Overview

Techtronic Industries (aka TTI) owns a portfolio of tool brands (the main ones being Milwaukee, Ryobi & Hart). TTI's portfolio is focused on power tools (drills, saws, sanders, nail guns etc) but also increasingly covers the outdoor equipment market (lawnmowers, hedge trimmers, leaf blowers etc) as well as the heavier duty construction market (concrete finishers, jackhammers, pipe cutters etc). This portfolio makes TTI the largest manufacturer of power tools in the world. TTI also owns a floor cleaning equipment business with its own portfolio of brands (inc. Hoover, Dirt Devil & Oreck). TTI is headquartered and listed in Hong Kong but generates a significant majority of its revenue in the US. TTI has a market cap of ~$17.5b and trades ~$60m per day. The company is still ~25% owned by the founders and their associates/families with the other ~75% free floating. TTI has an ADR (TTNDY US).

History

TTI was founded by Horst Julius Pudwill and Roy Chi Ping Chung in 1985. Pudwill was born in Germany where he had studied and become an engineer at Volkswagen before transferring to Hong Kong in the middle of the 1970s to become a general manager. TTI began life as an outsourced manufacturer for other brands, working out of a factory in Hong Kong. TTI spotted a growing demand for cordless tools among consumers (they were already popular with professionals) and designed a range of products specifically for the consumer market. Sears commissioned TTI to produce Craftsman-branded cordless power tools on their behalf in 1987. TTI also entered the floor care industry in 1987 when it began producing cordless and handheld vacuum cleaners for Bissell.

TTI opened its first factory in Dongguan, China in 1988.

TTI listed its shares on the Hong Kong Stock Exchange in 1990.

TTI dabbled in diversification during the early 1990s. They paid $36m for 51% of Gimelli, a Swiss contract manufacturer specialising in dental and healthcare appliances in 1991. They paid $67m for 76% of Solar Wide, a contract manufacture specialising in solar-powered appliances in 1992. They bought the manufacturing and distribution rights for the Jetstream oven from American Harvest.

TTI's business was still dominated by power tools and floor care products despite these acquisitions and their efforts to diversify so, in 1998, the company decided to refocus on its two core categories, a decision which has essentially been upheld ever since.

TTI acquired the VAX business for floor care products in the UK and Australia for $8m in 1999. This was a tiny deal but an important one as it marked the first time the company moved beyond its historical roots as a contract manufacturer and became a brand owner as well.

TTI's first major deal was the acquisition of Ryobi which took place over the course of 2000 to 2004, as the company bought up different international subsidiaries and distribution rights. In 2000, TTI acquired the North American Ryobi power tool business and exclusive manufacturing and distribution rights for the Ryobi brand in North America for $95m. In 2001, TTI acquired the European Ryobi business for ~$7m. In 2002, TTI acquired Ryobi's businesses in Australia and New Zealand for ~$3m. In 2004, TTI acquired the North American Ryobi outdoor equipment business. The Ryobi deal was important not just because it gave TTI ownership of a recognised brand but also because it gained them a major new client, The Home Depot, who became the exclusive distributor of the Ryobi brand in the US in 2002. That deal made Home Depot TTI's largest customer, jumping ahead of Sears. The early success of the partnership saw TTI sign a deal in 2003 to begin manufacturing a line of RIDGID tools for Home Depot (which was the exclusive licensee of Emerson's brand).

TTI acquired Homelite, a manufacturer of outdoor power equipment, in 2001 from John Deere for ~$25m.

TTI acquired Royal Appliance (manufacturer of Dirt Devil) for ~$105m in 2003. Royal had been generating ~$400m of revenue per annum and the acquisition expanded TTI's portfolio of floor care brands and products.

Stephan Pudwill, Horst's son, joined TTI in 2004. He was 27 when he joined and had previously worked in product marketing and strategic planning at Mercedes-Benz.

TTI's second major deal was the acquisition of Milwaukee which they bought along with AEG and DreBo in 2005 from Atlas Copco for ~$625m. Milwaukee is now the key asset of the company so its own history is worth recapping. Milwaukee Tool was founded in 1924. Milwaukee was first sold to Amstar in 1975, then Merrill Lynch Capital Partners in 1986 and then to Atlas Copco in 1995 for $550m in cash. The company had generated ~$370m of sales in 1994. The company was predominantly focused on North America at the time it was acquired by Atlas Copco but the Swedish company introduced its tools to Europe in a meaningful way for the first time in 2002. The three acquired companies had combined sales of ~$700m in 2003.

