Welcome to the Second Quarter 2024 Stanley Black & Decker Earnings Conference Call. My name is Shannon, and I will be the 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. Lange, 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 may 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 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 how we outperform the market to gain share and are pleased by the green shoots emerging in various channels. So while our markets will be choppy for the short term, we are building the processes and structure to create a sustainable growth operating model which will ensure we significantly benefit from the long-term growth opportunities in the industries we serve. I have asked Chris to describe how we are both thoughtfully and aggressively pursuing our growth agenda in Tools & Outdoor, which he will discuss in further detail this morning. Our global cost reduction program remains on track for expected run rate savings of $1.5 billion by the end of 2024 and $2 billion by the end of 2025. Our teams continue to accelerate savings actions, which have successfully delivered $1.3 billion of run rate savings program to date. These results reinforce our confidence in achieving our 35% plus adjusted gross margin goal. I am confident that by executing on our transform strategy, we are positioning the company to deliver higher levels of sustainable organic revenue growth, profitability, and cash flow, which will drive strong long-term shareholder returns. Now turning to second quarter results, we delivered $4 billion of revenue, down 3% versus the prior year. This includes 1% of organic growth, which was led by DEWALT, the outdoor product categories, and Engineered Fastening. This was more than offset by a 3% drag from the infrastructure divestiture and 1% of currency. Adjusted gross margin was 29.2%, up 560 basis points versus the second quarter of last year. Our supply chain transformation was a major contributor to this improvement. It has strong momentum that we expect to carry through the back half and into 2025. Adjusted EBITDA margins returned to double-digits and were 10.7%, which is a five-point improvement versus prior year. This was driven by our gross margin expansion, offset by deliberate increases in growth investments. Adjusted diluted earnings per share was $1.09 for the second quarter. Free cash flow in the quarter approached $0.5 billion, primarily due to accelerated working capital improvements, the strong cash generation, along with proceeds from the infrastructure divestiture, contributed $1.2 billion of debt reduction in the quarter. We continue to prioritize improving balance sheet health, and in a few moments, Pat will address our plans for more progress over the next 18 months. As we delever, we are also maintaining our commitment to returning value to our shareholders and to that end, our Board of Directors approved a modest increase to our quarterly cash dividend, which is now $0.82 per share. Finally, we are raising our 2024 full year adjusted diluted EPS guidance range by $0.10 at the midpoint to a range of $3.70 up to $4.50 and increasing our free cash flow guidance to $650 million up to $850 million. Pat will provide more color on this later in our presentation. I want to thank our team members for their collaboration and focus as we continue to make substantial progress on our transform plan and achieve our interim financial goals we established about two years ago. I will now pass it to Chris Nelson to review the business segment performance. Chris?

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 is affecting this region's economy. To round out geographic performance for the quarter, all other regions in aggregate grew 5% organically. This was driven by double-digit growth in Latin America, led by Brazil, along with high single-digit growth in India. In summary, for Tools & Outdoor, the quarter was highlighted by a return to organic growth with a meaningful step-up to segment margin. Now moving to Industrial. Second quarter Industrial revenue declined 20% versus last year, which was nearly all due to the infrastructure divestiture. Price contributed positive 2% to growth, offset by a 2% currency headwind. The Engineered Fastening business grew 2% organically, driven by aerospace growth, which more than offset the market softness in automotive and customer destocking in general industrial. The Aerospace business grew 24% organically, supported by new business wins and a strong booking rate. The Industrial adjusted segment margin was 13.5%, an improvement of 50 basis points versus prior year, driven by price realization and cost control. I'd like to thank our teams around the world for their dedication to delivering another solid performance in the second quarter. Their focused efforts delivered organic growth and margin expansion across both business segments. Moving to the next slide. As I reflect on my first year here at Stanley Black & Decker, much of my time and energy has been directed towards learning about our end users' and channel partners' priorities and how to both efficiently and effectively accelerate the next phase of Tools & Outdoor organic growth and market share gains. It's clear to me that we have four essential attributes for success. One, an industry with