University of New Haven

Questions:

1. In the Investor Overview, the company mentioned a continued portfolio transition momentum by increasing their relative weighting of Emerging Markets. Their goal is an increase of 20%. With a slowdown in the emerging markets wouldn’t that impact earning projections and increase risk? EM is forecast to make up >50% of GDP by 2020 – the market factors you reference will cause year-to-year volatility, but long-term EM makes up the #1 opportunity to capture underlying market growth. It should also be noted that the slowdown in EM still resulted in mid-single digit growth for the company in 2014…so a slower EM is still at parity to better than most developed markets.

2. 30% of the company’s revenue comes from the Industrial and Automotive repair business. The company is planning to expand more in Europe saying that “Europe provides large margin accretion opportunity in the long term. Wouldn’t a dollar and euro parity cut the margin substantially? EUR=1.12USD today with analysts expecting the dollar to strengthen thus, hurting companies that do business outside the United States, especially in Europe, like Stanley Black and Decker.Just a few notes. 1. The comment you reference is in regards to Europe security – which is operating in the mid single digits for 2014 – we see this business trending to the mid-teens over the next 2-3 years which is an opportunity. 2. Read the commentary from the call on FX – we made some comments about euro parity. Additionally FX will fluctuate – the more important thing however is that you compete in markets where you can grow, be profitable versus our margin targets and win versus competition. If those things stay true you do not necessarily need to be overly focused on the translation impacts of FX over the longer term.

3. More than 50% of the company’s revenue is generated outside the United States, shouldn’t we expect a decrease in earnings now that the dollar is much stronger? (26% of revenues generated in Europe)yes – as an example we expect to grow organically 3-4% in 2015 with a FX headwind of 4-5% -- if this occurs as planned the US will be a larger portion of our overall sales.

4.In 2013, $320M. Of revenues were generated by the oil and gas infrastructure business. With a steep decline in oil prices, wouldn’t oil companies cut costs? Does that affect the company and earnings?​Please see the call transcript for our discussion about this business.

5. Does the Company have any specific projects lined up for 2015 in terms of emerging markets and/or infrastructure? Our tool business is more short-cycle – so we have business plans in place to launch new products but do not necessarily have customer orders for anything outside of the next 30 days or so. For Infrastructure we do have orders and are working with our customers on project plans – the key in this business is when the onshore pipeline construction markets returns in a meaningful way – right now that is not forecasted until 2016.

6. In the investor overview and other company published data the U.S. Government is named as one of it's security customers are there any plans to tap into other governments internationally?We do business with the government in developed markets – there are not plans to do business with the governments in EM. China is the largest EM country that has an opportunity – that business is usually dominated by a local player.

7. There is a growing market for airline and marine port security, does the Company plan on entering this market and how so?We do business in those areas but we see larger opportunities in our other stated growth verticals at this time.

