolan, Jim and Don will review The Stanley Works and Black &
Decker transaction followed by a Q&A session. The entire call is expected to
last approximately one hour, and a replay of the call be available at 12:30 PM
today. The replay number and access code are in our press release, and as
always, please feel free to contact me or Mark Rothleitner at Black & Decker
with any follow-up questions after today's call.
We will
be making 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 actual results may
differ materially from any forward-looking statements that we might make today.
And we direct you to the cautionary statement in our 8-K, which we filed with
today's press release, and our most recent 1934 Act SEC filings.
Final
Transcript
|
Nov
03, 2009 / 01:30PM GMT, SWK - The Stanley Works and Black &
Decker Conference Call to Discuss
Announcement
|
With
that, I'll now turn the call over to Stanley's Chairman and CEO, John
Lundgren.
John
Lundgren - The Stanley Works -
Chairman and CEO
Thanks,
Kate, and good morning, and welcome to the call to discuss the exciting news
that we announced last night that The Stanley Works and Black & Decker are
combining to create a stronger, globally diversified industrial
leader.
As Kate
suggested, with me this morning is Nolan Archibald, Chairman, President and
Chief Executive Officer of Black & Decker, who will serve as the Executive
Chairman of the combined company for the next three years. Also with Nolan and
me are Jim Loree, Executive Vice President and Chief Operating Officer Stanley,
who will retain those titles at the time combined company, and Don Allan, Vice
President and Chief Financial Officer of Stanley, who will become Senior Vice
President and Chief Financial Officer at the combined company.
Before I
turn it over to Nolan to say a few words, let me say that this combination
presents our respective organizations with a unique opportunity, a unique
opportunity to bring together two complementary companies with iconic brands and
rich histories, yet virtually no overlap. Also to create a comprehensive global
offering in both hand and power tools; to build on the strengths of each company
in a way that is consistent with each company's core strategy and that will
allow us to continue to invest in our identified growth platform such as
security; and to build on our shared commitment to operating excellence and
benefit from significant cost and revenue synergies, which we will discuss in
more detail momentarily.
With
that, it is my pleasure to introduce Nolan. Over the past 24 years, Nolan
Archibald has built Black & Decker into a global leader in quality power
tools and accessories, hardware and home improvement products, and
technology-based fastening systems. Over the course of his tenure, Nolan has
created a significant value for Black & Decker's shareholders and has
furthered Black & Decker's commitment to operational excellence, innovation
and end-user focus. Going forward, over the next three years, Nolan will be very
focused on helping the combined company realize the full potential of this
compelling strategic combination, with particular emphasis on achieving the
significant synergies that we know were there. Nolan?
Nolan
Archibald - Black & Decker
- Chairman, President and CEO
Thank
you, John. I am very pleased to be part of this historic combination. It truly
is one-of-a-kind opportunity to bring together two outstanding companies to
create substantial incremental benefits that neither company could achieve on
its own. Both companies have long, rich histories with Stanley dating back to
1843 and Black & Decker dating back to 1910. Black & Decker and Stanley
have excellent reputations for product innovation, quality and service. And both
have exceptionally talented and dedicated workforces.
Both
companies have strong portfolios of leading brands and products. Together, we'll
have enhanced opportunities to generate superior returns as we build on this
new, larger platform with very little overlap. As John noted, the commercial,
operational and financial benefits of this transaction are very compelling. It
is expected to create tremendous value for shareholders of both companies
through the realization of significant cost synergies, operating margin
expansion and enhanced growth opportunities. We will have larger scale across
our business segments, including hand and power tools and storage and mechanical
security, as well as a continued strong presence in electronic security,
engineered fasteners and faucets.
With
Stanley's position in hand tools and Black & Decker's complementary position
in power tools, we will have unparalleled depth and breadth in product
offerings. Our portfolio of iconic brands will reflect tremendous success of
both companies' 250-year combined history. We will continue to have a
world-class innovation process that is currently the envy of the industry, but
now with even greater resources. We will have global low-cost sourcing and
manufacturing platforms and a broader geographic sales footprint with additional
presence in high-growth emerging markets.
From a
financial perspective, after the first year, this will be highly accretive to
EPS. It is expected to generate $1.00 per share in accretion to EPS in the third
year following the closing. Because of the unique footprint in commercial,
operations, sourcing and distribution that these two companies have, we expect
to achieve approximately $350 million in annual cost synergies by the end of
year three.
Final
Transcript
|
Nov
03, 2009 / 01:30PM GMT, SWK - The Stanley Works and Black &
Decker Conference Call to Discuss
Announcement
|
There is
also an opportunity to improve margins further across the portfolios. As a
result of these improvements, we expect that in 2012, free cash flow will be
approximately $1 billion in EBITDA will be over $1.5 billion. Those increased
resources and a strong balance sheet will be used to invest in security
solutions, engineered fasteners and other high-growth platforms. I am very
excited about the tremendous potential of combining Black & Decker and
Stanley.
Now let
me turn back to John to give you more details about the transaction and why we
believe this is such a unique opportunity. John?
John
Lundgren - The Stanley Works -
Chairman and CEO
Thanks a
lot, Nolan. First and foremost, we refer to the increased resources that we will
have to invest in security solutions, engineered fastening and other high-growth
platforms, such as healthcare and infrastructure solutions. So beyond the
obvious short-term cost synergies, this is also a growth story. And of equal or
greater importance will be the strength of our balance sheet. One of the ratings
agencies has formally weighed in on the transaction, and we are confident that
we will retain a strong investment-grade credit rating. And both Jim and Don are
going to talk more about the balance sheet and our cash and capital allocation
strategy going forward.
