Welcome to the Second Quarter 2025 Stanley Black & Decker Earnings Conference Call. My name is Shannon and I will be your operator for today's call. [Operator Instructions]. 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 2025 Second Quarter Webcast. Here today, in addition to myself, is Don Allan, President and CEO; and Chris Nelson, COO, EVP and President, 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 a.m. today. This morning, Don, Chris and Pat will review our 2025 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 in 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 measures 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 all of you are aware, this will be my last earnings call for Stanley Black & Decker, given our recent announcement that Chris Nelson will become the CEO effective October 1. I want to begin by sincerely thanking our shareholders, employees and customers for your continued trust and support throughout my tenure. Your commitment has been foundational to our progress and success, especially over the last 3 years. I believe now is the right moment to initiate this leadership transition, as I'm excited about how the team will build upon the significant company-wide transformation progress we have made since the summer of 2022. So in full alignment and with the support of our Board of Directors, I will move into the Executive Chair role, where I'll remain fully committed to supporting Chris and the company. I couldn't be more confident that Stanley Black & Decker is on a firm foundation for future growth and in excellent hands under Chris' leadership. As we move through the final year of our multiyear supply chain transformation and I reflect on the progress over the past 3 years, we have significantly advanced the vision we set forth during the spring of 2022. We stabilized, simplified and focused the organization. As a result, we have and are continuing to improve our cost position, capitalize on our core strengths and prioritize investments designed to accelerate organic growth. We have assembled a strong management team with the right people in the right roles across the organization, blending experience in our business and the industry with an infusion of new perspectives from experienced dynamic talent. We streamlined our portfolio of iconic brands and businesses by divesting $2.6 billion of revenue. We have honed our focus on the core strengths of…

Thank you, Don, and good morning, everyone. On behalf of the entire Stanley Black & Decker team, I would like to begin by expressing our appreciation to Don for his leadership and dedication to the company over the past 26 years. His deep connection with our customers and brands, coupled with his unwavering commitment to our global team, has been instrumental in positioning the company for lasting success. I'd also like to personally thank him for his partnership over the past 2 years and his help preparing me for this moment. Looking ahead to October 1, I am honored and excited to become CEO of Stanley Black & Decker, an iconic American company with a proud heritage and a bright future. The opportunity to work with our teams around the world to unlock the tremendous potential of our brands and drive share gain in the marketplace is energizing and I look forward to doing so in collaboration with our valued channel partners. Now turning to our second quarter operating performance. Our top priority continues to be serving our customers and accelerating initiatives to mitigate tariff-related headwinds, all while keeping our long-term financial objectives in sight. Beginning with Tools & Outdoor. Revenue for the quarter was approximately $3.5 billion, representing a 2% decline as compared to the second quarter of 2024. Organic revenue decreased by 3% and price realization of 2% represents a partial quarter benefit from our late April U.S. price actions. Volume was down 5% due to a slow outdoor buying season and tariff-related shipment disruptions. We were encouraged to see continued top line expansion of DEWALT professional products as Pro demand remained relatively resilient. This marks over 2 years of consistent growth from our powerhouse DEWALT brand, which year-to-date has grown in every product line and region. We…

Thank you, Chris and good morning, everyone. I would like to emphasize the importance of the strategic countermeasures that we are actively implementing. These coordinated efforts across our global teams are essential to protect our business, as we advance towards our long-term financial objectives, inclusive of growth and margin accretion. We currently estimate the annualized gross tariff cost from policy actions is approximately $800 million, excluding mitigation actions. The factors that underpin our cost estimates incorporate the most recent policy changes announced in July and those expected to be enacted within the next few days. These assumptions include 30% incremental tariffs on goods from China, 30% on non-USMCA-compliant goods from Mexico, over 20% in aggregate on goods from the Rest of the World and 50% Section 232 metal tariffs. However, the impact on our 2025 P&L is expected to be partially mitigated through a combination of ongoing targeted initiatives in addition to strategic pricing measures. Taken together, we currently estimate the net P&L impact for our 2025 to be approximately $0.65, reflecting the timing and costs required to implement mitigation strategies. In this estimate, we have included costs to accelerate the planning and execution of our supply chain initiatives as well as the anticipated increase in expenses required to manage current rare earth supply constraints. In the appendix, we have included an illustration that is consistent with prior disclosure of our U.S. cost of goods sold by country of origin to assist in modeling sensitivities relative to these assumptions. Now to unpack our remaining planning assumptions. Our earnings outlook for the year includes GAAP earnings per share of $3.45, plus/minus $0.10. Adjusted earnings per share is expected to be approximately $4.65. Pretax non-GAAP adjustments are estimated to range between $205 million and $250 million, primarily related to the supply chain…

