Welcome to the Fourth Quarter and Full Year 2025 Stanley Black & Decker Earnings Conference Call. My name is Shannon, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a formal presentation. Please note that this conference is being recorded. I will now turn the call over to Vice President of Investor Relations, Michael Wherley. Mr. Wherley, you may begin.

Thank you, Shannon. Good morning, everyone, and thanks for joining us for our fourth quarter and full year earnings call. With us today are Christopher Nelson, President and CEO, and Patrick Hallinan, Executive Vice President, CFO, and Chief Administrative Officer. 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 today's webcast will also be available beginning around 11 AM Eastern Time. This morning, Chris and Pat will review our fourth quarter and full year results, along with our outlook for 2026, followed by a Q&A session. During today's call, we will be making some forward-looking statements based on 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 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-Ks that will be 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 measure and additional information, please refer to the appendix of the supplemental presentation and the corresponding press release, which are available on our website. I will now turn the call over to our President and CEO, Christopher Nelson.

Thank you, Michael, and good morning, everyone. I am proud of the results our team delivered in 2025, a testament to our resilience, innovation, and relentless pursuit of excellence. DEWALT and aerospace fasteners were areas of notable revenue growth this year, up low single digits and 25% respectively, which contributed to full year revenues of $15.1 billion. Total revenues were down about 1% organically in 2025. Stanley Black & Decker has remained steadfast in our commitment to disciplined execution. This is especially important considering the constantly shifting macroeconomic and operating environment. We continue to proactively execute targeted growth investments and to pursue aggressive tariff mitigation actions. Part of our tariff mitigation strategy has been pricing actions, and we are closely monitoring the market response to ensure a balanced approach to top-line growth and margin expansion. We are confident that over the long term, these thoughtful actions will continue to drive strong performance and deliver meaningful value for our end users, channel partners, and our shareholders. Our tariff mitigation actions along with supply chain transformation efficiencies led to our adjusted gross margin expanding 70 basis points to 30.7% for full year 2025. We also marked the completion of our global cost reduction program, successfully capturing $2.1 billion of run rate pretax cost savings since the program's inception in mid-2022. As we have stated before, we will continue to tenaciously pursue annual productivity savings in the neighborhood of 3% net spend on an ongoing basis. The global cost reduction program helped to set a foundation from which we are institutionalizing the achievement of annual productivity savings to drive sustainable growth and support our adjusted gross margin expansion goals. Full year adjusted EBITDA grew by 5% as the adjusted gross margin improvement drove a 70 basis point improvement in adjusted EBITDA margin. We…

Thank you, Chris, and good morning to everyone joining us today. During the fourth quarter, we delivered significant progress on two of our top strategic priorities, expanding gross margins and improving the health of our balance sheet. I'll begin by taking a closer look at our gross margin performance. In the fourth quarter, we delivered an adjusted gross margin of 33.3%, a 210 basis point increase over the same period last year. This is a meaningful accomplishment achieved through pricing, tariff mitigation, and supply chain cost reductions. These factors were also the drivers of the company's full year performance of 30.7% adjusted gross margin. This represents a solid 70 basis point improvement compared to the prior year, an achievement made even more impressive given the broader market volatility we faced. I'd like to commend our team's outstanding execution as we encountered unprecedented tariff rate increases that began during the first quarter and peaked in April. The team's swift adaptability limited the gross margin decline to just one quarter before we resumed our positive year-over-year margin expansion trajectory in the second half of the year. As Chris mentioned, our global cost reduction program achieved its targeted objective, having delivered $2.1 billion of pretax run rate cost savings in total, including approximately $120 million of incremental savings in the fourth quarter. Operational excellence is one of the company's three strategic imperatives. Going forward, we expect operational excellence to remain a strategic imperative and to target gross improvement of 3% of net spend annually. Looking ahead, we remain fully committed to achieving adjusted gross margins that are above 35%, a long-standing objective that continues to guide our efforts and priorities. We continue to aim for reaching this milestone by 2026. Now turning to our cash flow and year-end leverage results. We generated $883…

Thank you, Pat. With a strong foundation in place and with a significantly simplified and focused business, we believe our future success will now be determined by how effectively we execute our strategy, which is firmly anchored by our three strategic imperatives: activating our brands with purpose, driving operational excellence, and accelerating innovation. As Pat outlined, we are continuing to proactively manage factors within our control to effectively navigate evolving market conditions and make progress towards achieving our goals. We believe our planning assumptions for 2026 are balanced given the elevated levels of global uncertainty, and we remain committed to driving towards the long-term goals outlined during our November 2024 Capital Markets Day. We expect to achieve the following level of performance in 2028: mid-single-digit sales growth, 35 to 37% adjusted gross margins on a full-year basis, accompanied by adjusted EBITDA margins of mid to high teens, cash flow conversion of net income approximating 100%, cash flow return on investment margins in the low to mid-teens. This will all be complemented by disciplined capital allocation and asset efficiency. As Pat and I discussed, we are focused on significantly deleveraging our balance sheet this year, which goes hand in hand with continuing to have a solid investment-grade credit rating. For clarity, the assumptions that underlie these 2026 to 2028 targets are that our markets are growing by low single digits, that the inflationary/deflationary environment is reasonable, avoiding the extremes of either. Finally, these goals assume the current tariff landscape. As we look ahead, I am energized by the opportunities that lie before us, and I'm confident in our strategy. With a clear vision for 2026, we are building on our hard-earned momentum to serve our end users and create lasting value for our stakeholders. We are now ready for Q&A, Michael.

