The operator welcomes participants to the Second Quarter 2024 Stanley Black & Decker Earnings Conference Call and introduces the Vice President of Investor Relations, Dennis Lange. He is joined by the President and CEO, COO, and CFO, who will review the second quarter results and other matters. They will also be making some forward-looking statements and may reference non-GAAP financial measures. A replay of the webcast will be available and there will be a Q&A session. The speakers caution that the actual results may differ from their forward-looking statements.

The company has shown strong execution in their operational priorities, resulting in improved gross margins and cash generation. They have stabilized their share position in the market and achieved positive organic revenue growth. Their priorities remain focused on profitability improvement, free cash flow generation, and sustainable growth. They are optimistic about long-term growth opportunities but acknowledge the uncertainty of the near-term environment.

The company is focused on capturing savings from cost structure improvements and investing in areas with growth potential. They are also pursuing a global cost reduction program and have successfully delivered $1.3 billion in savings to date. The company is confident in achieving their 35% plus adjusted gross margin goal and is positioning themselves for sustainable organic revenue growth, profitability, and cash flow. In the second quarter, they saw a 3% decrease in revenue due to divestitures and currency, but had 1% organic growth driven by certain product categories. Adjusted gross margin increased by 560 basis points due to a strong supply chain transformation.

In the second quarter, the company saw an improvement in Adjusted EBITDA margins and an increase in adjusted diluted earnings per share. They also reduced their debt and increased their dividend. The company's Tools & Outdoor segment had 1% organic growth, driven by strong performance from DEWALT and a stronger outdoor season. Despite a soft consumer backdrop, the company remains encouraged by their results.

In the second quarter, total revenue for Tools & Outdoor remained flat due to currency effects and promotions for DEWALT cordless products. However, the segment saw a 590 basis point improvement in adjusted segment margin, thanks to lower inventory costs and supply chain savings. Power tools declined 2%, while hand tools and outdoor products saw flat and 6% organic growth, respectively. North America and other regions saw modest and strong organic growth, respectively, while Europe experienced a 3% decline due to economic softness. Overall, the quarter was marked by a return to organic growth and an increase in segment margin for Tools & Outdoor.

In the second quarter, Industrial revenue declined due to a divestiture, but price and aerospace growth helped offset this. The Industrial segment also saw an improvement in margin. The CEO reflects on his first year and highlights four key attributes for success: strong industry growth, iconic brands, innovation, and customer relationships. The company plans to invest in order to capture future opportunities.

The speaker has been focused on establishing the right capabilities and skills within their organization to execute their strategy. They have a new leadership team in place, consisting of both internal and external talent, and are prioritizing resources on opportunities that serve the professional end user. They are also doubling down on being brand-led, with a focus on DEWALT, CRAFTSMAN, and STANLEY. Innovation is a core differentiating capability, with a focus on delivering purpose-built solutions to improve safety and productivity for professional end users.

DEWALT has announced new battery technology and a construction jack to enhance end-user productivity. They are also investing in market activation through digital marketing and field resources to expand their reach and engage with users. These initiatives are funded by new investments and reallocation of resources. Their supply chain transformation is also driving margin improvement and enabling further investment in their brands for organic growth.

The company is confident that their focus on operational excellence and changes to their production and distribution network will lead to sustainable growth. They believe their transformation plan and continuous improvement capabilities will help generate recurring productivity and position them for long-term success. Despite a mixed market demand environment, they are aggressively working to accelerate the growth of their brands. In the second quarter, they achieved $150 million in cost savings and have reached $1.3 billion in savings since the start of their transformation journey. They are on track to meet their objectives for the year and are capturing cost efficiencies to counter the soft demand.

The company has seen significant savings in the first half of the year and is on track to achieve its target of $1.5 billion in savings by the end of 2024 and $2 billion by the end of 2025. The main areas of savings are strategic sourcing, operations excellence, footprint actions, and complexity reduction. The company is also working on optimizing its distribution and manufacturing network and implementing a platforming strategy to standardize parts and components across product families.

The company's supply chain transformation program is expected to generate significant savings and improve gross margins by 2024. The organization is focused on generating free cash flow and expanding gross margins to support long-term growth and value creation. In the second quarter of 2024, the company saw a historically strong free cash flow of $486 million, supported by accelerated working capital improvements and reduced inventory levels. The company also reduced its commercial paper by $1.2 billion during the quarter.

The company has had a strong first half of the year and is reducing its capital spending expectations. They have raised their full year free cash flow guidance and plan to use excess cash flow to reduce their debt. They have also renegotiated their credit facilities to secure more liquidity. The company's priorities are investing in growth, paying dividends to shareholders, and strengthening their balance sheet. The company's adjusted gross margin has improved significantly due to lower costs and supply chain transformation.

The company is expecting a sequential improvement in the second half of the year, with adjusted gross margin estimated to be around 31%. This is supported by supply chain savings and puts them on track to achieve their long-term goal of 30% adjusted gross margin for the full year of 2024. They are confident in achieving this goal despite a challenging macro backdrop. The company has revised their 2024 guidance for GAAP earnings per share to $0.90 to $2 and raised the adjusted earnings per share range to $3.70 to $4.50. This is due to incorporating the second quarter environmental reserve expense and leveraging cost savings to offset a soft macro environment. The midpoint assumption for full year organic revenue is expected to be down 0.5%, with the primary area of variability being plus or minus 130 basis points in adjusted earnings per share.