Joe Galli joined TTI in 2006 to run its floor care unit (which was struggling at the time) and became CEO of the entire company in 2008. Galli's own history is worth covering as he is still CEO today and has been instrumental in TTI’s recent success. Galli joined Black & Decker in 1980 as a salesman fresh out of university. He excelled in that role and moved quickly into management. He ended up running Black & Decker's global power tools and accessories unit which accounted for ~70% of the company's sales at the time. He famously took the dormant DeWalt brand and relaunched it in 1992, growing the franchise from $60m in revenue in 1992 to $1b in 1999. It was around this time that Galli, per a WSJ article, told the CEO of the company that he was hoping to land the top job in the next 2-3 years. The CEO's response was to tell Galli that "it was best for me to move on". Galli was heavily recruited and was expected to join Pepsi as CEO of Frito-Lay North America before, at the last minute, taking a job as President and COO at Amazon instead, effectively as a number two to Bezos. Galli only lasted about a year at Amazon and the reasons for his departure seemed to be a combination of the fact that (a) he had been hired under the impression there was a path for him to end up as Amazon's CEO role however Bezos' intention of sticking around had become clear and (b) the options he'd been granted when he was hired vested over a long period of time but were now deeply underwater thanks to the .com bust. He ran another ecommerce business for a short time before being hired away by then-struggling Newell Rubbermaid as their new CEO. He was in this role for four years where he effected a lot of change very quickly but ultimately seemed to have upset so many people along the way that the board decided it was better to part ways in 2005. Galli had known Horst Pudwill for more than a decade and conversations of support for the downcast executive became conversations about recruitment. TTI was trying to acquire Hoover at this time and Pudwill ended up hiring Galli to run floor care with a plan for him to run the whole company once Pudwill retired as CEO and Galli's non-compete with Newell expired (Newell made drill bits that competed with certain products in TTI's power tool portfolio). This is exactly what happened and Galli has been CEO of TTI ever since, now going on 15 years.

TTI did end up acquiring Hoover in 2007 for ~$100m from Whirlpool. Hoover was founded in 1907 and had been a publicly traded company until 1985, when Chicago Pacific bought it for ~$520 million. Maytag acquired Hoover when it bought Chicago Pacific in 1988 for ~$1b. Whirlpool then acquired Hoover when it bought Maytag in 2006, but soon determined it wasn't a core business and sold it to TTI.

TTI acquired the vacuum company Oreck out of bankruptcy in 2013 for $24m (outbidding the founding Oreck family by $1m).

TTI acquired Empire Level, one of the leading US manufacturer of levels, squares, layout tools, and safety and utility tape, in 2014 for ~$30m. Empire Level was founded in 1919 and its claim to fame was as the inventor of the modern levelling tool used in the construction industry.

TTI acquired Imperial Blades in 2018 for ~$50m. This purchase resembled that of Empire Level in many ways, a small bolt-on deal for a niche producer of tool ancillaries with decades of heritage and built-up customer loyalty.

Business

TTI generates ~90% of revenue from power tools and ~10% from floor care products (mostly vacuum cleaners).

The power tools segment’s revenue splits 60-65% from professional tradesman (the Milwaukee brand) and 35-40% from DIY consumers (the Ryobi & Hart brands). The segment’s revenue splits 80-85% traditional power tools and 15-20% outdoor equipment. The segment’s revenue splits ~90% cordless and ~10% corded/gas-powered.

TTI is the largest power tool manufacturer in the world today. Its major competitors are Stanley Black & Decker (which owns the Stanley, Black & Decker, DeWalt and Craftsman brands and is the second largest player), Makita (which is present globally but particularly strong in their home market of Japan), Bosch (private German player) and Hilti (private German player). The data is imperfect but studies suggest that the top 10 players in the global market for electrical power tools together make up ~75% of the industry. In the outdoor equipment space, TTI increasingly competes with STIHL, Husqvarna, Toro and Hikoki (formerly Hitachi's power tool division). The data here suggests that the top 10 players in the global market for electrical outdoor equipment together make up ~90% of the industry.