Turning
briefly to the transaction highlights, each Black & Decker shareholder will
receive a fixed ratio of 1.275 shares of Stanley for each share of Black &
Decker. That is an implied 22.1% premium to the Black & Decker closing price
as of last Friday, October 30, 2009. Accordingly, the ownership of the new
company will be 50.5% former Stanley shareholders and 49.5% former Black &
Decker shareholders. We are expecting earnings accretion of approximately $1.00
per share by year three, and much of that is going to be driven by the $350
million in cost synergies on an annual basis that we expect we will fully
realize within the first three years.
Stanley's
nine directors will carry forward and six directors, including Nolan, from Black
& Decker will join the combined board. Nolan will serve as executive
chairman and I will serve as Chief Executive Officer, so our board will consist
of two employee and 13 independent directors.
Joining
me on the management team, as I mentioned earlier, will be James Loree,
Stanley's Executive Vice President and Chief Operating Officer, who will take
the same role in the new company; and Don Allan, who will become the CFO of the
new company.
The
company name will be Stanley Black & Decker. We will keep our corporate
headquarters in New Britain, Connecticut, but with the major presence in the
headquarters of the well-established power tool business in Towson, Maryland. We
expect the transaction to close in the first half of 2010. And given the minimal
overlap, we are committed to getting this transaction closed. It is currently
valued at $4.5 billion based on enterprise value.
What you
see on the next slide is a combination of highly complementary, iconic brands. I
would like to ask Nolan for just a second to walk those who are less familiar
with Black & Decker and its portfolio, through the Black & Decker brands
that are identified. And I will take it back to talk about the Stanley
brands.
Nolan
Archibald - Black & Decker
- Chairman, President and CEO
Thanks,
John. Black & Decker is fortunate enough to have a number of number one
brands in the markets they serve. Black & Decker is the number one world
name in market position in consumer power tools. DEWALT is the number one brand
in professional and industrial power tools. Delta is the number one market
position in stationary woodworking power tools. Porter Cable is the number one
brand in the portable woodworking power tool business. Emhart Teknologies is
virtually number one in the markets they serve. Baldwin is the number one brand
in decorator showrooms and locks and lock sets. Quickset is the number one lock
in residential hardware. And Weiser Lock is the number one brand name in Canada.
And Price Pfister is the number three faucet company in the United States.
John?
John
Lundgren - The Stanley Works -
Chairman and CEO
Thanks,
Nolan. Looking at the Stanley portfolio, the popular Stanley, FatMax and
Bostitch brands are our leaders in the construction and do-it-yourself segment.
Our security business is bolstered by Stanley's security solutions in the
mechanical space as well as -- and BEST locks, as well as Sonitrol, making
Stanley convergent security solutions the second-largest commercial monitoring
company in North America.
In the
industrial space, Facom being a market leader in Europe, Proto, Mac Tools and
Vidmar in our highly-engineered industrial storage business. Importantly, these
are well-known brands, but what is quite typical, the 80/20 rule, where 20% of
Stanley's end-users account for almost 80% of the business, and 65% of what is
sold by Stanley are sold to professionals or serious enthusiasts, people who do
this for a living. So what we have is a world-class portfolio of leading brands,
serving very different end markets, but a brand to essentially serve every
relevant segment of the market.
Final
Transcript
|
Nov
03, 2009 / 01:30PM GMT, SWK - The Stanley Works and Black &
Decker Conference Call to Discuss
Announcement
|
The next
slide is simply an example, hopefully, that a picture is worth 1,000 words. Many
of these products you will see, many of which you will be familiar with. And
importantly, as you see the array of Stanley hand tools on the left and Black
& Decker power tools on the right, it will become pictorially more clear
that there is essentially no overlap in our respective product
lines.
Moving
toward to the strategic logic of the combination, both companies have attractive
positions in markets and channels worldwide. Together we will have operations in
45 countries, with strong positions in North America, Europe, Middle East. And
for Stanley investors who aren't as familiar with Black & Decker's business,
enjoy -- Stanley's position in Latin America, will be strengthened by a very,
very strong position that Black & Decker holds in Latin America. And
together we can capitalize on this -- we hope to capitalize on this emerging
opportunity.
Growing
presence in markets such as Asia and Eastern Europe, as well as good access to
key end markets, including but not limited to industrial, construction,
automotive repair and do-it-yourself. The array of products and services is
unsurpassed.
Stanley,
well known for branded hand tools and storage, Black & Decker well-known for
cordless and corded power tools and accessories; collectively, a strong
mechanical security and hardware business; and a growing electronic security and
systems and service business; and the engineered fastening system business that
exists currently within Black & Decker, which will fit together like hand in
glove to make a comprehensive array of product offerings on a global
basis.
And both
companies are proud of their track records of innovation. That innovation is
based on intense focus on end users, specifically with the Stanley -- examples
being the Stanley discovery team and the Black & Decker end-user
specialists, both of whom have developed a tremendously broad pipeline and
robust pipeline of new product introductions. Strong value proposition,
compatible cultures and a continued commitment to focused R&D. Last, but
certainly not least, world-class operations and global sourcing.
The
Stanley fulfillment system, which Jim will talk to you a little bit more about
in his presentation, has become our core business system that has led to
expanded operating margins and significant improvement in working capital turns
over the last five years. Both companies are -- can boast low-cost country
manufacturing and sourcing capabilities. There were some overlapping physical
distribution systems that will work well together once coordinated. And both
companies are committed to best-in-class working capital efficiency. I would now
like to turn the presentation over to Jim Loree, our Executive Vice President
and Chief Operating Officer.
Jim
Loree - The Stanley Works -
EVP and COO
Thank
you, John. It is truly remarkable how nicely this company fits with our
strategic objectives. Let me start by summarizing our strategic framework, which
has now been in place for over five years. It starts with maintaining the
portfolio of transition momentum and to be a consolidator of the tool industry
and increase the relative weighting in emerging markets. Well, as you can see,
this transaction certainly accomplishes those objectives.