Thank you, Pat. I am grateful to have had the opportunity to serve as CEO of Stanley Black & Decker and work alongside an extraordinarily talented and resilient team. As I have said many times, Stanley Black & Decker is built on the strength of our people, iconic brands and a powerful innovation engine. These foundational attributes transcend external market conditions and I am confident that these traits are what position Stanley Black & Decker to thrive well into the future and generate sustainable long-term growth and value creation. We are now ready for Q&A, Dennis.

Thanks, Don. Shannon, we can now start Q&A, please.

[Operator Instructions]. Our first question comes from the line of Julian Mitchell with Barclays.

I just wanted to say congratulations, Chris and thanks, Don, for all the hard work and wish you well in the Board transition role.

Thank you.

Maybe just my question would be around the gross margin outlook. Just trying to understand, I heard Pat say gross margins are up year-on-year, both third and fourth quarter. Looks like you're embedding organic sales growth year-on-year in Q4 and there should be some good volume leverage perhaps there. So just trying to understand what's the kind of Q4 or exit gross margin that you're embedding for this year? And as you think into next year, I realize that the cost productivity program, the $2 billion number is largely in the run rate going into next year. So maybe any early thoughts on further gross margin expansion drivers, as I think you'd mentioned gross margin should rise again in the next year?

Yes. Julian, it's Pat. Yes, we're expecting each, third quarter and the fourth quarter year-over-year gross margin expansion. I'd say in the third quarter, in the 1.5 percentage to 2 percentage point range and in the fourth quarter, similarly maybe even getting above the 200 percentage point range. We would expect this fourth quarter of '25 probably in that 33% to 34% range. And I think it speaks to the hard work that the teams are pursuing both on the mitigation and pricing fronts. We're very committed to our 35% gross margin journey. And while tariffs have definitely given us something to manage, I think, the team has been very, very active in attacking it. And the back half gross margin result is a result of the mitigation and the pricing work. As we look to next year, I don't know that I want to pin myself down on quarter-by-quarter guidance for '26 yet. But we very much expect to maintain that 35-plus percent gross margin journey. And we would expect in the back half of next year to be kind of on that journey. I'd say that tariffs, probably from a timing perspective, created a 9- to 12-month delay in getting to 35%. But I think you should expect the back half of next year to be in the mid-30s and at/or approaching that 35% range by the end of the year. I think the front part of the year, we'll have to wait until we get further along this year and into next year because the front part of next year will be the unpacking of some of the FIFO, LIFO dynamics associated with tariffs. So I'm not going to pin myself in on the very front part of next year yet because we're still waiting to see how tariffs play out the back part of this year. I would say from volume, I mean, yes, we're up -- well, from sales were up 1 point in the fourth quarter of this year or thereabouts. Volume will be down, price will be up. There's nothing going on in the gross margin that is really a volume leverage dynamic. It is all about mitigation and pricing and the continuation of our transformation program. We do still expect to deliver the $500 million of gross savings in our transformation program [indiscernible].

Our next question comes from the line of Michael Rehaut with JPMorgan.

Congrats, Chris and Don, wishing you the best, great working with you.

Thank you, Michael.

Wanted to kind of unpack a couple of elements of the updated guidance and with some of the moving parts here. First, if you could kind of hit on the 2Q upside that we saw, what are the offsets that didn't allow that upside on 2Q to fully translate to the full year guide? And secondly, how should we think about the $0.65 headwind as it relates to 2026? In other words, do you expect to recover all of that through various actions or part of it? If you can kind of walk through those 2 elements.

Mike, it's Pat again. I would say for the quarter in the simplest of terms, the beat versus our adjusted outlook and consensus was really about $0.15 operational. And the rest was just tax timing. We had always expected in our 15% full year tax rate to have some discrete items, predominantly an IRS settlement. And about half of that was solidified in the second quarter much earlier than we had ever anticipated in our outlook. So $0.15 operational, the rest, tax timing. In that operational, some of it was the timing of tariff expense throughout the year. I would say about $0.10 of it was we had less tariff expense in the quarter just caught up in the FIFO, LIFO calculations. It doesn't change our outlook of tariff expense for the year. So really, in the quarter, you had some FX favorability. And I'd say there -- all else being equal, you might expect that FX favorability momentum to carry through the back half. And certainly, with the U.S. dollar strengthening a little bit, some of that might dissipate. But really, that's offset by some mitigation expense that we have in our SG&A. And so I'd say the operating dynamic is, we had some upside in the quarter. Most of it was just tariff expense timing. That balances out the back part of the year and then some incremental mitigation expense kind of consumes a small amount of FX upside for the year. I'd say most of what has changed in our forecast is, we're trying to be proactive and anticipate a bit as best we can, where tariffs are going. And so when we look at tariffs relative to where we were in the middle of the second quarter, we're expecting the countries that currently have received letters…