strong long-term growth characteristics. Two, iconic brands. Three, a differentiated innovation engine. And four, deep customer relationships and loyal end users. I have strong conviction that we can create long-term value by capturing the commercial opportunities ahead of us, both now and into the future. To capture these opportunities, we are funding investments both by redirecting existing resources towards the most promising opportunities as well as investing incremental dollars consistent with the $300 million to $500 million range that Don and Pat have referenced on previous occasions. Along with market-facing priorities, I've also been focused on our team putting in place the right capabilities and skills to execute our strategy. I am pleased to have my new organization established with a leadership team consisting of seasoned Stanley Black & Decker veterans complemented by external talent who bring fresh perspectives. They are all in place driving forward momentum. The valuable breadth and depth of knowledge across the leadership team and organization is allowing us to activate our strategy with urgency. We are prioritizing our resources on the highest impact opportunities which we believe are serving the professional end user within our most attractive market. Over the past 12 months, as we continue to streamline and focus our business, we've doubled down on being brand-led and are prioritizing DEWALT, CRAFTSMAN, and STANLEY. These powerful brands have significant scale in the marketplace and strong brand equity with end users. By continuing to strengthen these brands and maximizing brand health, we can capitalize on their potential for long-term growth, share gain, and margin improvement. Turning to innovation. We view our long-standing ability to listen to end users and to deliver purpose-built innovation as a core differentiating capability. We are laser-focused on driving innovation to help solve the most pressing challenges our professional end users face, namely finding ways to improve their safety and productivity on the job site while ensuring they have robust tools to help deliver the high-quality craftsmanship their customers expect. Our core brands have been synonymous with delivering this type of value to job sites for many years, and we will continue to push the boundaries of these solutions as enhancing safety and productivity on the job site has never been more relevant to the professional end user. For example, we announced the next evolution in battery technology this quarter, the DEWALT XR POWERPACK 8 AH Battery with tabless cell technology. This joins the reinvigorated XR line, which houses the best-performing 20-volt MAX batteries and power tools from DEWALT. This battery technology conducts more energy, delivers more power output, and has a longer lifespan, which enhances end-user productivity. We also introduced the DEWALT TOUGHSERIES Construction Jack, a tool designed to increase productivity by giving one person the confidence and security to lift, level, and hold material without assistance. With up to 340 pounds of lift capacity and fine-tuning adjustment features, this tool is a must-have for any end user. Market activation is another investment priority and growth opportunity. We are more aggressively activating our core brands through amplified digital product marketing and additional field resources, both with the goal of extending the reach and impact of our brands and innovation. We expect our elevated marketing efforts behind DEWALT, coupled with support to grow the trades through grants, scholarships, and tool donations will broaden user engagement and brand ambassadorship. These sales and marketing initiatives are funded with new investment dollars and the reallocation of resources, which illustrates our prioritization efforts towards our best prospects for growth. In addition to delivering cost savings and driving margin improvement, which you have heard from Don, our supply chain transformation is also an enabler of growth, enhancing operational efficiency and achieving 35% plus adjusted gross margin unlocks incremental optionality to invest even more behind our brands and to accelerate the virtuous cycle of organic growth. We believe that our emphasis on operational excellence, in combination with the structural changes we are making to our production and distribution network, which are the crux of our supply chain transformation, can become a sustainable growth enabler for the company as we serve our customers and end users with excellence and speed. In addition, the continuous improvement capabilities we are strengthening as a part of this transformation will serve as a sustainable engine to help generate recurring productivity to self-fund the business and our brands. In summary, while the near-term market demand environment remains mixed, we are optimistic about the long-term growth opportunities in our industry. We are aggressively moving forward to accelerate the growth of our powerful brands with our end users and customers around the globe. We have a talented team deployed that is moving with speed and a clear mandate, executing our transformation plan and accelerating share gain. This simple but powerful mandate energizes our team as we work to position ourselves to win in the marketplace.