Then we
go to be selective and operate in markets where brand is meaningful, value
proposition is definable, and sustainable through innovation, and global cost
leadership is achievable. We believe that when these attributes are present, a
company can earn above-average returns. I can't think of a company other than
Stanley which values these attributes more highly than Black & Decker.
Significant brand equity, great story there; an extensive array of high
value-added products and a strong culture of innovation at both companies. And
both companies are cost leaders. We will cement and secure our cost leadership
for years to come with this transaction.
And then
we turn to growth -- pursue growth on multiple fronts, through building on
existing growth platforms and developing new growth platforms over time. I will
talk in a moment about the existing platforms and the new ones that we are
building. But clearly the size and the scale from this acquisition, the new
engineered fastening growth platform and Emhart Teknologies, a proprietary stud
welding and riveting systems business, that in normal times are in the mid-teens
operating margin as great growth prospects; very much looking forward to
bringing that into the portfolio.
And we
will aggressively pursue revenue synergies, as well, which will further fuel our
growth, although none of this is counted in our financial commitment to you
folks. However, they are real, and we will expand upon them in a few minutes
when Don Allan talks.
Final
Transcript
|
Nov
03, 2009 / 01:30PM GMT, SWK - The Stanley Works and Black &
Decker Conference Call to Discuss
Announcement
|
And then
finally, accelerate our progress with the Stanley fulfillment system. And as you
will see in a moment, there is a greater opportunity here to apply those
principles to the Black & Decker activities and generate even more cash and
more operational efficiency from that.
But the
real story, when you cut to the chase here, is the cash flow that can be
generated as a result of combining these companies, and then redeploy it to
further building the growth platforms.
Now I am
going to talk about the growth platforms for a minute. Those of you that are
familiar with Stanley know that our three existing growth platforms are what we
call convergent security, which is the electronic security systems and services
business, with an emphasis on commercial monitoring and its capabilities; the
mechanical security business, which when the companies combine, will actually
have the full continuum of products right from the high-end electro-mechanical
locking systems all the way down to the residential lock sets; and then of
course industrial and automotive tools.
With
Facom, Mac and Proto, we are the number two franchise in the industry going head
to head with Snap-on. And it is really exciting to think of the potential for
merging with Black & Decker's power tool technologies and products and
developing them into these markets and growing that business.
And then
the new growth platforms. I talked about engineering and fastening, and the
exciting addition of that to our portfolio. And then we have healthcare and
infrastructure, two emerging platforms that we hope to grow to $1 billion-plus
businesses over time.
Now I
would like to touch upon our capital allocation strategy over the long term.
While the allocation of capital to growth will be a priority in the medium term
and the long term, our near-term focus will be on successfully integrating the
two companies and securing our status as a highly-rated investment-grade
company. So we are targeting a strong investment-grade credit rating, and you
can interpret that as no less than BBB+ and perhaps as high as single-A over
time.
We expect
to continue to invest approximately two-thirds of our excess free cash flow in
acquisitions and growth, especially in the growth platforms that I just walked
you through. And we expect to continue to return approximately one-third of the
excess free cash flow to shareholders. And over the years, that has been in
roughly 50% for dividends and 50% through stock repurchases.
And I
know many of you are interested in our dividend policy, and I'd like to mention
that we fully expect to maintain the dividend policy that we have historically,
with an eye to continued growth. As our shareholders can appreciate, we view the
dividend is an important element of our shareholder value creation formula. And
our capital allocation strategy supports a strong balance sheet, good
shareholder returns and continued growth.
Now on
the next page, I'd really like to address one of the myths about this
transaction, that some people seem to think that it is a bit of a regression
related to our diversification strategy. And I suppose mathematically if you
took a purely static look, you might come to the conclusion that it is a slight
step towards more concentration in CDIY. But perhaps not as big a step as you
might have thought at first blush, and I would like to walk you through these
numbers. These pies represent, under Stanley and Black & Decker, the way we
communicate the segmentation of our company externally.
And if we
start with Stanley, you can see where 42% of our revenues come from security,
34% from construction and DIY, and 24% from industrial. Black & Decker has a
slightly different way of characterizing their segments. They are 73% in power
tools and accessories, 16% in hardware and home improvement, and 11% and
fastening and assembly systems.
Now,
we've made an attempt here to try to recharacterize what the segmentation might
look like on a prospective basis if we simply use the categories of CDIY,
industrial and security. And so those reddish orange arrows actually show the
revenue from Black & Decker going into those various segments. So you see
$2.9 billion goes into construction and DIY. That comes from both some of the
power tools and accessories segment, as well as some of the hardware and home
improvement.
About $1
billion goes into industrial. That is a big chunk of power tools and
accessories, as well as the Emhart business. And then $740 million go into
security, and that comes from the mechanical security business and hardware/home
improvement of Black & Decker. So what you end up with here is a combined
pro forma company that is about half CDIY, 28% security and 23% industrial. So
from my perspective, this takes us back about to where we were in 2006 from a
portfolio distribution.
Final
Transcript
|
Nov
03, 2009 / 01:30PM GMT, SWK - The Stanley Works and Black &
Decker Conference Call to Discuss
Announcement
|
And I
want to emphasize that it is a great time to be in the construction and DIY
market. We really believe we are at a trough point in the cycle. And over time
we expect the remainder of the company to get larger and the percentage of
construction and DIY to get smaller. But I want to emphasize that that is
because we expect the remainder of the company to grow faster through allocating
growth capital through acquisition.
And then
the other point I just wanted to make on this chart is in terms of customer
concentration, at one point back in 2002, Stanley was 22% with one customer and
40% in the US home centers and mass merchants. We have talked a lot over the
years about how we have deliberately tried to reduce the customer concentration.
