史丹利百得 (SWK) 2002 Q1 法說會逐字稿

Thank you for standing by. Your conference will begin momentarily and thank you for results. It's been posted to our web site stanleyworks.com. John will open the presentation in a minute with a short review of the release and Jim Lori will highlight light some matters. At that point, we'll have Q&A If business conditions change, our guidance materially for example by more than 10% in either direction, we'll issue a press release. We've allotted 45 minutes for the call. The call is being recorded for replay which will be available beginning at 5:00 p.m. tomorrow night, April 25th through midnight Saturday. And the dial-in-number is 800-475-6701. 634493 is the access code, also available at stanleyworks.com after Saturday. If you have any questions call me at 860-287-2833. Certain statements are forward-looking statements. Actual results may differ materially from those director implied.

Good afternoon and thank you. Today we announced we [INAUDIBLE] earnings of 56 cents an increase of 4% last year and right on the guidance we gave you in our April 3rd earnings release. Half of that [INAUDIBLE] share was from the accounting change. We're down 1%, as the U.S. Industrial economy -- the U.S. economy continues to experience some of the weakest rates in a decade. Although economists have noted some improvement, businesses look to year-over-year comparisons. Operating cash flow of 2 million was a reversal of the $21 million cash consumption of the 1st quarter last year. Inventory decreased sequentially for the third consecutive quarter and on track to the $60 million commitment made on February 8th. In contrast on the overall volume decline in industrial commercial businesses, the consumer markets again provided some much needed strength. Sales were up modestly. Our entry door and hand tool businesses had solid gains. Our February guidance revenues were projected to be flat plus or minus 1% so it was just what we expected. Unfortunately the mix to lower margin retail channels once again yielded a decline in gross margins from a year ago which is a much more favorable sales but mixed last year. Despite slightly lower revenues and a very weak economy earnings per share, we're up 4%. We've successfully [INAUDIBLE] our cost base to [INAUDIBLE] with such revenue declines. We eliminated nearly 2,000 positions, almost doubled the projection at the beginning of the year, and already in 2002 another 600 people have come off the payroll as the long awaited economic recovery has not yet occurred. Production was being matched to lower customer demand and further reduced to control inventories. For the second quarter in a [INAUDIBLE] tools had encouraging results. Sales were down somewhat. But the business has controlled its cost and returned to solid profitability for the first time since early of 1998. The actions refunded [INAUDIBLE] are clearly paying off. The MAC advantage financing program had its best two quarters of results in several years. General and administrative costs were controlled and aside from $2 million of reincorporation cost remained essentially flat. We down scaled early enough and with enough [INAUDIBLE] or to make our earnings commitment. Resulting operating margin was 13%. A very solid performance we feel in this economic environment. On the growth side, we announced a few very important wins today. First, we were named category captain or hand tools for Wal-Mart's UK operations. We continue to outpace expectations and [INAUDIBLE] is presenting us with new opportunities. Stanley Access Technology has been selected to provide automatic door systems for all super centers that will open in 2002 through 2003. Also the Home Depot has selected Stanley Access Technologies to provide automatic doors for all its new stores to be opened over the next three years. Our national service capabilities and the development of innovative products were the catalyst behind these important wins. These two wins should solidify double digit for this business over the 2002 and 2003 periods. There are a few other topics I'll cover briefly. Our program at Wal-Mart, the replacement of a private label program with Stanley hand and mechanics tools continues to proceed beyond our expectation. The joint program has lifted Wal-Mart's over-all department result to a double digit percentage gain since its inception. The hardware success story continues to stand out. As the four year of transition continues are really paying off, operating margins in this business have soared from low single digit to high single digit in the first half of 2001 to solid double digit margins in the last half of last year and high double digit rate in the 1st quarter. Our hardware business delivered a double digit return off capital again this quarter. Our sales in this business have slowed dramatically from a 16% decline in the first half of 2001 to a 5% decline in the second half to only a 2% decline in the 1st quarter and an expectation of growth in the second. With over 1,000 traditional hardware outlets added and the recent Home Depot hardware is poised to grow over the year. Recent share gains, the Wal-Mart business, the five-year Home Depot contract, the travel trade penetration at [INAUDIBLE], the preview dealer program now over 8300 strong, and the recent win at access are the result of new product flow and better fill rates. With that I'll turn it over to Jim for a financial overview.

