Welcome to the Second Quarter 2024 Stanley Black & Decker Earnings Conference Call. My name is Shannon and I will be operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to the Vice President of Investor Relations, Dennis Lange. Mr. Lang, you may begin.

Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2024 second quarter webcast. Here today, in addition to myself, is Don Allan, President and CEO; Chris Nelson, COO, EVP, and President of Tools & Outdoor; and Pat Hallinan, EVP and CFO. Our earnings release which was issued earlier this morning, and a supplemental presentation which we will refer to are available on the IR section of our website. A replay of this morning's webcast will also be available beginning at 11:00 A.M., today. This morning. Don, Chris and Pat will review our second quarter results and various other matters, followed by a Q&A session. Consistent with prior webcasts, we are going to be sticking with just one question per caller. And as we normally do, we will be making some forward-looking statements during the call based on our current views. 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's, therefore, possible that the actual results may materially differ from any forward-looking statements that we might make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and our most recent 34 Act filing. Additionally, we may also reference non-GAAP financial measures during the call. For applicable reconciliations to the related GAAP financial measure and additional information, please refer to the appendix of the supplemental presentation and the corresponding press release, which are available on our website under the IR section. I'll now turn the call over to our President and CEO, Don Allan.

Thank you, Dennis, and good morning, everyone. As you saw in this morning's release, we extended our trajectory of solid execution on our operational priorities, which drove gross margin improvement versus the prior year and very strong cash generation in the second quarter. It is also extremely satisfying to report that we delivered organic growth this quarter. As you are aware there was a significant demand normalization post-pandemic that required a recalibration of inventory for us and our customers. We believe that we have stabilized our share position in the marketplace. And this quarter we capitalized on the strengths of the DEWALT plan and supportive pockets of end market demand to deliver positive organic revenue growth in the period. Our priorities remain consistent at this stage of our transformation. And this morning you will hear tangible progress in each of these key areas of focus. First, we continue to drive profitability improvement through the significant transformation of our supply chain to achieve our target of 35% plus gross margins. Next, we experienced strong free cash flow generation and significant balance sheet strength improvement. And finally, new investments to stimulate sustainable growth are increasing with the primary aim of reinvigorating share gain to achieve organic growth at two times to three times the market. We continue to be energized by the compelling long-term growth opportunities in our industry and believe in our ability to capture their value. Yet we remain clear eyed about the near-term environment and expect mixed demand trends to continue in 2024 across our markets. As we capture the savings from the cost structure improvements, which are broadly in our control, we will be measured and disciplined as we selectively invest in the parts of our business that offer the best prospects for growth. We are focused on…

Thank you, Don, and good morning, everyone. Beginning with Tools & Outdoor, second quarter revenue was approximately $3.5 billion with 1% organic growth versus prior year. DEWALT delivered another strong quarter, generating its fifth consecutive quarter of organic growth. DEWALT's performance, combined with a stronger outdoor season drove 2% volume growth. We are particularly encouraged by this result, given the soft consumer backdrop. Total revenue was flat as volume benefits were offset by 1% of currency in addition to 1% of price, which was consistent with our plan to support DEWALT cordless promotions. We are now back in line with historical levels of seasonal promotions. Second quarter adjusted segment margin was 10.4%, a 590 basis point improvement compared to last year. We delivered year-over-year margin expansion through lower inventory destocking costs, supply chain transformation savings and shipping cost reductions, which were partially offset by targeted investments designed to accelerate share gain and organic growth. Turning to product lines for the second quarter. Power tools declined 2% organically, driven by the consumer DIY category. Hand tools organic revenue was flat with new DEWALT product introductions driving increased product listings with our customers. Outdoor organic revenue grew 6% with strong retail volume growth, driven by handheld cordless outdoor power equipment and incremental retail product listings. Turning to Tools & Outdoor performance by region. North America generated 1% organic growth, driven by the same factors as the overall segment. Second quarter US retail point-of-sale demand was up modestly versus the prior year, led by outdoor and regain DEWALT cordless promotions. In Europe organic revenue was down 3% as declines in France and Italy were partially offset by growth in the UK, the Nordics and Iberia. We are prioritizing investments and new product listings to grow market share and overcome the macro softness that…