And by 2008, we were down to 6% with our largest customer and 13% in the US some
centers and mass merchants.
On a pro
forma basis, this transaction takes us to about 12% with our largest customer
and about 24% with the US home centers and mass merchants. It is a number that
we feel very comfortable with and it really just takes us back a year or two in
terms of the concentration level. And that really is the key, that this is an
outstanding opportunity to combine these companies, generate the cash flow. And
from a portfolio perspective, while it is a small step towards concentration in
CDIY, it is one that we will be able to address quickly on a prospective basis
as we grow the remainder of the portfolio.
My final
chart before I turn it over to Don addresses the Stanley fulfillment system. And
I am not going to go into all the details, given the time that we have today,
about how this system works. But I can tell you it's been very successful for
Stanley Works over the last three years or so, as it has come to maturity and
really generated some great benefits. As you can see on the chart on the
right-hand side, we have taken our working capital turns from 4.3 back in 2006
up to 6.1 at the end of 2008.
We fully
expect to be in the mid 6's, if not slightly higher than that, by the end of
this year. And Black & Decker has made some improvements as well. But we
think that with the application of the Stanley fulfillment system to the Black
& Decker activities, we can free up as much as $0.5 billion worth of cash
over the next three years, and we fully expect to capture that. And there's
really nothing that is dramatically different about these businesses that would
prevent us from doing that.
Now Don
Allan is going to cover the topics of integration and give you some color on the
financial aspects, including the synergy commitments that we are making
today.
Don
Allan - The Stanley Works - VP
and CFO
Thank
you, Jim. As Jim mentioned, I'm going to spend a little time talking about
integration and then I'll get into some financial numbers around the transaction
and going forward. Specifically here on page 16, as we spend time looking at the
integration process that Stanley has had in place for about five years, we have
implemented various best practices in that timeframe, which are depicted in the
upper left-hand corner, the first of which is really making sure that you have
an integration plan in place prior to closing. And that is something we will try
to achieve with this transaction within the boundaries of the legal
system.
In
addition, it is important to have consensus of that integration plan with both
the management teams prior to close. And as many of you will find out in the
future, we have spent a lot of time in the last few weeks, both management
teams, understanding where the synergies are and where the benefits are going
forward, both on a cost basis and a revenue basis. And as we dive deeper into it
prior to closing, we'll have a better understanding of those synergies, and
we'll have a more detailed action plan as we go forward.
The
integration management team will have various rhythms and milestones as we
establish it. We have initially established an integration team that will be
co-chaired by both Nolan and John, and we'll have members of senior management
as part of it going forward.
And most
importantly, we will have an experienced set of integration managers on each
team working through the integration, from both sides of the company, from Black
& Decker and Stanley Works. And Stanley has created a lot of experience
within its organization over the last five years as we've done over 50
integrations that we have completed in that timeframe. Black & Decker has
done integrations as well, that they have experienced in their organization. And
so the combined company will have a significant set of people that will be able
to work on this integration going forward. And then last but not least, the
importance of having people around the world that have in-country experience on
integration in Europe and Asia and Latin America, as well, will be very
important.
One other
item to mention on this page is that when you look at the historical performance
of our integrations at Stanley Works, in particular, these six large
integrations that we have done, on average, we have yielded about 6% improvement
in margin related to these six particular integrations. That is something that
we believe we can continue to do going forward, and you will see in a few
minutes as we look at the cost synergies that it's very much in line with what
we have done related to historical performance.
Final
Transcript
|
Nov
03, 2009 / 01:30PM GMT, SWK - The Stanley Works and Black &
Decker Conference Call to Discuss
Announcement
|
So moving
to the cost synergies, let's spend a little bit of time getting into some of the
details, which I am sure many of you are interested in. As we mentioned
previously, we believe $350 million of cost synergies are achievable, which is
about 4% of the pro forma sales of the combined company. When you look at the
$350 million and you break it down into four significant categories, the first
of which is business unit and regional consolidations and integration, we think
that in North America and Europe and Asia, there is some significant
organizational overlap around management and sales forces that will allow us to
integrate on many of these organizations in particular in the new CDIY segment
that Jim described to you previously.
In
addition, there will be a large amount of back-office functions that we will be
able to integrate as well in those parts of the world, and that is about $135
million of the $350 million total.
The next,
of course, is corporate overhead. We have two corporate locations, one in
Towson, Maryland, and one in New Britain. As indicated in the press release, we
will be combining those functions within the New Britain location in Connecticut
and the elimination of the duplicate company costs will result in about $95
million of cost synergies.
The next
area is purchasing. Clearly a bigger company will have a larger purchasing base
around direct and indirect materials, as well as freight. And so as a result, we
will be able to achieve some savings by having a larger spend. Approximately 2%
to 3% of our combined spend will equate to about $75 million of cost
synergies.
Then last
but not least, the smaller piece is manufacturing and distribution. We do have
overlaps in our distribution network because we have similar customers and
similar deliveries to the end markets, especially in our CDIY businesses. So as
a result, we'll be able to combine some DCs and eliminate certain locations, as
well as similar in our plant footprint, we will be able to do some small
consolidations as well, which total $350 million of cost synergies.
Last but
not least, the one-time costs associated with these synergies is about $400
million. And if you look at the breakdown of that, it is about 90% of that is
related to headcount and 95% of that is cash-related expenditures.
Going to
the next page, we don't want to lose sight of the fact that there are
significant revenue synergies as well by combining these two companies. As Jim
mentioned, we have not put these in our financial projections, but they are
certainly things that will be a high priority for the management teams going
forward. And here's some examples of that on this particular page. We will be
looking at various cross-selling opportunities of products of both companies in
existing mature markets.