Thank you, John. On February 8th, we provided first quarter guidance before the implementation as [INAUDIBLE] sales flat plus minus 1%, SGA $168 million. $138 million, and operating cash flow in the range of $20-30 million including another sequential decline in inventories. And I'm pleased to say that we hit this guidance on all counts. These results were predictable because they relied on actions already taken by February 8th and did not involve a major bet on sales growth. Employment levels were reduced by over 600 in the quarter following the elimination of nearly 2,000 positions in 2001. SG&A charges decreased by $11 million or 7% from the first variety quarter a year ago. It is important to understand that the $135 million incurred in this 1st quarter included $2 million of expenses related to the proposed Bermuda Reincorporation. And that current rating, 21.6% of sales, 180 basis point below last year 1st quarter run rate. These numbers are net of a $5 million reclassification into net sales in both years as required. Production levels were balanced using input-output controls to set inventory levels and execution was enhanced. Inventory decreased by $15 million sequentially. And a similar decline is expected this 2nd quarter. We are on track for the committed $60 million full 2002 inventory decrease. We're gaining tracks in inventory reduction after pound on this issue. And as importantly, we are beginning to address the issues systematically and therefore expect the results to stick. One apparent achilles' heel was a $37 million increase in accounts receivable year-over-year. Approximately half of this increase is the result of sales timing within the quarter which resulted from a very poor January. Another $9 million related from administrative terms error. Since corrected and $5 million was a balance sheet reclassification between -- receivables. Our total debt of 36.1% is down 380 basis points a year ago and all of that in a year when an acquisition was made and the dividend was increased. With payables up another $2 million to working capital, story continues to materialize although economic conditions continue that make it tough, and we had a solid start to our year financially -- $20 million of operating cash flow. And only 50 basis points declined from the operating margin levels of a year ago, and they bode well for our future. Regarding earnings guidance, we provided the latest update on April 3rd. We're confidently re-affirming our previous stated 2002 estimate of $2.73 to $2.82 per diluted share without any significant change in the current economic conditions and with 2-4% sales growth in the second half. That estimate includes 6 cents for the accounting changes eliminating the amortization of goodwill. We are also reaffirming our previously stated 2nd quarter estimate of 71 to 83 cents of diluted share. This includes another 2 cents for the reincorporation cost and these unusual times when trust and credibility are at such a high premium. I would like to address the quality of earnings as well. On February 8th, I spent considerable time developing into these matters in detail. Subsequently the FCC reviewed our 10-K which became effective April 2nd, and no significant exceptions were motivated. We're both forthright in our practices and highly scrutinized as all public companies should be. Stanley is a simple company. During the last few years we have implemented a strong system of internal controls both financial and [INAUDIBLE] in nature and these controls have made us more predictable. The 1st quarter is our 11th straight meeting or exceeding [INAUDIBLE]. The cash flow was excellent and no benefit was recorded. Our guidance for the 2nd quarter with flat revenues up 26% includes no benefit. Since our defined benefit term was recently approved, we'll be no longer acknowledging the --. We expect to realize a small gain not included in the guidance in 2nd quarter and $60 million of cash early in the 2nd quarter. In all of this predicted earnings growth is on top of an earnings base which some of you have questioned. The proof will be in the pudding. Those that understand the growth story and the operating leverage will most likely be rewarded. We look forward to that time because the cash is going to flow. With that, I would like to turn it back over.