TTI as a whole generates 75-80% of revenue in the US, 15-20% in Europe and 5-10% in the rest of the world. It’s reasonable to think that these geographic splits look similar for the power tools given it makes up ~90% of total revenue and there's no reason to think floor care will look significantly different.

TTI generates just under 50% of its total revenue from Home Depot. This level of concentration has actually increased modestly over time despite the high starting point as the two companies have formed an incredibly strong and successful partnership. The consumer-focused Ryobi brand is sold exclusively via Home Depot in the US (and has been for the last 20 years) and Milwaukee has not been sold at Lowe's for more than a decade now (though it is sold in smaller home improvement retail competitors like Ace and at industrial distributors like Grainger). The relationship here is more than a traditional vendor/retailer one. In every Home Depot store in the US there is a TTI sales rep wearing a Ryobi or a Milwaukee shirt who just specialises in explaining and selling power tools. That's hugely valuable to Home Depot and something that no other competitor could justify providing given nobody else has close to the shelf space at Home Depot that TTI has. The guy who runs TTI's North American tools division is the son of the cofounder of Home Depot. TTI is a product-first company and that means there is a constant stream of innovative new models and new products that they're bringing to market which means freshness and differentiation for the Home Depot range of tools. That has real value for Home Depot and if the innovation flywheel at TTI seemed to be slowing down, I'd be worried that this pillar of the relationship was weakening but, quite the opposite, TTI seems to be accelerating their R&D and product introduction efforts right now.

Business Quality

The power tool business benefits from several attractive characteristics, particularly on the pro side.

The equipment is expensive per unit but cheap per use. If you're a contractor, you may have a tool or a few tools in your hand most of the day. Ensuring that it's precise, fast, reliable, durable, ergonomic and can run all day is essential to your own productivity and ability to do your job well. If you could buy a drill that was $50 cheaper and it stops just once on a job-site, forcing you to jump in the truck to go buy a replacement, you've already more than offset whatever you saved on the purchase, probably many times over.

The equipment is increasingly subject to switching costs in the form of battery compatibility. In the past tools were largely corded however the vast majority of tools sold today are cordless given the many and obvious benefits of losing the cord. That means the tools need batteries. If you already own a few Milwaukee tools but want to run them hard, you probably want to buy a spare battery or two (which will work across all your tools). If you're back in Home Depot a few weeks later looking for a new nail gun and you have your stack of spare Milwaukee batteries ready to use, are you going to buy a Milwaukee nail gun or a competing brand knowing that if the battery on the DeWalt runs out, you're stuffed.

The last point is less tangible but the Milwaukee brands has built up real equity among a small group of users over a very long period of time. Milwaukee Tool was founded in 1924. Their users are proud of their tools and they're proud of the brand of tool they choose and associate themselves with. That preference can of course be undermined by a better price or a better product from a competitor, but it's certainly a nice-to-have dynamic when it comes to the existing players retaining and gaining market share.

TTI specifically has a few other idiosyncratic points in its favour. The company grew up in the razor-thin margin world of contract manufacturing. They were among the first companies to move their manufacturing footprint to China and have been operating there for many decades (they have started to diversify into Vietnam and Mexico in the last few years). They design and manufacture a higher percentage of their product than most of their peers. For example, most tool makers buy brushless motors from third parties. TTI designs and manufactures their own which has enabled them to produce motors that are 20-25% more efficient than those of their peers. TTI designs their battery packs and battery management systems in-house, only buying the li-ion cells themselves. This philosophy gives TTI the opportunity to produce better-designed, more tightly-integrated products at lower prices (since they're not paying a margin away to third party vendors on these components). This is possible in part given that the company has been focused on developing products for an all-cordless, all-electric future for the last 15 years.

Thesis

We believe that the market is underestimating both TTI's ability to continue to deliver robust growth for the next 5+ years and TTI's ability to expand margins. In our base case, we see a path to grow EPS in the high teens over the coming years and assuming an exit at 16x forward earnings, in-line with longer term median/average multiples for high quality US industrials, we see a path to an IRR in the high 20s.

There are three major drivers of continued revenue growth for TTI in its core power tools segment. These are geographic expansion, outdoor and heavy construction.