We will
be looking at how we can penetrate and use our scale in emerging markets to
accelerate that penetration and growth. And then also, we'll be looking at the
innovative processes of both companies, because both companies, as you have
heard this morning, have a long legacy of new product innovation. We should be
able to share best practices and accelerate the new product development in the
new combined company.
And then,
of course, with the increased cash flow, we'll be able to have greater
reinvestment in our existing branded channels and operations, which will allow
us to expand top line.
And a
couple of specific examples of that here on the right side of the page, as many
of you know who follow Stanley, we have a global industrial and automotive
repair business, which includes our Facom, Mac Tools and Proto brands. We
believe that we will be able to sell some additional DEWALT power tools through
those channels and really leverage that benefit going forward.
Another
example would be Latin America, as John mentioned earlier. Black & Decker
has about a $400 million Latin American business today. We have a very small
presence there, and we think leveraging our hand tool sales through their
distribution and customer network will be a significant benefit to the combined
company.
And then
last but not least is leveraging Black & Decker's strong presence and [to
stack] the channels and then really be able to move the Stanley-branded hand
tools through that particular channel. So we think it is a significant
opportunity that we have not forecasted, as we have mentioned, and we'll
continue to focus on that over the coming years.
The next
page is the pro forma financial impact to the combined company. If we start with
synergies and a breakdown by year, what we have done is we have assumed a
three-year scenario here after closing. So year one would be the first year
after closing. We believe we have $125 million of the $350 million of synergies
in year one, $250 million in year two, and then getting to $350 million by year
three, a relatively sequential performance, which we think is very
achievable.
Final
Transcript
|
Nov
03, 2009 / 01:30PM GMT, SWK - The Stanley Works and Black &
Decker Conference Call to Discuss
Announcement
|
Looking
at the GAAP EPS accretion in the three years as well, you can see that it is a
significant dilutive impact in year one on a GAAP basis because there are some
significant charges that I'll walk through in a few minutes that need to be
recorded in that timeframe. And then build up to $1 accretion by year three on a
GAAP basis.
So if we
look at some of the charges that need to be recorded on a GAAP basis, the costs
to achieve I mentioned were $400 million. The breakout there is on the page, of
$330 million in the first year, so the vast majority of those charges will be
recorded in year one. We will have a non-cash inventory step-up or charge. That
is an accounting-related matter that we will need to be recorded of about $200
million in year one. And then the transactional fees and some other expenses of
$70 million in year one as well, which total $600 million in year one, which is
about $2.80 of EPS of a dilutive impact. So if you adjust for that, you have a
pro forma adjusted EPS accretion or dilution of about $0.45 to $0.20 of
dilution.
Adjusting
that as well on a cash basis, because there will be significant additional
intangible amortization of anywhere from $80 million to $90 million on an annual
basis, it's modestly positively accretive in year one when you adjust for that
on a cash basis. Year two is when the accretion really starts to get
significant, and you can see on a pro forma adjusted basis that it is $0.50 to
$0.60 accretive in year two, and then moves its way up to $1.05 to $1.15 in year
three.
And then
last but not least, looking at the cash EPS accretion, you could see in year
three it gets close to $1.50 when you exclude the effect of the additional
intangible amortization. So we clearly feel it is a significant accretive
transaction, which will ultimately result in the combined company being
approximately $5.00 of EPS by year three.
So let's
move to our balance sheet and our liquidity. As we mentioned earlier, we believe
that we will have a very strong financial position as a combined company. You
can see here on page 20 and when you look at the company on a pro forma basis in
2009, the EBITDA will be approximately $1 billion; free cash flow will be almost
$700 million, which equates to a debt to EBITDA ratio of 2.9 times. And our debt
to cap on an adjusted basis when you adjust for our hybrid equity instruments
will be about 30%.
As we
look at the cash flow of the sequential three years and what it will be like in
year three, you could see after the synergies are achieved, our EBITDA gets to
$1.5 billion and our free cash flow, $1 billion. So our debt-to-EBITDA ratio
goes down to 1.4 and our debt to GAAP on an adjusted basis is about 25%, which
is why we feel comfortable stating that we will be a strong investment credit
rating, as Jim mentioned earlier, which we are defining as BBB+ or better. So we
feel like this company, combined, is creating an even stronger company with a
very strong foundation going forward.
Looking
at liquidity on page 21, which is important to all of us, making sure that we
come out of the gates, so to speak, post-closing with a strong liquid position.
Here on the left side of the page, you can see we feel that we will have a lot
of liquidity at that timeframe. We expect to have cash position of about $1
billion post closing. Stanley has existing committed credit facilities that
expire in 2013 of about $800 million. And then we will expand those by about
$500 million and $750 million post acquisition to ensure that we have enough
liquidity and to adjust our facility to the size of the new
company.
As many
of you know, we have a hybrid transaction that will result in us issuing shares
in May of 2010 and we'll receive cash of $320 million. So that combined will
result in having total near-term liquidity of about $2.6 billion to $2.9 million
on day one, which is a very good story.
And then
last but not least, looking at the maturities, as you factor in the maturity,
what are the maturities of debt over the next two to three years? And you can
see the top part of the chart depicts what the maturities will be, where we have
about a little more than $500 million in 2010 on a combined basis, $400 million
in '11 and about $500 million in 2012. And with our existing credit facility and
expanded credit facilities, combined with the stock purchase contract, we feel
like we have ample liquidity to meet all the needs of the new company on day one
and going forward.
So to
summarize the financial portion of this on the next page, Stanley has had
financial objectives in place since 2004, as depicted on this page. And during
2003 and through 2008, we achieved the vast majority of these particular
objectives. And then the economy had a significant negative impact on all of us,
including Stanley and Black & Decker.