Our next question comes from the line of Tim Wojs with Baird.

I'll echo the same comments on Chris and Don, thanks for everything and Chris, good luck. I guess maybe just on pricing. Just kind of curious if you could elaborate a little bit how the pricing increases are tracking versus your expectations. I think the 2% in the tools segment might be a little bit below what some are looking for and I think that should accelerate into the second half. So just maybe a little color on how the price is being accepted, if there's any kind of elasticity that you point out and how to think about pricing in the second half?

Yes, Pat or Tim, this is Chris. So from a pricing perspective, as we talked about last time, our price increase went in on schedule and has moved through and been realized in line with our expectations and in the timing that we expected. So we feel good about where we are. And importantly, we feel good about what we've seen from competitive dynamics and how it's playing out not only on the shelf but then as we look at our demand patterns after that price increase, we haven't really seen a significant change or really any change in the demand patterns or any new buying behaviors. As it relates to what you asked about elasticity, as Pat referenced in his comments, we are seeing about a one-for-one offset price for volume trade-off, which is kind of what we thought and is in line with our expectations. So the timing is on. We feel like the impact is on. The competitive dynamics seem solid. And then as we think about moving forward, the combination of changes in tariff policy with us being able to firm up more of what we see as our well-planned out mitigation actions. Our next round of price increase, which will go in -- and we're in discussions right now to get it moving along with our customers, will go in at the beginning of Q4, is going to be much more modest. So it's kind of -- you think about it as roughly half of what the first price increase was. And we're going to be able to do so in a way that we believe will continue along those same dynamics. And we have seen -- if we think about just what we've seen since the increase has gone through, we've seen roughly the same POS and it's been fairly stable as what we've reported before. And in the quarter, it was down -- flat to down slight low single digits with a little bit of acceleration coming out of the quarter and the beginning of Q3 as well. So the pricing plan is solid and we're seeing it executed in the field as we would have expected and as we articulated last time we talked in -- at the end of last quarter.

And Tim, the only thing I'd add to that is, you'll see the full run rate, obviously over the back part of the year and you're probably going to be seeing in the T&O business the high single digits range of a price increase. And as Chris was saying, a like offset in the volume netting to flattish total organic revenue performance for the back half.

Our next question comes from the line of Nigel Coe with Wolfe Research.

Don, it's quite a run there, so congratulations. Hope you enjoy some retirement; and Chris, congrats on getting the big seat.

Thanks, Nigel.

On the pricing, I just want to make sure, are those actions being -- at this point being actioned and announced through the channel? Or is that still to come through the quarter? And then maybe just a bit more detail on the $800 million of tariffs. I mean, obviously, it changes by the day more or less. But would the copper tariffs be part of that? Or is it because it hasn't been confirmed, if not, I mean, just talk about that. And then I think the other big moving piece right now in that math is the USMCA compliance in Mexico. So just maybe just bring us up to speed in terms of how that's trending.

I'll start and tackle the price in the USMCA, Nigel. So the price -- the first round of price is fully in. It is in. It's on the shelves, it's been passed through. And we've been tracking the impact for a number of weeks now as that has gone in. And what I was referring to is that we are -- for the round 2, we are currently -- we have notified our channel partners and we're in discussion about what we would see as an implementation of that second round of pricing, which once again would be more modest and about half of what we saw for the first round is going in at the beginning of Q4. As it relates to USMCA, we have -- we've been doing a lot of work there, as you might imagine. And we do believe that we have plans and programs in place that will allow us over time to get more towards what you'd would say is the average type of USMCA qualified for a like industrial manufacturing company. And those programs, obviously, range in time from things that are easy to do with changes in bills of material, to longer lead time with changes of component suppliers and localization of the supply chain. But we see nothing structurally that would prevent us from over time being at what we'd see is that kind of more industry average level.