The fact that TTI still makes almost 80% of revenue in the US implies that there is huge scope for TTI to grow outside the US. If we look at the major countries TTI operates in today outside the US, their combined population is 750-800m. TTI generates ~$4 of revenue per capita in those countries. In the US, TTI generated ~$30 of revenue per capita in 2021. If we haircut that $30 by 50% to account for lower GDP per capita in most countries relative to the US, that would still imply the potential to ~4x ex US revenues. That would add ~$9b or ~60% of TTI's 2022e revenues if achieved and, if it took a decade, that alone would drive ~5% revenue growth.

TTI has been present in the outdoor market for a long time but their efforts to break into the market have really stepped up in recent years as electric tools (where TTI has considerable expertise relative to traditional outdoor tool manufacturers) have begun to see increasing penetration. The global power tool market is ~$40b while the global outdoor equipment market is ~$25b. These numbers are inexact as are our estimates of the split of power tools vs outdoor equipment within TTI's revenue. That said, our best guess is that TTI has 20-25% market share of global power tools, 25-30% market share of global electric power tools but only 5-10% market share of global outdoor equipment. If we assume constant share within categories and that the market for both power tools and outdoor equipment is all-electric, before factoring in any market growth, that would add ~$12.5b or ~90% of TTI's 2022e revenues if achieved and, if it took a decade, that alone would drive ~6.5% revenue growth.

TTI's entry into "heavy industrial" use cases is being done under their Milwaukee MX Fuel sister brand which the company launched in late 2019. The products here are a combination of (a) souped-up versions of the core Milwaukee power tool lines for cutting, drilling and sanding stuff that's bigger and harder and (b) some totally new products for Milwaukee like concrete vibrators, jackhammers, light towers and drain cleaners. The reason that this product line is so nascent is that it has only recently that the combined capabilities of motors and batteries have reached a point that a cordless, battery-powered tool is able to do a job as well as if not better than a tool that relies on an air compressor connected to a diesel-powered generator. The result of this steady relative improvement in performance is that each year battery-powered tools will become more competitive with a larger and larger subset of the jobs traditionally performed by diesel-powered compressor-based tools. If and when a battery-powered tool does become capable of fulfilling specific jobsite requirements, the contractor's choice is pretty easy. The battery-powered alternative is cordless, quieter and doesn't pollute (the environment or the jobsite workers' lungs). The addressable market here is extremely nebulous. There are thousands of different pieces of equipment on the jobsite for something like a large bridge or airport plant and they're made by myriad different vendors. To the extend that those vendors are public, these products typically sit within a much larger and broader organisation (for ex, Atlas Copco) so haven't attracted much focus or detailed analysis. The CEO of TTI will tell you this is a $100b opportunity. The two segments of Atlas Copco that seem to overlap most closely with the markets TTI are going after generated ~$3b of revenue in 2021. Atlas Copco is a highly decentralised organisation so any single market share number is almost useless but I've seen numbers of ~25% so if we blindly apply that to the revenue in question, it would imply a TAM of ~$12b. I've done some very crude reverse engineering work based on US infrastructure spend and historical "equipment intensity" which also suggests that TAM might be ~$12b here. If we stick with the $12b number and assume TTI can grab ~15% of the market (half where they are today in electric power tools) that would be $1.8b which would add ~15% to TTI's revenues if achieved and, if it took a decade, that alone would drive ~1% revenue growth.

These three opportunities are each clear but also hard to precisely quantify, particularly within a defined time period. That said, if we take them together, you're looking at three growth drivers which could deliver, without any help from the base business, a ~10% revenue CAGR over the next decade. In other words, there seem to be enough conservatively quantified opportunities for growth over and above what the core business is capable of achieving through market growth and grinding out further share gains that underwriting a ~12% revenue CAGR over the next 5 years seems fairly reasonable.

There's another potentially growth lever in the form of Hart, a previously dormant brand that TTI resurrected in recent years to replicate the Ryobi/Home Depot exclusive partnership but for Walmart and at a lower price point. This is a very small contributor to revenues for now and may stay that way given Walmart isn't known for its power tools but it’s obviously a huge retailer and a SKU that's small for Walmart is probably a big SKU for almost any other retailer on the planet (the company have soft-framed this as a ~$1b opportunity over time) and this is yet another "shot on goal" that TTI has to keep driving above-market revenue growth for the foreseeable future. 