But going
forward, as the economy has stabilized, we begin to grow again, we feel that
these objectives will be achievable and that the combination of these two
companies actually puts us in a very nice place for us to continue to go forward
over the next five to ten years and hit these different objectives in that
timeframe. So with that, I will turn it back to John for him to summarize the
call today.
Final
Transcript
|
Nov
03, 2009 / 01:30PM GMT, SWK - The Stanley Works and Black &
Decker Conference Call to Discuss
Announcement
|
John
Lundgren - The Stanley Works -
Chairman and CEO
Thanks a
lot, John. Well, we are bringing together two great companies known for tools.
In closing, I wanted to reemphasize Stanley's strategic direction remains the
same, and I think Jim did a really good job pointing that out. We are 100%
committed to security solutions and our other high-growth platforms, and we are
really excited about a new growth platform, engineered fastening, that comes
with the combination with Black & Decker.
With the
strong cash flows created by the merger, we will have increased resources to
invest in these growth platforms. Stanley achieved record gross margins in the
second and third quarters of 2009, and we believe the combined company will have
further opportunities for margin improvement across all business segments and
allow us to maintain all of our long-term capital allocation objectives that Jim
described, as well as retaining a strong investment-grade credit rating that Don
just walked you through.
We will
have a comprehensive array of iconic brands with global product offerings that
are also complementary. The transaction enhances the core strength of each
company, and creates a stronger global company with a shared commitment to
operational excellence. And I think it is clear there are substantial synergy
opportunities in this transaction. I would now like to open it up for the
question-and-answer session.
QUESTION AND ANSWER
Operator
(Operator
Instructions). Jim Lucas, Janney Montgomery Scott.
Jim
Lucas - Janney Montgomery
Scott - Analyst
Two-part
question here. First, I agree, Jim did a very good job of highlighting why
strategically things have not changed and financially a very compelling story
here, but I guess the first question would be why now? What drove this
transaction today as opposed to any time in the years past?
And the
second part is a lot of positives highlighted on the call here, but this is a
substantial integration unlike anything that either company has taken on before.
And what do you see as the biggest challenge in putting these two companies
together?
Nolan
Archibald - Black & Decker
- Chairman, President and CEO
Jim, this
is Nolan. I will answer the first part of the question then I will turn it over
to John and his team for the second one. Why now is unlike some of the -- there
were a couple of reports that talked about was this motivated by the current
economic condition. It had nothing to do with the current economic
condition.
Both
companies were weathering this downturn extremely well. In fact, if you look at
the cash flows of both companies they were very healthy. The markets had
stabilized. In fact, we are anticipating that things are going to be turning up.
And so both companies had a very bright future on a stand-alone basis. They even
have a brighter future for all the reasons that we went over just this morning
together.
Now, why
now? Six months ago, I received a telephone call from John inviting me to have
lunch with him and talk about the possible opportunities and benefit for the
shareholders of both companies. A couple of months after that in early June, we
met in New York for lunch, and the more we talked, the more we realized the
significant shareholder value that could be created by the combination of these
two.
Historically,
as some news articles have pointed out, this is a romance that started
approximately 28 years ago. And on three different occasions, the CEOs of
Stanley and Black & Decker, because of the unique and complementary fit of
these two companies together have talked about a merger. And each time, for
various reasons, it didn't go anywhere.
Final
Transcript
|
Nov
03, 2009 / 01:30PM GMT, SWK - The Stanley Works and Black &
Decker Conference Call to Discuss
Announcement
|
The more
John and I talked was that we just felt like there was such a significant
shareholder creation opportunity here that we ought to pursue this and our teams
got together. We have identified even more synergies than we initially thought,
and that is why the timing. John?
John
Lundgren - The Stanley Works -
Chairman and CEO
Nolan,
thanks. Jim, I will take your second one on integration, because it is a huge
challenge. I think Stanley's integration track record, as presented by Don
Allan, and I know you know as somebody who has followed Stanley for many years,
I would say the record speaks for itself. But we have never taken on anything of
this magnitude.
So what
are we doing about it other than employing our I will say tested and proven
process as well as methodology? First of all, as we would do on any transaction,
but this is the highest level, created a synergy -- a steering committee that
Nolan and I will co-chair. Jim Loree, Don Allan, Mark Matthew and other senior
executives will sit on that steering committee. And simply said, without naming
too many names on this call so early in the process, we have identified the
A-Team from Stanley, our most tested, proven process leaders with years of
experience around the globe doing this by function and by business to lead this
charge. As of today, we are now in a position to work with Nolan and his
executive team on who their counterparts will be on each of those teams to
ensure that we get the best from both companies.
So we've
done this before. It is very fair to say we have never done it in this
magnitude. But we truly believe we have a process, methodology, rhythm and
rigor; one of the most important aspects of which is senior management
involvement on a regular basis; which Nolan and I and our management teams are
committed to. Thus, we feel there is a very high probability of success in
meeting or achieving the targets we've put before us.
Nolan
Archibald - Black & Decker
- Chairman, President and CEO
On the
Black & Decker site -- this is Nolan again -- we have had a lot of
experience also. Emhart acquisition a decade ago or over the decade ago
virtually doubled the size of our company. That was a $3 billion integration
process. And most recently, the Porter Cable/Delta acquisition was over $1
billion that was successfully integrated into our power tool business. So I
think we have good experience on both sides, Stanley and Black &
Decker.
Jim
Lucas - Janney Montgomery
Scott - Analyst
Okay,
great. And congrats on a good deal, guys.
Operator
Peter
Lisnic, Robert W. Baird.
Peter
Lisnic - Robert W. Baird &
Company - Analyst
Congratulations.
I guess first question on the cash flow, the $1 billion target, can you maybe
parse out what piece of that would be attributable to implementing SFS at Black
& Decker? When I look at the working capital, for example, at Stanley, the
turns there ought to be a little bit better I think because of the security
business. I'm just wondering how much you have embedded in that cash flow
forecast for SFS application at Black & Decker.