The S&P 500 is reporting earnings down about 11%. Actual results indicate average or eliminating goodwill amortization both 2002 and 2001 first quarters of 16%. Our earnings on a similar basis were up 2% not only do [INAUDIBLE]. We're the only ones with actual improvement. That's result of attention to on going productivity. The more we look, the more opportunity we find. For example, since the recent Home Depot contracts contain price concession, we have a [inaudible] point to reduce costs since our suppliers should feel both the gain and the pain from that success as go. I'd like to note just a few items and then we'll proceed to your questions. We're managing our product mix much better. We promoted randomly. That is without any regard to margin. With the reduced [INAUDIBLE] count and category -- the opportunity exists to change the mix to enhance both our customer's and Stanley's gross margin rates as well as inventory turns. We're doing just that. For example, the Home Depot modular is set in the second home. Will reduce the [INAUDIBLE] count by more than two-thirds but our share will increase from 10% to 30% and both our gross margins and theirs will increase. Category -- is very detailed. When a near neighbor category opens due to understand performance, the category captain is the first choice. Just by hanging around you pick up excuse. -- by making the customer sourcing easier you become the consolidator. Just one example. Our garden line has not had significant distribution. We were able to get 3 [INAUDIBLE] into Wal-Mart this year. The result is our [INAUDIBLE] is their best selling garden tool thus far. This is if that holds, we'll get several more next year. That is what category does for you. Since then we've filed our SF and 10-K, and they were both thoroughly reviewed by the FCC. There were no adjustments. If any of you need further explanation, please ask but please do not paint us with a brush that applies anything but how [INAUDIBLE] honesty. The tone of their report, which I understand Jerry sent out to as many of you as possible this morning, was encouraging, and I urge all of you to take a closer look at it. On April 2nd, the FCC approved the filing. We really believe that Stanley is disadvantaged today against foreign companies. Asian competitors particularly with those of private label volume have 20-25% tax rates. We were out bid for a Swedish acquisition candidate by a German company with an effective 20% tax rate. Connecticut law requires two-thirds of all shares be to be voted in favor of the proposed incorporation. This is extremely difficult since only 75% of shares typically vote. We need your help. Particularly those of you serving retail customers. We're only 15% response rate is expected. Thanks for your help.

Now Alan, we'll turn it over to you for questions.

All right. Ladies and gentlemen, if you wish to ask a question, please depress the 1 on your touch tone phone. You'll hear a tone indicating that you've been placed in queue. You may remove yourselves at any time by pressing the 2.

Two quick questions. Can you talk about sell through to the customer with respect to the industrial side. I think we're seeing increased inventory in anticipation of a recovery. Second question would be your [INAUDIBLE] was down. Are we still on track for a full $160 million level by year-end.

The latter question is yes. You'll see the Delta grow over the next few quarters. On the industrial side, we get the data on industrial sells monthly from some major customers. We don't see this presumed recovery happening. If you look at the capacity utilization rates, that will give you a very good idea as to where we are. Now they are bounced up a little bit, but compared to year ago where we were running in the upper 70s to where we are now, we have a significant drop and that is not going to right itself for a few quarters in our view. So we hear the words but we don't see -- but the music is a little deafening right now.

You did see some inventory build-up on the retail on the customer side?

We have seen some build up on the customer side. Some slight but we've not seen the [INAUDIBLE] out the door that would support it.

Do you think that will continue or will it equal your shipments at this point?

I think they will have an inventory retrenchment if they don't get the bounce that they expect.

I'll defer to my other colleagues.

We have a question from Margaret Wieland.

Thanks. Will you talk about the trend on the industrial side of the business by month-by-month where we are? It bounces up and down. No trend.

And on retail, is it about the same as well?

The retail market looks likes it's improving a little bit sequentially. March looked like it was a little bit better than 1st quarter over all slightly. Home Depot should have a pretty good quarter.

Is any of the gross margin deterioration -- kind of new products that is lower margin?

No. It's basically a channel issue. And think sequentially, you'll see it maybe changing as the quarters go. In fact, we get a little bounce.

And then just a question on the working capital on the inventory. How did you reduce it by $15 million.

We have and guarantee a number of programs going on. Particularly as Jim mentioned, we're measuring each one of our businesses on a very steady diet here. Weekly, every other week on a Monday afternoon, we go through the input-output and ask some probing questions.

Weight Watchers?

That's a good thing.

We tie it to the financial forecast which is a beautiful thing, too.

We're getting there.

Thanks very much.

We have a question from Jason Putnam.JASON PUTNAM Good afternoon, guys. First question relates I guess to employment levels 2000. You took out in 2001, 600 in the 1st quarter of 2002. If demand improves, are all of those permanent reductions and the ones you have in queue, are those still going to come out if you see a good pick up and demand?

We'll deal with the pick-up and demand as we go. If we get an improvement in demand, you'll see gross margin rates go up.

So the 60 are all permanent?

No. It depends on how much demand picks up.