Thank you. We will now open for questions. Our first question comes from Julian Mitchell of Barclays. Your line is open.

Hi, good morning. I just wanted to dial in a little bit more into the cadence of the gross and operating margin performance for the year. I think you said gross margin is flat year on year in the first quarter, up 150 points for the year. So just trying to understand, does that imply in, say, the fourth quarter, you're up 300 points or something, and maybe flesh out a little bit, you know, how quickly that gross margin improvement happens? Do we see it in the second quarter example, growing year on year? Thank you.

Hey, Julian. Good question. Certainly, a lot of moving pieces in gross margin as we head into 2026. You know, I'd say the cadence throughout the year is we expect, you know, the first quarter to be around 30 and a half, the second quarter to be between that and maybe 31, and then the back half to be for each of the third and the fourth quarter in the 34 to 35% range. And the reason for that, a bit maybe unanticipated gross margin cadence coming off of the 33.3 in the fourth quarter is we do have affecting both the first and the second quarter, peak tariff expense across the two years. Our quarterly reported tariff expense in the first quarter and '26 will be at their peak. We have the volume deleverage which was effectively under absorption in the back half of '25 rolling off the balance sheet, affecting both quarters, and that under absorption came from the volume declines associated with tariff pricing. As we said before, as we went into tariff pricing, we were emphasizing margin preservation with our pricing and mitigation actions and service level by keeping that capacity in place, but it does have a deleverage effect as an expense in the first half of the year. And roughly, you can kind of think of those as, you know, tariffs are about 100 basis points a quarter or maybe slightly less than that, and deleverage is 100 basis points or more than that in one of the in those two quarters. So you're kind of between the two of those factors, you're losing about 200 basis points a quarter in each of the first and the second quarter. You know, whether you're looking kind of sequentially coming off Q4 or whether you're looking…

Thank you. And our next question comes from Nigel Coe of Wolfe Research. Your line is open.

Thanks. Good morning, everyone. Thanks for the question. I just wanted to pick up maybe on the tariff mitigation measures, Chris. It doesn't sound like price is part of that. And I'd like I'd just I'd just like you to touch on the fact that you mentioned, you know, consumers are a bit more promotional sensitive. So maybe just address the price elasticity as part of question. But I'm more interested in really in the tariff mitigation and the measures you're taking around supply chain and other factors to, you know, USMCA to to mitigate those tariffs?

Sure, Nigel. Good morning. Nice hearing from you as always. So I'll start with the tariff mitigation, and just to make sure I rebaseline everybody is that we we started with the premise, as Pat said, that we're gonna continue to emphasize the service levels for our customers, which we've done very well. We're we're actually at all-time highs right now from recent history, as well as making sure that through mitigation pricing actions, we would be covering margin and cash going forward. If we start with the specific operational mitigation plan I think you're referencing, you'll remember recall that rough order of magnitude, we were importing about 20% of a little bit less than 20% of our volume, for North America sale from China. And we had talked about, by the end of this year, 2026, largely being out of China for US consumption less than 5%. Those actions are a multiple of actions whether it was transferring from China to North America, whether it was taking dual, dual qualified SKUs and starting the production in North America versus exclusively in China. And we are we are pacing ahead of those mitigation transfers, vis a vis what our plan was. So we are comfortably on a glide path and actually a little bit ahead of the glide path in order to be at that level of essentially being out by the end of the year. So that's that's that. And I I I would just be remiss to say that, you know, in all of this, the amount of work that the team has done to get us ahead of the game is is really admirable. And as we talked about when Pat said, you know, a little bit of the capacity rolling off, you'll a part of that…

Thank you. And our next question comes from Timothy Wojs of Baird. Your line is open.

Hey, guys. Good morning. Chris, I had a follow-up on that question and then just my question. So the follow-up is you know, the tweaks that you're making, you know, to some of the promotional cadences and and price points and things. Is that really more of a reaction to what the consumer and how they're reacting to to price? Or or is it more competitive? So that's my follow-up question. And then the question I have is just on volume. You do kind of expect it does seem like you kind of expect volume to start to improve at at some point in 2026. How much visibility, I guess, do you have that you know, do you to that? Any sort of kind of specific share gains that you could kind of talk about it, you know, outside of just having some easier volume comps as you kind of work through the?