Don
Allan - The Stanley Works - VP
and CFO
This is
Don. That's a good question. We have approximately $150 million to $200 million
of working capital improvement on an annual basis embedded in that number for
Black & Decker in particular. And the basis of that is we feel as the chart
Jim reviewed indicated, we feel with the application and the implementation of
these different processes and systems that we have within Stanley fulfillment
systems, that we will be able to in essence do what we did with our company of
the last three years where we took it from about 4 working capital turns to over
6. We believe we can do the same thing in the next three years with the Black
& Decker working capital efficiency, implementing those different
processes.
Final
Transcript
|
Nov
03, 2009 / 01:30PM GMT, SWK - The Stanley Works and Black &
Decker Conference Call to Discuss
Announcement
|
Jim
Loree - The Stanley Works -
EVP and COO
This is
Jim. The security business is not dramatically different from a working capital
perspective than any other part of Stanley. So it is a misconception that
security mix drives favorable working capital performance in this
company.
Peter
Lisnic - Robert W. Baird &
Company - Analyst
Fair
enough on that. And then for the second question, in terms of the cash flow that
you are going to generate, you talked about the capital allocation priorities.
I'm just wondering if you could dive into the security business a bit more. Does
this change the way that you approach that business in terms of potential size
of opportunities out there or how quickly you could ramp the business? And also,
does it sort of shut you out of bolt-on acquisitions over the next period of
time as you are integrating Black & Decker?
John
Lundgren - The Stanley Works -
Chairman and CEO
Yes, that
is very fair. It was kind of a two-pronged question. Let me answer the second
part first. It really doesn't shut us out of bolt-ons because bolt-ons by
definition are smaller. Our security team, obviously, with a little help from
corporate, has grown from a couple hundred million to $1.6 billion over the last
five years. They are perfectly capable of continuing to do their bolt-ons and
roll-ups, whether that is the purchase of a franchisee or a regional monitoring
company or a smaller company particularly outside the US.
We feel
if we apply our process successfully as we have done it in the past and as the
Black & Decker team has done in the past, the pipeline is there, bolt-ons
are there. And we don't think for one second they will be a distraction anymore
than they have been in the past.
As it
relates to security from a broader perspective, the answer is we have never been
more committed to security than we are today. And as this transaction was
presented to our security teams, they understood exactly the value of it. In a
down year, as we've pointed out, the combined cash flow of these companies this
year, 2009, is looking to be $750 million, perhaps even a little more. That is
publicly committed externally by the respective teams.
If you
think about modest working capital improvements that Don has talked about,
improved EBITDA, that $1 billion of cash flow is readily achievable. Jim talked
about our capital allocation strategy. Once we have insured that we have
protected our upper tier investment-grade credit rating, paid the dividend,
there is a tremendous amount of cash left for accretive, high-growth
acquisitions, much of which will be focused in security.
So this
is just a terrific opportunity to employ the significantly increased cash flow
of the combined company towards the identified growth platforms, certainly the
most important of which is security, but not to overlook engineered fastening
systems, infrastructure and health care.
Operator
Megan
McGrath, Barclays Capital.
Megan
McGrath - Barclays Capital -
Analyst
I'm
wondering if you could just give us some idea of your underlying macro
assumptions for the different large end markets you face, like residential
construction, etc. And as a follow-up to that, is there any risk or potential
upside to your accretion estimates if those assumptions don't come to
pass?
John
Lundgren - The Stanley Works -
Chairman and CEO
I'm going
to defer to Jim Loree, our resident economist, who loves these
questions.
Final
Transcript
|
Nov
03, 2009 / 01:30PM GMT, SWK - The Stanley Works and Black &
Decker Conference Call to Discuss
Announcement
|
Jim
Loree - The Stanley Works -
EVP and COO
Resident
economist I think is more accurate. But both companies have indicated separately
that they are not looking for any kind of a major surge in the economy next
year. I think we are probably both in kind of 1% to 2% GDP of
zone.
And as
far as the accretion goes, the accretion really does not relate at all to the
economy. The accretion derives from cost take-outs, which are going to occur
with or without or in any economy, any economic situation. So really, the
accretion is a separate matter from the economy. I think we have fairly
conservative, we hope, macroeconomic assumptions.
Megan
McGrath - Barclays Capital -
Analyst
Okay, so
just as a follow-up. The accretion, and I know you have not a lot in the
manufacturing base, but it is not really reliant on putting through a
significant amount of incremental volume with the recovery in the
economy.
Jim
Loree - The Stanley Works -
EVP and COO
Zero
dollars of incremental volume or -- okay.
Megan
McGrath - Barclays Capital -
Analyst
Great,
thank you. And just one other quick follow-up on your distribution synergies.
Can you give us a little bit more detail on where you think those synergies
might be coming from, especially on the big-box retailer
side?
Jim
Loree - The Stanley Works -
EVP and COO
Yes. As I
indicated in the presentation, there is some significant overlap of our
distribution networks in both North America and Europe. So those are the areas
that we think, and our CDIY business and Black & Decker's power tool
business, where we both have the end user market of the mass merchants and the
big-box retailers, that there is opportunity to consolidate some of those
distribution networks and centers.
Operator
Eric
Bosshard, Cleveland Research.
Eric
Bosshard - Cleveland Research
Company - Analyst
Two
questions for you. First of all, both companies have been really aggressive in
the last few years in taking costs out of their business. When you talk about
creating a lot of synergies by consolidating operations and distribution, I
guess it somewhat implies some excess capacity. So I would love you to speak to
your conviction in the ability to achieve cost saves from businesses that have
been pretty active in pulling costs out.