Thanks, Chris, and good morning. Turning to the next slide. We're two years into our transformation journey and are continuing to make meaningful progress each quarter. I would like to highlight our accomplishments during the second quarter and how we intend to meet our objectives with continued focus and intensity during the back half of 2024 and beyond. We achieved approximately $150 million of pre-tax run rate cost savings in the quarter, bringing our aggregate savings to approximately $1.3 billion since program inception. Our performance represents strong execution. On a year-to-date basis, we are tracking to plan, driven by strategic sourcing actions. We are diligently capturing cost efficiencies to counter the soft demand backdrop. I am pleased to say the savings we generated in the first half support the second half gross margin expansion included in our guidance. More on that later. We continue to target $1.5 billion of pre-tax run rate savings by the year-end of 2024 and $2 billion of pre-tax run rate savings by the end of 2025. We are on track to achieve both targets. As a reminder, the biggest areas where we see savings opportunities are strategic sourcing, operations excellence, footprint actions and complexity reduction. Strategic sourcing remains the largest contributor to our transformation savings to-date. We are actioning $5 billion of addressable spend across areas such as materials and components, finished goods and indirect expenditures. Operations excellence is the next area of opportunity. Our initiatives are driving productivity improvements that translate into tangible results. This initiative encompasses our manufacturing operating model and leverages lean principles. In 2024, this has been particularly effective in reducing downtime and improving labor efficiency. We have a robust pipeline of projects lined-up to deliver savings this year and beyond. Turning to footprint-related projects and product platforming. We are optimizing…

Thank you, Pat. As you heard this morning, the company is making meaningful progress across our key priorities of margin improvement, cash generation and balance sheet health, while also investing in future sustainable growth. We are moving with speed and delivering results in a macro environment that has not been supportive, but we are confident that it will turn from a headwind to a tailwind in the future. Until then, we are focused on consistent execution while positioning the company to deliver higher levels of sustainable organic revenue growth, improved profitability and cash flow to drive strong long-term shareholder returns. We are now ready for Q&A, Dennis.

Great. Thanks, Don. Shannon, we can now start the Q&A, please. Thank you.

Thank you. [Operator Instructions] Our first question comes from the line of Julian Mitchell with Barclays. Your line is now open.

Hi. Good morning.

Good morning.

Good morning. Maybe just a question around the earnings trajectory. So it looks like sort of EPS is guided to be flattish sequentially in Q3 and then up, I think, $0.40 or so sequentially in the fourth quarter. So understand the sort of tax rate movement from 20% to negative tax in Q4, but maybe if you could flesh out any of the moving parts around sort of revenue and margin for the third and fourth quarter. And on that tax rate point, what's a good kind of placeholder for next year, please?

Hey, Julian, it's Pat. Yes, you have it correct. That's the correct EPS flow. I'd say the fourth quarter seasonal revenue impact is what drives the revenue and OM in the fourth quarter. So you're slightly north of $3.5 billion in revenue in the fourth quarter. And you're probably in between $300 million and $330 million in the OM range in the quarter with the flow in the third quarter, obviously rounding out the back half of the year. The third quarter is seasonally strong as some of the holiday shipments start humming around the September time frame. In terms of the tax drivers, as we've said before, these were some of the things that were in motion and affecting tax last year in '23, a set of discrete planning items that were put in motion even early stages of COVID and before. And so it will play out through this year and a bit into next year. I'd say for next year, we're probably in the high teens, approaching 20% range would be my guidance for tax for next year. We're obviously not at '25 guidance yet, but that would be kind of the ZIP code I would expect to be in.

Thank you. Our next question comes from the line of Tim Wojs with Baird. Your line is now open.

Yeah. Hey, guys. Good morning.

Good morning.

Nice to see volume growth in tools. Maybe on that kind of topic, Don, just maybe if you can give us a little bit of an update just on the operating environment. It doesn't seem like a lot has changed, but kind of curious on your opinion there and just how your retailers are kind of thinking about kind of the promotional period at the end of the year. And then you guys mentioned in your prepared remarks a few times product listing ads and product focused ads there. If you could maybe just talk about some of the investments and where some of the priorities are and just maybe where you're kind of focused on adding incremental shelf space.