TTI made ~10.5% EBIT margins in 2021. This was up from ~8.5% in 2011, implying that margins have expanded at ~20 bps per annum on average. It's our contention that the business' entitlement margins are meaningfully higher and that reported margins are being held back by the significant investments the company is making in the three growth vectors I just described (new geographies, outdoor & MX) but that as these each move through their own S Curves, there will be a natural moderation in the rate of OpEx growth and TTI's EBIT margins can start to expand more significantly than they have in the past. The conviction we have in the fact that entitlement margins are meaningfully higher than today's margins is supported by the fact that almost every single one of TTI's competitors and peers is making meaningfully higher margins than TTI. From 2017 to 2022, Stanley's Tool & Storage division will have averaged ~15% EBIT margins after corporate overhead. For the same period, Makita has averaged ~15% EBIT margins. Hilti (the private German tool manufacturer) made a 14% EBIT margin in 2021. Atlas Copco's two most comparable divisions have averaged ~18% EBIT margins. ITW's Construction Products segment has averaged ~25%. Graco's Contractor segment has averaged ~28%. Even Chervon, an Asian tool manufacturer which is about 1/7th the size of TTI is expected to make ~9% EBIT margins this year.

If TTI can deliver ~12% revenue growth from 2022 to 2027, expand EBIT margins from ~10.5% to ~12%, we're looking at a company that will be generating ~$2.7b of PAT and ~$1.5 of EPS in 2027 and that will have ~$1b of net cash on the balance sheet or ~$0.6 per share. If we value it on 16x (where higher quality US industrials historically traded over the 5-10 years pre COVID) and credit them for the net cash, you're looking at a $26 stock or 170% upside from here or a ~27% IRR (exit is YE26).

Risks

The main risks we see here are (a) excessive customer concentration with Home Depot, (b) underestimating the tailwinds created by COVID and, by extension, the headwinds posed by reopening that still have yet to flow through the numbers and (c) key man risk.

The Home Depot risk was one of the questions we focused most on during our underwriting but conversations with formers on both sides of the table leave us comfortable that this is a true partnership, one that has been hugely beneficial to both parties and one where there are no signs of relationship weakening. In addition, there are two big power tool vendors in the US, TTI & Stanley. TTI are aligned with Home Depot and Stanley are aligned with Lowe's. If Home Depot decided to kick out TTI and all their brands, it's not as though Stanley could just backfill the shelf space tomorrow. That would completely undermine their own relationship with Lowe's. There's a natural equilibrium here where the two large home centres each partner closely with one of the two large tool brands. Is it possible that someone like Makita or Bosch could displace TTI or Stanley. In theory, of course but I doubt that either retailer would really want to risk replacing leading, well-known, proven brands with loyal bases of consumers and contractors with a brand that many consumers and contractors might never have heard of, let alone trust.

The reopening dynamic seems to be fairly well understood at this point. The company guided to MSD growth in 2022 (slightly higher excluding a few points of FX headwind) which implies H2 2022 will be a touch better than flat Y/Y and will have grown at a ~20% CAGR vs H2 2019. If we look at some of the US metrics, we can see that YTD in 2022, PCE tool volumes per capita are running at a ~5% CAGR vs 2019. The historical growth rate has been ~3% so maybe there's a little bit of above-trend spending to digest in 2023 but it feels modest at this point. The inflation carryover alone if we assume prices are flat going forward should be good for ~5% of revenue growth in 2023 and with the street at ~10% growth for TTI's revenues in 2023, it feels like the risk that this ends up being meaningfully too high is modest.

It probably wasn't particularly clear from the above so it's worth explicitly stating here that Joe Galli has been a driving force behind TTI's strategy and success since he became CEO almost 15 years ago. If you have the chance to meet him it's very clear (a) why he wouldn't be the easiest person to work for but (b) why he's been able to have such success at both Black & Decker and now at TTI. He is 63 today so there are justifiable concerns about how much energy and appetite he has to continue in his role as CEO. This was initially a concern for us but we became comfortable as it appears that (a) Joe is having a great time running the company and sees himself in this role for a good few more years to come and (b) the culture of performance and excellence that he has instilled over the last 15 years has left the company with a deep bench of talent from which to look for a replacement and well-placed to continue executing strongly even under a different CEO.