Yes. And Nigel, on the tariffs, yes, it does change with frequency but we've kind of been anchored to around 3 numbers, now $800 million being the third and the current run rate. It was as high as $1.7 billion annualized run rate back in early April when China was at [ $145 million-plus ]. Then in the middle of the quarter when there was relief, the 90-day relief period, it went down to $600 million. Our best estimate of where things are likely to go inclusive of us paying a bit more in China tariffs as some of the rare earth timing works itself out is around $800 million annualized. The change from $600 million to $800 million is mostly our best estimate of us paying marginally a bit more in China tariffs as both of our governments work through rare earth licensing. The Rest of World, which is 23% of our U.S. COGS base going from 10% to 20% and a few above that, like Thailand and Cambodia, which are 36%; and Malaysia is at 25%; and then Mexico going from 25% to 30%, that's the estimate. And in the simplest rule of thumb what we would expect in our income statement this year is about 60% to 65% of that annualized run rate in that ZIP code.

Our next question comes from the line of Chris Snyder with Morgan Stanley.

I wanted to ask on customer buying patterns. It sounded like maybe that signaled there were some inventory that came out in Q2 from the channel. I guess, was that the correct takeaway? And then any expectation on potential destock into the back half of the year? Do you have visibility into that when you speak with the customers, particularly on the home center side?

Yes. This is Chris. I'll tackle the second question first is say that we don't -- we see our inventory levels as being healthy. They're in line with historicals. And as we've been in discussions with our channel partners, we anticipate that remaining the same. So there's no big story on destock. What you were referencing from some of -- maybe some of the volatility that we saw in the quarter as it related to buying patterns, that's more in line with the fact that as everyone was trying to be able to put together the best plan that they could for the change in trade policy, there were changes in promotional plans, as simple as I can put it, where people were deciding what they were going to put on promotion, what they were going to bring in to have promoted in not only Q2 and Q3 and how they were going to adjust their promotional inventories to support that change of plans. So that's a temporary disruption that I think is what you would expect as people tried to -- us included, we went through a fairly extensive process with all of our channel partners and making sure that we could put forth with them the most attractive assortment of products with advantage position for our -- in a tariff world that our end users would want. And so we've been going through that planning and that is just a temporary kind of Q2, Q3 dynamic that we saw in the changing of promotional inventory and timing of those shipments.

Our next question comes from the line of Rob Wertheimer with Melius Research.

Congrats. I wanted to start with the commentary around outdoor. And just curious if you have any amplification around that? Is it any share or is it just category? And does it spill over into other -- outdoors maybe a little bit more seasonal, into more consumer grade or DIY grade other tools?

No. This is Chris. We don't -- it's nothing broader than what I'd say is we had a later start to the season as it was pretty wet. And then what we've been seeing as of late is a much more robust POS activity. So as Pat referenced in his comments at the beginning, we see that market as being all in for the year, kind of down 1 point, flat to slightly down overall but with no real significant change in buying patterns or competitive dynamics. And we actually believe that based on what we see for more of the industry data, we're actually in a good position from a share perspective as well as we've really been seeing some nice traction with DEWALT as well as CUB CADET in those areas.

Our last question comes from the line of Jonathan Matuszewski with Jefferies.

Nice to see the ongoing momentum at DEWALT. Can you spend some time discussing the trend at CRAFTSMAN? What are you seeing in the competitive landscape there? And how do you think about factors beyond potential interest rate cuts stimulating demand on the DIY side?

Yes, thank you very much. As we've pointed out, we've been very pleased with our continued momentum and really across the board success we've been having with DEWALT for a number of quarters now. And as you think about the CRAFTSMAN brand and playing more in that DIY segment, obviously, that segment has been more affected than the professional as of late. We have seen -- as we've been looking at our POS versus what we see for credit card data in that area, we've been performing at -- roughly at what we think the market has been doing. So it's been more of a market issue. Obviously, as you point out, there is a interest rate sensitivity to that. But more importantly, from our perspective, we do believe that we have opportunities with the CRAFTSMAN brand to continue to expand our assortment of products and specifically in the power tools space to continue to be able to build out that brand and control what we control and drive organic growth in any market condition and that's really where we're putting our focus. We have great channel partners there and it's an emphasis for everybody moving forward. And I think what we'd say is that we're going to be making significant progress over the next 12 to 24 months. And when the market turns, which inevitably it will as well with change in repair and remodel work, we're going to be in a position to certainly take advantage of that overall in the company. So it's a great brand.

I would now like to turn 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, just 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.