All right. Hey, Tim, this is Chris. Nice hearing from you and good morning as well. As far as the first part of the question from an operating environment perspective, as the guidance would indicate, we're essentially expecting the back half to have a similar operating environment as the front half. And we are dialed in to be back up to our run rate level of promotional support in the back half of the year. We feel very excited about what we've got laid in with our retailers and especially with our ability to drive more promotion and demand in our accretive cordless power tool segment. So that's what we're kind of looking at for the back half. As far as in that environment, what is really important is, and that we're -- as you heard from Don, we are absolutely committed to is executing our strategy. So if you think about what's going to really drive our performance in the back half and beyond, it's going to be continuing that supply chain transformation that allows us to not only drive margin accretion, but as our service levels continue to improve, we're getting more opportunities to take share and shelf space in that environment as we fulfil better for our customers. And then if we think about the investments, what we are committed to do with the investments that we're -- and the incremental margins that we're generating is to make sure that we funnel those to our highest growth priorities. Specifically, we've been talking about how we want to make sure with STANLEY, CRAFTSMAN and DEWALT, we are focusing on those brands and specifically investing in both market activation from a digital marketing perspective as well as we've been working to add field resources to make sure that we can work with our end users and our customers to make sure that they are -- understand our story, understand our products, and we can continue to get feedback on where we need to drive innovation. So that combination of the transformation with targeted investment that we're committed to, we've started to see some encouraging performance, especially as you've heard for the past couple of quarters with DEWALT. So we're going to stay committed to that and understand that we're going to navigate a fairly flat macro environment.

Thank you. Our next question comes from the line of Jeffrey Sprague with Vertical Research Partners. Your line is now open.

Hey. Thank you. Good morning, everyone. Hey, with perhaps fingers crossed, right, getting close to some kind of cyclical bottom here on the consumer, the economy, rates, the whole thing, really want to kind of step back and get maybe a refresh perspective, Don, maybe starting with you, but just on what really normalized could look like. And the spirit of the question kind of goes, right, $2 billion in cost reduction is something like $11 a share, right? Investments of $200 million to $300 million is $2 or $3. So there's a lot of "gross savings" in that construct. But where is the leakage on a net basis, right? And as revenues recover maybe in the construct of that 35% gross margin, what really is kind of a realistic EBITDA margin on a normalized basis? Sorry for the philosophical question on an earnings call, but interested in your thoughts.

Well, it's actually a very good question, Jeff, because it's something that we spend time actually thinking about as we go into our annual strap planning cycle, which is just beginning now and be part of a Board presentation in October as we think through where we are in the transformation journey, the financial goals that we've established, what's the earnings potential for Stanley Black & Decker over the next three years and beyond. And so when you step back and begin to think that through, we clearly feel very good about where we are in the journey around transformation. We think 35% plus is still very achievable in that time horizon. We do believe as the markets begin to get stronger or stabilize and start to grow and in some time frame, I think, we're all wondering exactly what that time frame is, but let's presume that happens in the next year or so then we really think we're building an operating model around organic growth. As we said, that can grow two times to three times in the market. And so how do you define the market? We've done a lot of different analysis on this, and there's different ways to look at it in the short-term. But over the long-term, if you just look at GDP and say, can we grow two times to three times GDP over the long-term, we definitely think that is achievable. And so that puts you in a mid to high single-digit growth mode depending on GDP over the long-term. And then what's the ultimate leverage you're going to get from that growth or benefit into margins. And I still think this is a 40-ish percent business as you grow and you leverage the effect of that. We will continue to invest. We're seeing the benefits of investing. We said $300 million to $500 million, and it probably is going to trend closer to that $500 million number in the time horizon we've talked about. So the earnings potential is strong. I'm not necessarily going to throw a number out there and say, what do we think we can get to. But to say we can get back to where we were from an earnings point of view as a company does not scare any of us. It's just a question of the time horizon of that.

Thank you. Our next question comes from the line of Adam Baumgarten with Zelman & Associates. Your line is now open.

Hey. Good morning, everyone. Just curious if you could give us some color on point-of-sale trends through the quarter and into July, would be helpful.

Yes. This is Chris and nice to hear from you, Adam. Throughout the quarter as I think was mentioned earlier, point-of-sale was modestly positive. It was driven really the positive aspects were driven by an outdoor season that was more normally patterned as that season would look as well as the overperformance that we saw in DEWALT. As we finished out the quarter and the outdoor season at peak, we kind of saw them coming back more to that flattish type of perspective. And if you look at our back half, that's kind of what we think the market is going to look like in the back half as well.

Thank you. Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Your line is now open.

Yeah, thanks for the question. Good morning, guys.

Good morning.

Just wanted to ask about free cash flow. So Don, can you -- or Pat, can you guys talk about the cadence that you expect in the second half, given the timing shift into the second quarter. So thoughts on net working capital and other variables in the back half? Thank you.