The company expects a decline in organic revenue for the Tools & Outdoor segment, with flat pricing and a focus on cost management. The Industrial segment is expected to be relatively flat, with investments in innovation and technology. The company also expects a 10% adjusted EBITDA margin for the full year and a flat to slightly positive adjusted segment margin for the Industrial segment. Adjusted earnings per share are expected to be $0.80, with market demand being a major factor. The company will work to optimize gross margin and manage SG&A carefully while maintaining investments for long-term growth.

The company's GAAP earnings include non-GAAP adjustments related to supply chain improvements and environmental expenses. The adjusted tax rate is expected to be 10% for the full year. The company is focused on executing supply chain improvements to improve gross margin and earnings in the second half of 2024. They are confident in their actions to drive towards a target of 35% plus adjusted gross margin and are prioritizing margin expansion, cash generation, and balance sheet health. The company is making progress despite a challenging macro environment and is positioning itself for long-term growth and value creation. The call is now open for Q&A.

The Q&A session has begun and the first question is from Julian Mitchell with Barclays. He asks about the earnings trajectory and the tax rate for the third and fourth quarter. Patrick Hallinan responds that EPS will be flattish in Q3 and then increase by $0.40 in Q4 due to seasonal revenue and operating margin impacts. He also mentions that the tax rate will be negative in Q4 and likely in the high teens to 20% range for next year. The next question is from Tim Wojs with Baird.

Timothy Wojs asks Don about the operating environment and promotional period at the end of the year, as well as the company's investments and priorities. Chris responds by stating that the back half of the year is expected to have a similar operating environment as the front half, with a focus on driving promotion and demand in the cordless power tool segment. The company is committed to executing their strategy, which includes supply chain transformation to improve margins and fulfill customer orders, leading to opportunities to take share and shelf space.

The speaker discusses the company's commitment to investing in their highest growth priorities, specifically focusing on the STANLEY, CRAFTSMAN, and DEWALT brands. They mention their efforts in market activation and adding field resources to drive innovation. The company acknowledges a flat macro environment but remains committed to their transformation and targeted investments. A question is posed about what a normalized state could look like, with the speaker mentioning $2 billion in cost reduction and $200-300 million in investments, but also acknowledging potential leakage and a realistic EBITDA margin.

The speaker acknowledges the philosophical question and discusses their company's financial goals and potential earnings. They believe that their transformation journey will lead to a 35%+ earnings potential in the next three years. They also mention their operating model for organic growth and their belief that they can grow two to three times the market rate. They also discuss the potential for mid to high single-digit growth and the benefits of investing in their company. Overall, they believe their earnings potential is strong.

The speaker, Chris, mentions that the company's earnings have not yet reached a certain number, but they are confident that they can get back to their previous earnings level. An analyst, Adam, asks about point-of-sale trends, and Chris responds that they were modestly positive due to a normal outdoor season and strong performance in DEWALT. However, they expect the market to flatten out in the back half of the year. Another analyst, Nicole, asks about free cash flow and the company's progress in the first half of the year. The speaker, Patrick, responds that they are proud of their progress and expect the back half of the year to be strong due to both income improvement and working capital improvement.

The company expects drivers in the back half of the year to impact income, working capital, and CapEx, with a mix of working capital and CapEx driving the beat on initial guidance. The gross margin for the second quarter was impacted by the divestment of infrastructure, but the company is confident in delivering a 30% gross margin for the full year, with the fourth quarter finishing in the low 30s and the third quarter at or slightly below 31%.

The speaker discusses the dynamics of their business, particularly in terms of gross margin, driven by the current portfolio and progress in the T&O business. They mention a divestiture that was dilutive but anticipated, and attribute some unabsorbed overhead to volume softness in the back half of 2023. They also mention a successful acceleration of program savings despite a soft macro environment, and expect to continue this trend. They feel confident about their trajectory and expect to reach mid-30s gross margin by the end of next year. The speaker then addresses a question about consumer behavior and acknowledges the back and forth in other reports.

During a recent earnings call, Christopher Nelson, a representative from a company, addressed concerns about consumer variability and uncertainty. He mentioned that their internal data showed that the professional sector was stronger than the consumer sector, and they expect this trend to continue. They also noted that consumers are responding well to promotions, which will benefit the company in the long run. Nelson acknowledged that the market will be uneven, but the company is focused on executing their supply chain transformation and investing in major brands to target the professional sector. Finally, he mentioned that they have adjusted their full-year organic sales growth forecast to a decrease of 50 basis points, indicating some uncertainty in the market.

The speaker is discussing the company's recent growth quarter and the drivers behind it, including traditional outdoor season and strong performance in DEWALT and aero products. They also mention that they expect the back half of the year to be softer, with DIY and auto sales remaining soft. As a result, they anticipate the tools and storage business to decline slightly in the back half, with a decrease of around 100 basis points. This is due to a combination of factors, such as a soft consumer market and the end of the outdoor season.

In the Industrial sector, aero is expected to remain strong, but there are some headwinds from the auto industry. SG&A for the year will be slightly above 21%, and there are no significant changes expected in the next year. The company is focused on investing in growth and protecting those investments. In the near-term, there are plans to reach a gross margin of 31% in the third quarter, which is typically a slower quarter. In the longer-term, the company is tracking replacement cycles to determine when there will be an increase in volume.

The company's gross margin progression has been complex due to various factors, including expensive inventory coming off the balance sheet. The savings cadence has driven gross margin improvement, leading to a tick up in the second half of the year. The company is optimistic about the long-term potential of the markets it serves, particularly in construction.

The speaker believes that the professional and consumer markets, driven in part by repair and remodel projects, are sensitive to interest rates and that this will be the first sign of a positive change in the market. This change will take time but will unlock potential for the markets they serve. The speaker thanks everyone for participating and encourages further questions. The operator then concludes the call.

This summary was generated with AI and may contain some inaccuracies.