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 our distribution footprint as well as redesigning our manufacturing network to leverage scale and centers of excellence as we maximize operational efficiency. This multiyear endeavor continues to progress as planned, and we expect to exit or transform a number of facilities across the globe over the next 18 months. We are well underway with our platforming strategy, which identifies methods to standardize parts and components across product families to eliminate complexity and to improve procurement scale. We are incorporating this strategy into our product development process across power tools and outdoor products with significant opportunities across DEWALT, CRAFTSMAN, and zero-turn mowers. This exciting program is in the early innings, and we believe it can be a source of material productivity well beyond 2025. In aggregate, our supply chain transformation initiatives are expected to generate approximately $0.5 billion of savings in 2024, achieve a full year gross margin of 30%, and fund additional growth investments in our core business. I would like to commend the organization for diligently pursuing the goals of our transformation. This journey would not be possible without everyone's contributions. We are developing the sustainable cost structure and operational efficiency needed to return our adjusted gross margin to 35% or greater while enabling targeted growth investments. Moving to the next slide. Two main areas of focus this year are generating free cash flow and expanding gross margins to support long-term growth and value creation. We generated a historically strong $486 million of free cash flow in the second quarter of 2024. This brings our year-to-date free cash flow to approximately neutral. Our performance was supported by approximately $400 million of accelerated working capital improvements, which were realized earlier in 2024 versus our initial plan. We continued to make progress on our inventory levels and sequentially reduced our inventory balance by approximately $100 million this quarter. Inventory days remained below 150 and are moving toward our long-term target of approximately 120 to 130 days. The remainder of the working capital favorability was a result of improved accounts receivable and accounts payable balances versus our plan. Our strong free cash flow, along with the net proceeds from the infrastructure sale enabled $1.2 billion of commercial paper reduction during the second quarter. The strong momentum in the first half and a modest reduction to our capital spending expectations gives us the confidence to raise our full year free cash flow guidance range to $650 million to $850 million, up from our prior range of $600 million to $800 million. We expect second half free cash flow in excess of the dividend to support an additional $400 million to $500 million of short-term debt reduction by year-end, which will result in a total debt balance that is a little over $6 billion. In 2025, we are targeting further deleveraging through free cash flow generation, coupled with the funds generated by strategic portfolio pruning actions. Our goal for the year-end 2025 is total debt in the low $5 billion zone, inclusive of inorganic cash generation. This plan enables us to achieve our desired leverage metrics and is consistent with the discussions with our rating agencies. Another item of note, this past quarter, we proactively renegotiated the company's core credit facilities, securing access to significant liquidity to support the company's ongoing transformation. We prioritize maintaining investment-grade credit ratings and have access to $3.5 billion in credit facilities backed by a long-standing, well-capitalized and diversified bank group. Our capital allocation priorities remain investing in our organic growth and our transformation, funding our long-standing cash dividend to return value to shareholders and further strengthening our balance sheet. Turning to profitability. Adjusted gross margin was 29.2% in the second quarter, a 560 basis point improvement versus the prior year, driven by lower inventory destocking costs, supply chain transformation benefits, and lower shipping costs. In the first half of 2024, we improved adjusted gross margin by 40 basis points sequentially versus the second half of 2023 consistent with our plan. We are planning for further sequential improvement in the second half of this year with adjusted gross margin expected to approximate 31%. Our second half step-up is supported by our supply chain transformation savings, which are and have been tracking to plan. This plan puts us on a path to deliver our long-held transformation goal of approximately 30% full year 2024 adjusted gross margin and exit the year in the low 30s. We continue to be on a solid trajectory of adjusted gross margin improvement against a challenging macro backdrop. Our momentum gives us confidence in our ability to achieve our gross margin objectives for 2024 and achieve 35% plus adjusted gross margin within the transformation time horizon. Now turning to our 2024 guidance and the remaining key assumptions. In addition to the updated free cash flow guidance I just shared, we are revising GAAP earnings per share range to $0.90 to $2 and raising adjusted earnings per share range to $3.70 to $4.50. The GAAP earnings per share revision is primarily a result of incorporating the second quarter environmental reserve expense of approximately $155 million into the range. The adjusted earnings per share is being revised $0.10 higher at the midpoint. Our outlook factors in a soft macro environment in the second half. We are leveraging the cost savings within our control to offset this and generate second half adjusted EBITDA