Yes, Tim. Thank you. It's great hearing from you. I mean, I would just start by saying that everything that we do is going to be in response to what we see our end users and our buyers and our customers doing. And I think it's obviously, there's a byproduct of what the competitive set is doing, but we are we are looking at our core end users and and customers by segment. And these are tweaks around the edges that you would expect to modify as we go forward. And I think that, you know, I I can't completely tease the two apart because as I said, you know, right now, there are still pricing actions being taken in the market by the competitive set. And, obviously, we'll keep that as a part of what we monitor as we make the modifications. Now was it as it relates to the to the promotional question you asked, these are, you know, these are things that are they're normal. They're normal course of business as you think about how you set up your promotional plans, and their normal mode of modifications that we go through on a on an annual basis. I think what is different is that because we have gone through a step function change in pricing, getting those levels dialed in to understand exactly where our models say that we're getting the the absolute optimal trade off between the volume and the margin, we're just working through those in certain highly sensitive SKUs but they're they're minor adjustments for us to make going forward. And, you know, we're we're once again reiterate, we're confident that that we're on the path to being do so. And know, it'll it'll be kind of those those things will be able to be in place going into Q2, and we'll probably see them in Q2 and Q3. From a volume perspective, I'd say that the most encouraging thing that we see is that through all of this, we have continued to see a very strong professional market. And our, you know, our professional channels and the the construction and industrial channel was a nice nice growth generator in in Q4, and we see that continuing. And as we get the different kind of kind of opening price point branded type of work done in in the retail segment as well as our promotional line. That underlying momentum that we're seeing there, I think, is gonna be a nice it's a nice indication that the overall strategy that we've laid out is is is actually paying dividends. We'll continue continue to grow. So, yes, that there would be, nice indications underlying that we see the volume opportunity for 2026.

Thank you. And our next question comes from Christopher Snyder of Morgan Stanley. Your line is open.

Thank you. I appreciate the question. If we you guys talked a couple quarters ago about an that the tariff related price increases on the industry would maybe like, a one for one elasticity, on volume. Know, if we look over the last three quarters, you know, it seems like the elasticity has been more significant than that. The volume declines have been steeper than the price increases. So I guess, is that just a function of, you know, some of the soft consumer backdrop that we've talked about? Could it be a function of, you know, maybe something Stanley specific and maybe that could change as competitors push more price? In '26 per some of the earlier conversation. But just any color on that? And what could maybe cause that to get better over the next twelve months? Thank you.

Yeah, Chris. You know, that's certainly our expectation as we went into, this pricing dynamic, which started in the second quarter. And, you know, for the first two quarters, you know, our overall results were very much in line with that expectation. I mean, you could tell by the results we reported in the fourth quarter, we did see an elasticity that was greater than that one for one level. And, you know, consistent with, some of the points Chris made in the last couple questions, I said, you know, we we see that heightened sensitivity was was really concentrated in opening price points and a few promotional areas. And as we expected all along on this journey because we and other players in the industry, both, manufacturers and retailers, took prices at very different time points in very different manners that we'd all be adjusting along the way, and there'd be some choppiness along the way. And we think you know, the fourth quarter was an indication of that choppiness. We probably have another at least first quarter to go, of some of that choppiness. But we think with very manageable and modest adjustments to promotional rhythms and levels and a few targeted opening price points in some nonstrategic brands. That we get back into that one to one zone, is our expectation, we think. That's, you know, very much within the manageable boundaries of of all the things we're navigating during the tariff jolt that's impacting the industry.

Thank you. And our next question comes from David MacGregor of Longbow Research. Your line is open.

Hi. Good morning. This is Joe Nolan on for David. You guys talk about being focused on paying down debt after selling the aerospace fastener business. Can you just talk about plans to invest in growth in the Craftsman and Stanley brands? And just how you expect to see share gains there and margin improvement in these brands in 2026. And just along with that, if we see the DIY space remain a little bit softer, just how much progress you can make in those spaces? Thanks.