Yes. We're proud of the progress we made in the front half of the year. That progress was driven both by year-over-year income improvement, but also working capital improvement. The back half of the year is traditionally the strong part of the year. So we expect the drivers in the back half to remain income and working capital, but also a bit of CapEx. And I'd say by the time we get to the end of the year, the drivers of the beat on our initial guidance are going to be a mix of working capital and CapEx. And those drivers are going to be pretty much even between those two, will be roughly on our inventory target for the year. And I would say it's going to be pretty traditionally weighted in that it's going to be pretty balanced across those two quarters with a little bit towards the fourth.

Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Your line is now open.

Thanks. Good morning, everyone. I'd be curious if you could just maybe unpack the 2Q -- the 1Q to 2Q gross margin, just given the divestment of infrastructure. I'm not sure if that was gross margin above fleet average or where that was and maybe the mix between the outdoor tool, sorry, the outdoor products versus power tools given that mega mix. Then maybe just looking at the second half of the year. You said 31%, I think, Pat. How do you think that 31% divides between 3Q and 4Q?

Yes. I'll start with the latter part of that, Nigel, and then I'll come back to the other first half dynamics. I'd say we're very confident in delivering our year in gross margin and taking that progression into 2025. And I think that's the most critical message we want to get across. We'll finish the year at 30%. The fourth quarter will finish in the low 30s. We would expect the fourth quarter even with some of the seasonal dynamics of the fourth quarter, the fourth quarter is going to be north of 31%. And the third quarter is probably going to be at to slightly below 31%. I'd say those are ZIP codes. But those are all being driven off of the portfolio we have right now with the bias of progress at the gross margin line in the T&O business, which has been the case throughout this year and is likely to be the case heading into next year. In terms of the dynamics across Q1 and Q2, I'd say, there's less of a dynamic that is driven by the divestiture or any other movements. I mean the divestiture was modestly dilutive in that regard, but we had anticipated that when we set up the plan and set up the guidance. And really it's been playing out across the front half of the year was the fact that we had some volume softness in the back half of 2023 that always puts a little bit of unabsorbed overhead onto our balance sheet, which is unfavorable. And against that, we were raising an acceleration of program savings, which is what we've been up against for a while now as the macro has been soft on our margin improvement journey. And we've been successful in driving savings despite the soft macro. We expect to continue doing that throughout this year and into next year. And I think the dynamics that unfolded across the quarters were really those things coming off the balance sheet, an acceleration of savings relative to some softness in the back half of '23. And I think the really -- the favorable news is even with a stronger-than-expected outdoor performance, which is welcome from a revenue standpoint, we still deliver gross margin with strength coming from a segment that has gross margins slightly below fleet average. So we feel confident with the trajectory we're on. And we expect to continue to making progress and get into the mid-30s by the end of next year.

Thank you. Our next question comes from the line of Rob Wertheimer with Melius Research. Your line is now open.

Yes, hi. My question is on the consumer behavior. I think we all see some of the macro back and forth in other reports and such. But I'm curious what you're seeing in your internal data just to illustrate the consumer variability or weakness or uncertainty or whatever. And how much if any risk or the upside or downside, does that kind of put into back half? What's the variability around the trends you're seeing? Thank you.

Thanks, Rob. This is Chris. I mean we certainly have seen a continuance of the trend that we've seen where the professional is relatively stronger than the consumer. And we would expect that to continue. We have certainly, as you would expect in this environment, seeing consumers respond much more favorably to promotions, and that's good for us because we're -- we have an opportunity as we get back up to our normal run rate on promotions to benefit from that and benefit with accretive business. So we feel good about that and what we see from the opportunity with our merchandising in the back half. As far as what we see looking forward, I mean, it's going to be an uneven environment as we go forward. And we're going to stay really focused on our mission to execute against the supply chain transformation as well as we know the things that we're investing in with our major brands and specifically targeting the professional provides us some upside to the market that we're going to continue to stay diligent as we pursue. So we're excited about where we're heading and do see that dynamic that you referenced with the consumer.

Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Your line is now open.

Thanks. Good morning and congrats on the results. Just wanted to dial in a couple of areas, if I could. First, just to get a better understanding of it looks like a slight reduction of the midpoint of organic sales growth for the full year to down 50 basis points from maybe flattish before. And it would appear, correct me if I'm wrong, that perhaps you're also looking for tools and storage to go slightly negative again in the back half. So I just wanted to understand the drivers of that and if I'm correct on the back half. And then secondly, you also mentioned SG&A, mid-21% and maybe going to the higher end of the $300 million to $500 million in reinvestment. I was wondering if you had any early view on what 2025 SG&A could be given those comments around higher reinvestment into the business.