And then
my second question is, does the historic growth targets, the 3% to 5% organic
and the 10% total sales growth, how do you feel about those numbers in the
go-forward organization?
John
Lundgren - The Stanley Works -
Chairman and CEO
Jim, go
ahead.
Jim
Loree - The Stanley Works -
EVP and COO
Eric,
most of the synergies really relate to the elimination of redundancy, redundant
supply chain, not so much redundant factories because we don't make that many
things in common. So it's just more of a supply-chain overhead, indirect,
administration, corporate expenses, those types of things. So it doesn't really
imply excess capacity per se. There may be a little -- obviously, with our
volumes being down 20%, there's a little excess capacity in our supply chain or
physical distribution systems. But it really does not imply that there is excess
capacity by virtue of quantifying the synergies at the level we have. That said,
we both have excess capacity, there's no question. We are poised to serve. And
if the economy does rebound, then we will be ready. And Nolan, I know you wanted
to comment as well on that aspect.
Final
Transcript
|
Nov
03, 2009 / 01:30PM GMT, SWK - The Stanley Works and Black &
Decker Conference Call to Discuss
Announcement
|
Nolan
Archibald - Black & Decker
- Chairman, President and CEO
Yes.
Eric, we at Black & Decker, as Stanley has done, have taken significant
costs out. We have taken over $200 million of costs out just over the last
couple of years. In fact, we have taken so much out that any further reductions
on our own would likely get into the bone and would impair our ability at the
recovery to really take full advantage of it if we were to cut any deeper. That
is why this thing was so attractive to both companies, because we have both cut
our costs substantially almost to the bone, and this gives us an opportunity now
to eliminate those duplicate expenses.
Just to
expand on that a little bit is, we have a European organization; they have a
European organization, and a lot of cases, selling both to the same customer.
You don't need two European organizations. You don't need two Latin American
organizations. You don't need two Asian operations. And we've got similar
duplication in the United States. So there is going to be significant dollars
that was shown on that previous chart that will come out for the overlap there.
And then corporate of course is an obvious one.
So all of
these are duplicate costs, as Jim said. And that is the great opportunity. With
no increase in sales, we are going to have substantial cost benefit. And then
when the economy does turn, with all the costs we have taken out before the
acquisition, and the additional synergies we get, we will have tremendous
leverage when the economy turns around.
Jim
Loree - The Stanley Works -
EVP and COO
And Eric,
as far as the second part of your question, we really see this acquisition as
supportive of our long-term growth objectives, 3% to 5% organic and 10% plus
total. Clearly, with the cash flow, we are going to have the opportunity to
develop those growth platforms out. That is going to help with the 7 to 9 points
or so that come from that acquisitive growth.
And then
as far as the organic growth, the growth profile of this company is quite
similar to ours. We don't see it as suppressing the organic growth whatsoever in
the near term in the next couple of years. It's probably actually going to
accelerate the organic growth potential of the company. Over time, as the cash
flow kicks in, the acquisitions are done in higher margin areas, the overall mix
will be, hopefully, enriched, and we will continue to see realistically 3% to 5%
organic growth within reach.
Operator
Dan
Oppenheim, Credit Suisse.
Dan
Oppenheim - Credit Suisse -
Analyst
I was
wondering about the comments for the CDIY; you talked about that becoming a
larger portion of this. What are your thoughts in the home and hardware
division? Do you have any thoughts in terms of not keeping that? How do you look
at that business?
John
Lundgren - The Stanley Works -
Chairman and CEO
No,
absolutely not. The Black & Decker home and hardware business fits
beautifully with the Stanley mechanical security business. There's a little bit
of product duplication which we will sort through in our ongoing effort jointly
and separately to eliminate complexity. But if we had to say where that goes
right now, the Black & Decker home and hardware business becomes an integral
part of the Stanley mechanical access platform. Nolan and I have discussed this
at length, and I think, Nolan it is safe to say that we believe those two
businesses go well together.
And they
are -- it is Stanley's legacy of business. It has always been a strategic
business for Black & Decker. And there's no thoughts whatsoever of divesting
that business.
Final
Transcript
|
Nov
03, 2009 / 01:30PM GMT, SWK - The Stanley Works and Black &
Decker Conference Call to Discuss
Announcement
|
Dan
Oppenheim - Credit Suisse -
Analyst
Okay. And
then secondly, just wondering about the purchasing synergies where you identify
the $75 million. How much of that is coming on the freight side in terms of
shipments versus the material side when you look at that?
Jim
Loree - The Stanley Works -
EVP and COO
It is
about a-third freight, 20% to 30%, something like that. And I think that is
conservative. We've spent hundreds -- each spent hundreds of millions of dollars
a year on freight. But until we really put the routes together and figure out
the logistics aspects of it, it is difficult to really quantify. So we have
taken a conservative position on that.
Operator
I will
now turn the call back over to Kate White.
Kate
White - The Stanley Works -
Director of IR
Thank you
all for tuning in today. I know that many of you have some further questions
that unfortunately we weren't able to address as the market is about to
open.
As I said
at the outset of the call, please feel free to call Mark or myself. All of our
information is on the press release, as well as the website and the transaction
website. I hope you all have a wonderful day. Thank you.
Operator
Thank you
for joining today's conference call. You may now disconnect.
|
DISCLAIMER
Thomson
Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In
the conference calls upon which Event Transcripts are based, companies may
make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may
differ materially from those stated in any forward-looking statement based
on a number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the
companies mayindicate and believe that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could
prove inaccurate or incorrect and, therefore, there can be no assurance
that the results contemplated in the forward-looking statements will be
realized.
THE
INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF
THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS,
OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE
CONFERENCE CALLS. IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY
OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR
OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON
THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE
APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S
SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
© 2009
Thomson Reuters. All Rights Reserved.
|