Yeah. Joe, I'll start and give you kinda some of the financials, and then I'll let Chris talk about some of the things going on with the Stanley and the Craftsman brand, which we're very excited about, and we do expect to see sales inflections in both of those brands this year, 2026. You know, from a pure kind of financial framework, as we stated on the call, you know, we'll get the proceeds from this transaction and pay down debt and get very much you know, at or below the two point times net debt to leave to EBITDA threshold, we certainly plan to persist a growing dividend, but that should still result in additional capital flexibility that we'd probably more likely been biased to pursue share repurchases as an export of call. As it pertains to investments in the brands, we certainly, in 2026, expect to be making an incremental $75 million to $100 million greater investments in the brands versus 2025. And, you know, you see our SG&A for the year will be up somewhere in that $90 to $100 million range. And what's happening inside of SG&A is the brand investment is going in, but we continue with SG&A efficiencies elsewhere. So elsewhere, the efficiencies are offsetting the things like merit and benefit inflation and offsetting some of the overhead that gets stranded with CAM. And that just leaves our year-over-year SG&A cadence really reflecting the incremental investment in the business. But we don't see the investment in the business going beyond that kinda incremental $75 to $100 million in 2026. But Chris can talk a little bit about what's going on with Craftsman and Stanley. We've making investments in those brands. Over a twenty four month plus horizon, and we expect those investments to result in inflection this year.

So thanks a lot, Pat. You know, Joe, great question. What I'd say is that I just take us to the beginning and and, you know, if you remember the beginning of the of the when I started talking about this, it was we made the conscious decision to start having our investment towards DEWALT out of the gate. It was, you know, in the professional segment, you know, greatest scale as well as had the most, what we thought clear, quick payback on those. Quickly following that, we started, as Pat said, you know, in the you know, you know, twenty four months ago to then, layer in incremental investments in both Stanley as well as Craftsman. As our other core brands. And, specifically, we're gonna start to see the fruits of that what we've been putting in for the past twenty four months and specifically a lot of the last twelve months, as we come into this year, we'll continue to invest. Let me give a little bit of color to that. I would say that from a product perspective, Craftsman and Stanley are going to see the some of their largest new product launches from a from a a kind of quantity perspective in, you know, in certainly recent history as we're launching a a large suite of Craftsman 20 v 20 products in 2026 as well as, you know, as we've talked about before. We put in a lot of work into redefining and refreshing the Stanley lineup, and that is now coming in as we speak right now in the lineup and being launched into our channel with our channel partners. So we're very excited about the and what we see there, and I think that's gonna be a nice inflection point that we can…

Thank you. And our next question comes from Robert Wertheimer of Melius Research. Your line is open.

Question is a little bit about margin trajectory and just drivers beyond 26. I wonder if you can comment on what your kind of rate of inflation, your natural rate of inflation is running. Does productivity fully offset that? And so kind of margin gains from here are are price led? Is the idea that the 3% productivity will give you tailwinds versus your cost structure? I'll stop there. Thanks.

Yeah, Rob. Good question. I'd say beyond '26, as I think both Chris and I mentioned, in the opening comments, we're pursuing gross annual savings roughly in the ballpark of 3% of our cost structure, which is, you know, call it $300 million in that ZIP code. Those are gross savings. You know? And every year, you get a manner of wage and benefit inflation inside of our COGS cost structure, plus you get you know, materials inflation and deflation that tends to be kind of net inflationary predominantly driven by metals. You know, I'd I'd say that that leaves you with usually a net savings after inflation. You know, in in the, you know, 100 ish million dollar range. Which allows you to make choices on incremental margin expansion, and or investment in the brands. I'd say that's that's kind of our structure going forward. And, you know, we'll manage SG&A relative to overall volumes. So, you know, we'll manage SG&A up and down with the volume in the business. And I'd say, you know, our our pricing in the business will be will be driven by innovation and brand building, you know, that know, that can be in place, you know, should material inflation get outside of any kind of normal band. But I'd say that's our our margin algorithm going forward that you know, you should expect, you know, pricing to be something when you get high side, margin or material inflation rather or things like tariffs. That itself help inside of COGS elsewhere and that we kinda manage SG&A to deal with with volume. Versus SG&A inflation.

Thank you. And our next question comes from Eric Bosshard of Cleveland Research Company. Your line is open.

Thank you. I think I understand strategically what you're talking about. In terms of managing pricing and promotion through the first half in order to get better volume? You also talked about some price increases in 4Q and competitors raising price in 1Q. And so I guess what I'm trying to really understand is how pricing behaves 1Q, 2Q and into the back half. Do you sustain the current level of price? Do you get more price? Do the tweaks mean you end up getting less price? Just trying to figure out how that behaves in one Q2 q, and two half.

Yeah, Eric. I don't know that I know it intimately by quarter. I would say for the full year, enterprise-wide, we would expect pricing in the range of plus 2%. It's for the most part, the carry in with the absorption of, you know, kind of modest changes to promotions and OPP that are are baked within that 2% pricing. Obviously, most of that's gonna come in the first half of the year. I I don't know it precisely by first quarter versus second quarter, but mostly, that's gonna come in the form of positive pricing in the first and second quarter, I would assume dominated by the first quarter since we started our pricing in the second quarter of last year. And then be relatively flattish, the third and the fourth quarter.

Thank you everybody for those questions. We would like to thank you for your time and participation on today's call. If you have any further questions, please reach out to me directly. Have a good day.

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