Hey, Mike, it's Pat. Yes, I think you're reading the year right. We had a growth quarter. We're very proud of driving a growth quarter in a very soft macro. The drivers of that were, I'd say, more traditional outdoor season, especially at retail and especially with electric products and outdoor. DEWALT posted its fifth consecutive quarter of growth. And then we had a strong aero through the -- we had strong aero performance throughout the quarter. And auto didn't really start trailing off until late in the quarter. Our expectation for the back half and we're just trying to be clear eyed about the back half. We're not here to break some big new macro news. It's just we expect DIY to stay soft. It's been soft and now we're heading into the holiday period where that's more consequential. Auto, we started trailing off in the second quarter, the latter parts of the second quarter. We expect that to remain soft. And so that's it's really driving the back half. But you would be correct in interpreting the fact that we expect the T&O business to be down slightly in the back half kind of roughly averaging down 100-ish basis points across the back half really on the backs of a soft consumer during a holiday period and the fact that the outdoor season has mostly run its course. And then in Industrial, we expect aero to remain strong, but we do have some auto headwinds baked into that which has that business to slight growth, but less robust than would have otherwise been the case had auto not trailed off. The SG&A for the year is going to be slightly above 21%, I would say, for the year. As far as next year, I mean, we're not here to kind of give '25 guidance. I don't expect SG&A as a percentage of sales next year to depart from this year in some meaningful way. All we were trying to signal is that we really believe this is a growth business and we're going to invest behind growth and we're going to protect growth investments. And so Chris and his team and the broader organization is working to put growth behind the most promising elements of our business and even in a soft macro to protect those investments, but we're not trying to telegraph some meaningful departure of SG&A as a percentage of net sales this year or next.

Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is now open.

Thanks. Good morning, everyone.

Good morning.

Good morning.

So I've got a near-term and a longer-term question. On the near-term side, the commentary around getting to gross margins of approximately 31% by the third quarter, can you maybe just parse that out a little bit. If I look at things historically, it tends to be a seasonally lighter quarter and you typically don't see that much improvement 2Q to 3Q. And so I'd love to hear a little bit more about that. And then just the longer-term question is really more around like getting comfort with the timing of an eventual like volume inflection. And specifically like is there a way that you guys are tracking a replacement cycle and ultimately when we could see the timing of an inflection? Thank you.

Hey, Joe, it's Pat. I'll start with the first one. I think reading our gross margin progression across time during this transformation has been complex because there's been so many factors in motion and some of them are what I would call atypical factors of when does expensive inventory come off the balance sheet. I would say the read of gross margin across fiscal 2024 is more a factor of it took a bit more of our savings in the latter part of '23 and the early part of '24 relative to soft volume to generate the gross margin improvement that we saw. And we had to accelerate savings throughout the latter part of '23 and throughout this whole year in a soft macro environment to get to our originally stated gross margin objectives throughout this whole journey. So Don and team laid out a road map in the latter part of 2022 that had us ending 2024 at roughly 30% and the fourth quarter in the low 30 percentile. But that was on a much, much more robust market and volume assumption. We're probably almost $1.5 billion in revenue down from that original 2022 assumption. So we've been accelerating savings to drive gross margin improvement. So the tick up from the first half of this year to the back half of this year has more to do with the savings cadence relative to longer-term margin dynamics than any kind of traditional seasonal dynamic.

All right. And for the second one, I think what I -- this is Chris. What I would say is that, first and foremost, we really like the end markets that we serve and we like them in the long-term. And we think that there's, as Don referenced, some really nice long-term GDP plus growth potential in those markets. But whether -- especially when you're talking about the professional and it's linked to whether it's residential or commercial and industrial construction. But I think it's safe to say that whether it's professional or the consumer, which you could argue, partially driven by repair and remodel are all fairly interest rate sensitive businesses, and that would be the precursor to what we think would be -- start the inflection point. And while it wouldn't be instantaneous, we think that is kind of the first thing in the cycle we'd want to see change that would then start to unlock some of that longer-term potential that we do see for those end markets that we serve.

Thank you. This concludes the question-and-answer session. I would now like to hand the call back over to Dennis Lange for closing remarks.

Thanks, Shannon. We'd like to thank everyone again for their time and participation on the call. Obviously please contact me if you have further questions. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.