Second question relates to industrial acquisitions. We've talked in the past, especially given the mix of more retail sales, that some opportunities in the industrial side, especially given the weakness in that market. Are you seeing anything there and would you expect anything over the remainder of 2002?

We are very close to a deal, and we got out a bid so there is stuff in the funnel all the time and we'll see what happens. Who knows but we won't over pay as I promised you in February.

And then just lastly, a little bit of housekeeping. The other [INAUDIBLE] can you break down, there were a lot of moving parts in that line with the pension gain and a couple of the other charges. Could you gives the details on that?

If you take all of the noise out of the number, it's about a $5 million improvement. And the $5 million improvement is predominantly driven by the asset quality improvement in the MAC business. One of the reasons MAC earned as much as it did is that the financing portfolio has made a 180 degree turn around which we started about a year ago, and we put about 60% of the distributors off hold until they cleaned up their portfolios, and we're conscientious about writing off these assets. And over the past year we have after written off the bad ones and we're not putting the bad ones on the books any more. The write-offs are cut in half. They were running almost $2 million a month and now they are running less than $1 million. About $1.5 million and that's a large amounts of the improvement.

The pension benefit isn't in that line. It's SG&A gross margins. If I were doing the modeling, I would run it up straight.

Okay. Thanks a lot.

We have a question from Jim Lucas.

Thanks a lot. Good afternoon. Following up on the acquisition question, are you seeing more opportunities in Europe versus North America?

No. The answer to that is no.

And you've talked mostly about the North American industrial and consumer markets, but can you talk about what you're seeing in Europe?

Weaker. Europe is following the U.S. by about six months.

And with regards to MAC, could you give us an update on the truck count and how that breaks down?

I can't, but I can tell you that our recruiting was the highest it's been in three years. Jerry will give you the numbers. Or Jim has them.

It's about 5006 internal folks. Down from -- 500 internal folks. -- and about 1100 and 1200 of the regular.

If you were to look at the number of routes that are available, can you ballpark percentage of how many routes would be available?

You can take [INAUDIBLE] on to be 100% of the market. So just do that division.

Okay.

INAUDIBLE] covers the whole country and probably in every nook and cranny so they define the could-be-state if you will.

Okay. Fair enough. Thanks.

You're welcome.

Next we go to the line of Eric Bosner.

Good afternoon. First of all, Jim or John, can you talk about tool margins and profits which declined at a faster rate in the first quarter than the 4th quarter.

We didn't look at it sequentially off the 4th quarter. We'll get you the answer.

Let me clarify. Tool profits were down in the quarter $10 million in the 4th quarter, they were down like $5 million so margins. Also, we had margins decline. I'm trying to figure out why the 1st quarter looked worse.

Why don't you call us [INAUDIBLE] and we can talk through that. We don't have the sheet of paper in front of us and rather than try to guess with numbers that we don't have, we'll handle it off-line.

Okay.

We just don't know. We'll give the answer. We just don't know.

Can you help me understand depreciation and amortization which was down $6 million in the quarter. I know [INAUDIBLE] 142 was an issue but it was down little bit more.

First of all, in Q4 there is a little catch up as things are put into service, and we're on the half-year convention. If you look at the second, third, and fourth quarter and average it out, it's not dramatic. But we also determined that 1st quarter we had a $2 million classification issue on the cash flow statement. It was a swap between depreciation and cap-x.

And the Delta, remind us what the Delta is for [INAUDIBLE] 142.

It's $1.3 million.

Year or quarter?

Quarter.

Okay.

Actually it increases in the second half because the Contact East Acquisition was added in May of last year.

Okay and last question, receivables with all of the explanation you provided us for receivables, are we likely to see receivables flat or down? When are we going to get back the prior year levels?

I think quickly. The typical pattern in the 2nd quarter is flat from the 1st quarter. I would be surprised if we did not get some decrease in receivables in the 2nd quarter because of the aberration in the 1st quarter. And that should correct it, and we'll make it a slight decrease.

But in a year-over-year basis, receivables will they match prior year levels?

They should be pretty close. Yeah. Flat sales and flat receivables. We don't have a terrific improvement story going on but nor do we have a great deterioration either.

It should get to flat.

Great. Thank you.

Next, we have Ivy Zelman.

Hi, guys. If you can just help me go through in terms of your sales force and on the consumer side, maybe and differentiate in terms structure. And how much is outsourced today versus employees.