growth versus the prior year. The EPS improvement at the midpoint passes along a portion of the second quarter operating outperformance and includes lower back half interest expense due to accelerated deleveraging. Our midpoint assumption for full year organic revenue is expected to be down 0.5 percentage point. This contemplates the continuation of the stretched consumer in Tools & Outdoor along with a declining automotive production backdrop in Industrial. Our sales range contemplates plus or minus 130 basis points, which is the primary area of adjusted earnings per share variability. Turning to the segments. Tools & Outdoor full year organic revenue is expected to decline 1% at the midpoint, plus or minus low single digits, with a range of variability similar to the total company. Pricing for Tools & Outdoor is expected to be relatively flat for the full year, which is consistent with what we are seeing in the market today. The Industrial segment's organic revenue is expected to be relatively flat to slightly positive as aero fasteners' growth is partially pressured by global automotive OEM light vehicle production headwind. We are maintaining a disciplined approach to cost management and remain committed to funding and reprioritizing investments for long-term organic growth. Our planning assumption for innovation, brand, marketing activation, and technology growth investments remains an incremental $100 million in 2024. Our expectation for full year SG&A as a percentage of sales is to be in the mid-21% zone. Turning to profitability. We expect total company adjusted EBITDA margin to approximate 10% for the full year, supported by savings from the transformation program. Adjusted segment margin in Tools & Outdoor is planned to be up year-over-year, also driven by continued momentum from our ongoing strategic transformation. The Industrial adjusted segment margin is expected to be flat to slightly positive versus the prior year as operating improvements and cost controls in Engineered Fastening are offset by the dilution from the Infrastructure business divestiture. Our adjusted earnings per share range is $0.80 with variability in market demand being the largest contributor. We will work to optimize adjusted gross margin and manage SG&A thoughtfully throughout the year to balance the macro uncertainty while working hard to preserve investments to position the business for long-term growth. Turning to other elements of our guidance. GAAP earnings include pre-tax non-GAAP adjustments ranging from $445 million to $495 million largely related to the supply chain transformation program as well as the second quarter environmental expense. The adjusted tax rate is expected to be 10% for the full year with the third quarter approximating 20% and a benefit in the fourth quarter. Our 2024 guidance assumptions at the midpoint are noted on the slide to assist with modeling. We expect the third quarter adjusted earnings per share to be approximately 25% of the full year at the midpoint. In summary, looking forward, we remain focused on executing our supply chain improvements to further improve gross margin and earnings in the second half of 2024, and our progress to date supports our improved full year adjusted earnings and free cash flow outlook. We remain confident that our actions to drive toward our target of 35% plus adjusted gross margin while funding additional organic revenue growth investments will continue to generate positive results. Our top priorities remain delivering margin expansion, generating cash, and further strengthening the balance sheet to position the company for long-term growth and value creation.

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. Our first question comes from Julian Mitchell with Barclays. Your line is now open.

Hi. 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 operating margin 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 operating margin 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 the 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. It's great to hear from you, and good morning. Regarding the first part of your question about the operating environment, as indicated in our guidance, we expect the second half to mirror the first half. We are prepared to return to our usual level of promotional support in the latter half of the year. We're very optimistic about our collaboration with retailers and our potential to boost promotion and demand in our cordless power tool segment. This is our outlook for the second half. In this environment, what's crucial, as you heard from Don, is our commitment to executing our strategy. The key elements driving our performance for the latter half and beyond will be our supply chain transformation, which not only enhances margin growth but also improves our service levels, allowing us greater opportunities to capture market share and shelf space as we serve our customers more effectively. When it comes to our investments, we are dedicated to directing the additional margins we generate towards our highest growth priorities. Specifically, we are focusing on our brands—STANLEY, CRAFTSMAN, and DEWALT—by investing in digital marketing and increasing our field resources to engage with end users and customers, ensuring they grasp our story, our products, and providing us with feedback on where we need to innovate. This combination of transformation and targeted investment has begun to show positive results, particularly with DEWALT over the past few quarters. We will remain committed to this strategy while navigating a largely stable 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, and 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 are 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.