Uconn

  1. What do you believe are the key drivers for revenue growth for each segment (CDIY, Security, and Industrial)? Also can you identify growth drivers geographically? Developed markets will be market growth plus share gain through innovation & leveraging our brands | EM will leverage the same but have the additional benefit of Medium Price Point offerings (MPP).
  2. What are the company’s revenue growth projections for each segment geographically for next 3-5 years? Corporate target of 4-6% is reasonable in the longer term – use our 2015 guidance for next year.
  1. What are the company’s estimates for profit margin in each segment for the next three to five years? Target margins by segment are CDIY – 16-17% | Industrial 17-18% | Security – Near term mid-teens & longer term closer to the vision for the other segments
  2. CDIY business margin was 16.5% and industrial segment margin was 15.9% for Q3-2014, do you think these margins are sustainable in long run? What do you think are the sustainable (or targeted) margins for the three segments?
  1. As per your Q3 2014 earnings call, the company plans to reevaluate its security business in Europe in Q4, specifically Spain and Italy: Please see the 8K on 12/19 on the Spain/Italy situation & the 4Q call for an update for Europe as a whole
  2. What are your thoughts on this region going forward and how do you feel the leadership changes have affected this area of your business? Jim had some comments in the call on this. In short we feel that we now have the right people in place and now it is setup for the team to execute
  3. Also what is the time frame for stabilization of security business in Europe? 2-3 years….so if the target is low to mid-teens OM% we should exit 16 at levels near there.
  4. Contribution of Europe in overall security business decreased from 41% in Q3-2013 to 37% in Q3-2014. How do you see the European security segment performing during next few years? What are the future estimates (in terms of revenue growth and profitability) for European security business? Jim also commented here. We expect that the team should start showing organic growth in 2H-15.
  1. Can you provide updates on the progress of the large vertical market installation in NA security? How efficiently is this process occurring? See the 4q call
  1. What percentage of the overall security segment revenue is this installation? In regards to recurring revenue, what percentage of revenue is from recurring business? The Commercial Electronic business is ~$1.8B of the $2.4B segment in 2013. Approx 40% of the Electronic business is recurring.
  1. How is the launch of the mid-price point products progressing? Do you believe these products will have a significant impact in the emerging markets? See the call for the update. Yes these offerings should allow us to outpace GDP in these markets by 2-3x
  2. Also, do you believe these products will negatively impact profit margins? If yes, then by how much? The profitability of these offerings are consistent with line average.
  1. Previously in the investor conference call you had mentioned expanding North America retail offering and partnerships for CDIY. Please provide an update on these additional opportunities, specifically regarding the expansion of your retail partnerships. Also, are there any expanding partnerships to increase your market share in areas outside of North America, or segments outside of CDIY? Please see Jim Loree’s commentary from last week’s call.
  1. Infrastructure organic growth was down 1% in Q3-2014 as solid hydraulic tools growth was offset by the slowdown in on-shore oil & gas activity and project delays due to the geopolitical situations inRussia,Ukraineand theMiddle East.
  2. How do you expect the current crash in the oil market to affect your industrial segment and what measures have you taken to offset this impact? We are planning this business to be down 10-20% in 2015. Is the slump in oil price likely to affect access to bank loans? No it is a relatively small piece of our business
  3. How much will the Infrastructure segment contribute to the total Industrial segment in terms of revenue and profitability?It is roughly 0.5B in top-line. The profitability greatly depends on whether or not the Oil & Gas business is in a boom or lull from an end market perspective. As such in 2015 it will be below line average profitability.
  1. What are the reasons for change in revenue growth? Specifically:
  2. From 6% for FY2013 to 3% for 9M-2014 for Japan
  3. From -7% for FY2013 to 4% for 9M-2014 for Australia. 2013 was impacted by a competitive launch at a large customer – the recovery in 2014 reflects a reversal in this trend.
  4. From flat growth for FY2013 to 5% for 9M-2014 for Canada.NA has been a healthy tool market in 2014 – Canada typically has trends consistent with NA.
  5. Furthermore, what are the projected revenue growth trends for these geographies? Would expect them to outpace GDP in those economies by a point or two
  1. As per Q3-2014 earning call, the company had already finalized a currency exchange risk hedging strategy for 2015 and estimated loss of for FY2015 was $45-$50 million.
  2. Major currencies have depreciated against dollar in last few months. What are your estimated currency exchange losses for 2015? Please see our 4Q earnings call deck and transcript
  3. Has company taken any additional steps to reduce/hedge currency exchange losses?Please see our 4Q earnings call deck and transcript
  1. Do you see any negative impact on your European business in the case that Greece or Portugal exits from European Union?
  2. Both of these countries are smaller markets for us – so direct risk of these two specific economies are low. Spillover to other economies like France, Germany and the UK would be more problematic.
  3. Any risk however to the value of the Euro per USD is a risk to the translation of earnings from EUR to USD – while not a commentary of the underlying competitiveness of our products in these markets – they could be worth less on a USD basis if the euro was to further degrade (i.e. if parity is achieved)
  1. Based on your current growth and future projections, what are your capital expenditure projections for next 3-5 years?
  2. Will these capital expenditures be funded internally or through borrowing? We anticipate CapEx to approximate 2.5% of sales in most years – this will always be funded with operating cash flow
  1. Working capital turn was 6.5 times for Q3-2014. What is the time frame to achieve your targeted working capital turn of 10 times? We achieved 9.2 turns in 2014 year end – which is the primary measure – we expect to get to 10 turns over the next 2-3 years
  1. What are strategic reason for moratorium on acquisition? Organization capacity and the focus on fixing European Security & achieving operating leverage across our remaining businesses. Expect that the return to acquisitions will be 2016 – potentially 2H-2015 at the earliest.
  2. What will be the main criteria for acquiring a company in future (Geographical criteria, Segment criteria and others)? Priorities will be Consolidating the tool industry (fill in geographies or product lines), Engineered Fastening (new end markets like aerospace). Our criteria are businesses that fit our stated strategy and achieve the financial metrics stated for the corporation. The primary metric for financial evaluation is CFROI (12-15% strategic | high teens bolt on).
  1. If Company is planning additional borrowing in FY15 & FY16, what is the expected borrowing interest rate? No plans for additional borrowing at this point. Temporary funding will be handled through the CP market.
  1. Lastly, in your opinion what are the most important things stock analysts are missing about Stanley Black & Decker?Strength of our organic growth performance and valuation based on our levels of Free Cash Flow
  2. In your opinion, if there are any positive or negative surprises over the next two years, where will they be?Most likely the surprises would come from a changing global macro environment or disruptions from competition.
  3. What global macroeconomic factors do you find most disconcerting to your overall business?Today it is the FX environment (see 4Q earnings call). See the K for a discussion on risk factors for the business.

University of Hartford

  1. What do you feel is the biggest competitive threat for the company? We feel that by improving our focus on innovation & commercialization process to fuel continued organic growth are critical to us maintaining successful brands and businesses.
  1. What are your thoughts on the current strategy of the company?
  1. What would you say is your competitive advantage? World Class Brands, Operational Excellence/SFS, Acquisition Integration
  1. Where do you see the company in 5 years? I would use the financial vision from the 2013 in conjunction with our LT financial objectives.

  2. What are some external factors that affect the business? Page 52 of the investor overview (posted online) has our end market exposures (note this page could change as we are updating this presentation w.o 2/2). Additionally the 10K reviews the external risk factors that are relavent.
    What are your financial goals for FY 15? Please review our recently released guidance from our call last week.