Oh. You are talking about the sales force itself?

Yeah.

Okay. On the consumer side, we have essentially a national accounts organization. Home Depot, Lowes, Menards, Target etc., all under no one individual. And he basically takes the full basket of products to those customers. On the industrial side, you have segment sales force going to particular customers so there is an air tool sales force, a [INAUDIBLE] sales force and so on. So that's the way the thing is organized.

But how much of those employees are internally versus outsource?

All of the employees in the consumer side are Stanley employees and there is a mixture on the other side but most of them are direct employees as well.

There is a trend that you're seeing. I'm hearing that you're going more outsource [INAUDIBLE]?

You may hear that servicing some stores. We're bringing some of the stuff in [INAUDIBLE] we'll now service [INAUDIBLE] ourselves. On the other hand, we have allocated store service in certain markets to people that we think can do a better job and have density, more density than we do.

And what percentage of that do you think having the service provided in house?

I have no clue. I don't have the split.

And actually, Ivy, on the hardware side on the independent side, we had tried independent reps. We had gone from Stanley people to reps and now we're back to Stanley people again because the reps were a giant failure.

And then I missed your comments earlier about Lowes, but why are you no longer selling hardware?

We are. We had lost the Lowes Hardware business, because Lowes had decided to try to do this thing direct in the Far East. We-- they have now stretched that to August, and we'll see what happens after that. It's a very difficult and complex thing. Very [sqew]. Maybe they have a change in heart. But right now they are telling us the end of August, but obviously they are having some problems with the logistics.

National Hardware has picked up the business there, and they are not going to the Far East, so is that no what you under?

No. But you can have better information that I do.

Because there was concern that you lost the business because of the Home Depot.

No. It had nothing to do with that. Our share with Lowes is up considerably. They have taken the Gold -- business. We're having a very good time with Lowes.

Good. And lastly, I think Eric touched on it, but I missed it. Can you -- explain; half receivables were due to timing. How does that work, because sales were down 1% for the quarter, so shouldn't it even out?

You have a poor January. January was pay wipe out for us from a sales perspective versus it is prior year.

You have 45 day terms. Everything you sell after the middle of February, you don't collect in the quarter so if you have a weak January and a very strong March, you don't collect the 45.

Okay. One more question. At our housing conference, you mentioned that you saw some improvement all will be it they were small, but they were giving you some encouragement. Is that trend not continued, and are you feeling less optimistic?

No we have the access technologies business which is part of what he was referring to. Which is strong and the business that you mentioned which is hydraulic business has had very solid continuing order rates as long as the steel scrap prices stay up.

But that's encouraging on the industrial side.

Next is Steven East with AG Edwards.

Good afternoon. John a couple of questions.

can you talk about the impact the offsets that you're trying to do? And also just sort of quantify, if you could for us, the industrial decline versus the retail growth?

I'll let Jim handle the second one. The first one, the steel [tariffs] are impacting us. We have had people break contracts. With price increases. We have reminded our sourcing people to tell them that our memories are very long here. And we understand how the game who Works and we understand if the contract is over, you want to up things that's great. But you have to honor contracts. So we are doing a variety of things. We're - obviously one of the things that we're doing is we're changing the composition of the steel. So we're doing things to change the composition of what we bring in. We're looking at different forms of steel that may not be tariffable and so on. But it is a problem to be worked on. It is not by itself not being worked on, we would have an issue but the guys are all over it.

Okay.

Now, Jim will give you the consumer industrial.

It's more complicated than usual, because what's happened on the consumer side, the U.S. consumer business is booming, and it's up in the double digit range, but it's somewhat offset by a weak Europe and a weak [INAUDIBLE], which is going through a significant inventory face at Home Depot. The consumer business is up in the mid-single digits. It should be up a little higher. On the other hand, the industrial is down in the mid single digits, and that's basically down in double digits and then somewhat offset by 4 points by the contact east acquisition.

So they look closer than they are, but they aren't really close.

Fair enough. And one last final follow-up. You accounted for most of it the Delta, but you're still around $2 million or so, which is depending on how it's taxed?

I can't account for every last penny. There are a lot of things that come in and out. We have retirement. I know at least $1 million of retirement. We have thing that are put into service, so for me to reconcile that for you would be very difficult.

