Techtronic: Drilling deep into the supply chain

Company overview

Techtronic Industries is one of a number of consumer discretionary or industrial manufacturing companies within our portfolio. We consider these companies to be, from an engagement perspective, ideal investments as each has multiple touch points with different SDGs. Techtronic is a Hong-Kong listed company focused on the US consumer market, with predominantly Chinese manufacturing operations for its power tools and floor-care products, principally sold under its Milwaukee brand.

• Market capitalisation: $10bn
• Leadership: Joseph Galli Jr, CEO; Horst Julius Pudwill, Chair
• Operational scope: Hong Kong-listed with a majority Asia-based workforce, but principally a US sales market.

Investment case

The attraction of the stock is its exemplary innovation record, which has resulted in it rapidly taking market share in the industry verticals it has chosen to target. This was evident to us in a recent visit to the global R&D centre of Milwaukee – one of the most impressive company visits that Hamish Galpin, Lead Manager of the Fund, has undertaken in his 29 years as a professional stock picker.

From a financial perspective, if the company delivers on its aims of releasing innovative products, achieving further increases in market share and expanding into new markets, it should sustain a strong growth profile for a number of years to come. The stock has a similar margin and return profile to its larger and better-known competitor, Stanley Black and Decker, and we believe its slightly higher return on equity and price-to-earnings ratio are justified by the track record and quality of the business.

Engagement opportunity

• Techtronic’s global reach – it has 41 operations and 22,000 staff worldwide – provides many touch points for SDG-aligned engagement. Its relationships with suppliers and employees can help to alleviate poverty and promote health, well-being and gender equality, all while increasing levels of innovation. Through high-quality manufacturing operations, the company can minimise waste, increase renewable energy usage, and its innovative product designs can promote resource efficiency and economic growth.
• Early on, Techtronic identified consumers’ growing preference for cordless power tools, and is committed to further expanding its range of products. In addition to growing sales, this shift supports user productivity and reduces energy demand.

Engagement objectives

• Ethical and inclusive supply chains: The shift to cordless power tools increases Techtronic’s need for certain commodities – cobalt in particular – which are used in its lithium-ion batteries. The company develops the batteries in close collaboration with large suppliers. Our initial objective is for the company to improve its oversight of its total supply chain, especially in relation to cobalt and other rare minerals.
  • Aligned with SDGs one, 12 and 16
• Resource efficiency: The company is primarily vertically integrated and, in recent years, has delivered many product innovations. Milwaukee now offers over 500 tools, all of which make use of the same battery platform and therefore preventing older products from falling into obsolescence. Multiple business lines have grown from zero to several hundreds of million dollars in just a few years. Our objective is to encourage the company to further assess adjacent opportunities for developing cordless products, enabling greater resource efficiency, and to consider what scope there may be to generate additional impacts from the data it is generating from its connectivity software and other existing technologies.
  • Aligned with SDG 12

Techtronic has exposure to the SDGs:

SDG 1: End poverty in all its forms everywhere.

SDG 12: Ensure sustainable consumption and production patterns.

SDG 16: Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels.

Engagement progress

• In addition to meeting with the company’s CEO and CFO and speaking with its Vice-Chair, investor relations team and others, we visited the Milwaukee CFO at the company’s innovation centre, where we were able to see first-hand the breadth of its cutting-edge product development.
• We have provided recommendations to the company about how to improve its due diligence on its existing supply chain, based on our knowledge and expertise as a leading investor expert on this theme.