I wanted to ask about free cash flow. Don or Pat, could you discuss the expected trends in the second half, considering the timing shift into the second quarter? What are your thoughts on net working capital and other factors in the latter part of the year? 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'm interested in understanding the gross margin from the first to the second quarter, especially considering the divestment of infrastructure. Was that gross margin above the fleet average, and what was the mix between outdoor products and power tools? Additionally, looking ahead to the second half of the year, you mentioned 31%. How do you anticipate that 31% will be split between the third and fourth quarters?

Yes. I'll begin with the latter part of your question, and then I'll address the first half dynamics. We're very confident in achieving our year-end gross margin and maintaining that progress into 2025. This is the key message we want to convey. We anticipate finishing the year at 30%, with the fourth quarter expected to end in the low 30s. We expect the fourth quarter, despite some seasonal impacts, to be above 31%. The third quarter will likely be around or slightly below 31%. These figures are approximate but illustrate the strong performance driven by our current portfolio, particularly in the T&O business, which has been a focus throughout this year and is expected to continue into next year. Regarding the dynamics in Q1 and Q2, there isn't much impact from the divestiture or other changes. While the divestiture had a modest dilutive effect, we anticipated this when we established our plan and guidance. The first half of the year experienced some softness in volume during the latter part of 2023, leading to unabsorbed overhead on our balance sheet, which is not ideal. In contrast, we have been accelerating our program savings despite the challenging macro environment affecting margin improvement. We expect to maintain this momentum through the year and into next year. The dynamics across the quarters involved balancing these savings against some softness experienced in the latter half of 2023. The positive news is that, in addition to stronger-than-expected performance in the outdoor segment, which is beneficial for revenue, we are still delivering robust gross margins from a segment that typically sees margins slightly below fleet average. Therefore, we are confident in our current trajectory and expect to make further progress, aiming for mid-30s gross margins 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 the back half? What's the variability around the trends you're seeing? Thank you.

Thanks, Rob. This is Chris. We have definitely noticed a continuation of the trend where the professional sector is performing better than the consumer sector, and we expect this to persist. In this environment, we have seen consumers respond more positively to promotions, which is beneficial for us as we aim to return to our normal promotional activity and capitalize on that for growth. We are optimistic about our merchandising opportunities in the latter half of the year. Looking ahead, we anticipate that the environment will be uneven. Our focus will remain on executing the supply chain transformation while investing in our key brands, particularly targeting the professional sector, which offers some market potential. We are excited about our direction and acknowledge the dynamics you mentioned regarding consumer behavior.

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 strong aero performance throughout the quarter. 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 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, 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 slightly growing, 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 are working to put growth behind the most promising elements of our business. Even in a soft macro, we're going 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 getting comfort with the timing of an eventual 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 the team laid out a roadmap 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. For the second point, this is Chris speaking. First and foremost, we have a strong preference for the end markets we operate in, and we have a positive long-term outlook for them. We believe, as Don mentioned, that these markets have promising long-term growth potential that exceeds GDP. This is particularly relevant for professional markets tied to residential, commercial, and industrial construction. It's clear that both professional and consumer sectors, which are somewhat influenced by repair and remodeling activities, are quite sensitive to interest rates. This sensitivity would serve as an early indicator of a shift we anticipate leading to an inflection point. While this change won't happen overnight, we believe it will be an important first step in the cycle that could eventually unlock the longer-term potential we envision for these markets 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.