Fair enough. Thanks a lot.

And the next question is Larry Horn.

Number of issues have been covered, and the question I was mainly interested was evidence that the industrial markets are bottoming. Away from Stanley Works access, excuse me, Stanley Access Technologies, and some of the comments you made on the scrap steel business, what other things are you seeing that lead to you believe that this bottoming process has occurred?

The only thing a that we have have is a few consecutive months of capacity utilization rates that have held or improved a little bit, a little bit but the problem is that the economist look at run rates and we look at year to year comparisons. That's why recessions end to some extent, because the negative runs out of gas if you will. It's not so much that the positive booms all of a sudden. So you have this temporary thing going on that you just need to wait a few quarters, so as long as it doesn't sequentially get worse which it's not then you've got to say that it's getting better. There is enormous excess capacity in the world and every time that something gets hot, very quickly, I'll give you one story here. I remember wall board a few years ago, it was a wall board shortage. Nobody could get wall board. There was allocations going on. Wall Street articles talking before wall board problems. Nine months later, the price of wall boards dropped 30%. Unbelievable amount of [INAUDIBLE] in wall boards. No problem getting all you want. Truckloads available and so on. So, it doesn't take very long. We're in a global world here. It doesn't take very long for entrepreneurs to add capacity, so the utilization rates of what is keep can prices down. Supply and demand doesn't work. This is not a tough game to figure out. So maybe just need to get up to the building level but before you can see it. So that's what is going on here in our view.

You're seeing stage situation.

Let me give you an example. We have this business that [INAUDIBLE] to the electronics industry. It was down 50% from a year ago. If in the 1st quarter down 25%. You drown in 15 feet of water. Now you're in feet of water. None of us is 8 feet tall. You're still dead.

Okay.

Next question.

What was the amounts of accounts receivable Secure advertise had in the quarter?

We'll have to get back to you. We don't know. Why do you want to know?

Because if I want to come patient receivables and get a DSO number, I have to know how much you sold, right? I forgot, I'm not supposed to look at the balance sheet.

There is no difference in securitization year to year.

Was any receivables sold in the quarter?

The answer is no.

Okay. And did I get this right? On an apples-to-apples basis, if you add back the amortization, the DNA would have been 18?

Yes.

Thank you.

Can we just have one more question.

And that's from Steve Gish.

Could you talk about the product innovation credited with the opportunity at Wal-Mart and Home Depot for Stanley access technology?

Yes. We have two things going on here. One is] that major league areas in the access game, and one is we're changing the certain sensing technology. All of this sensing technology today is motion, and we are changing it to video, and that changes the whole loss prevention side of things, as well as moving into the security side of the issue, particularly at airports and so on. The other side of the fence is service. We are a brick-by-brick building ago a direct national service capability. We've brought some people over from ge that used to work for me, and they moving ahead in building this capability, so both of those things contributed to us delivering this proposal to Wal-Mart and having them accept it.

Okay. Thank you.

You're welcome. All right. we think this was a landmark quarter for Stanley. And we had almost as important wins in access technology at both Home Depot and Wal-Mart. After almost a year of study and discussion, we announce our intentions. While these matters consumed our attention, our people never took their eyes off the ball. Stanley today is a much more capable company, though I'm sure that those you who have been with me know than just a few years ago. Fill rates remained at high levels. Our magic mile program, whose objective is to convert 300 hardware stores to Stanley -- had 110 of those happen. Inventories have improved. Not close to where we want them to be, but better and on track. Our white space and initiatives are succeeding and helping us help our customers grow. At Lowes, profitability. At Lowes, Target and the Home Depot. Our relationships with these large customers have never been better, and they are improving with the traditional too. I've been here more than five years. We are on the cusp of a break-out quarter. Just a little volume will solidify that objective. While one never likes to count the horses before they are in the barn, the herd is fast approaching. We thank you those of you who have and are supporting us. We won't disappoint you. Thank you.

Ladies and gentlemen, the conference will be available for replay beginning at 5:00 p.m. today, April 25, 2002 ,for two days until April 27th at 11:59 p.m. Dial 1-800-475-6701 and enter the code 634493. The numbers again are 1-800-475-670 1. The code is 634493. That does conclude your conference for today. Thank you for your participation.