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Welcome to the Second Quarter 2023 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 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 2023 second quarter webcast. On the webcast in addition to myself is Don Allan, President and CEO; Pat Hallinan, EVP and CFO; and joining us for Q&A this morning is Chris Nelson, COO, EVP, and President of Tools and Outdoor. 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 AM today. This morning, Don and Pat will review our second quarter results and various other matters followed by a Q&A session. Consistent with prior webcast, 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 our cautionary statements in the 8-K that we filed with our press release and in our most recent 34 Act filing. I will now turn the call over to our President and CEO, Don Allan.

Thank you, Dennis, and good morning, everyone. Stanley Black & Decker's second quarter performance represented strong execution across the organization, driving significant progress towards our business transformation objectives on multiple fronts. Before I get into the results, I am extremely pleased to welcome Chris Nelson to our leadership team and we have him joining us on the call for Q&A today. Chris started in June as our Chief Operating Officer and President of our Tools and Outdoor business. Chris is an experienced global business leader with strong industry knowledge and a successful track record of implementing growth strategies, which have delivered customer-centric innovation and profitable market share expansion. I'm excited to see Chris assume leadership of the Tools and Outdoor business. He is bringing new energy and perspective, which will further position us for strong execution and faster profitable growth. Welcome, Chris. With this critical appointment, Stanley Black & Decker's senior leadership team is now in place. Together we will bring our shared vision to life, optimizing the company around our core businesses and strong portfolio of global brands, as we execute our strategy to generate sustainable growth and margin expansion. As you'll hear from Pat in a few moments, our cost and supply chain optimization program is ahead of plan to the first six months of 2023 and building momentum. The compelling long-term growth opportunities in the markets we serve combined with the progress we've made transforming our business, including our improved cost position, gives us the confidence to pursue further growth investments in the second half of this year. Deploying these growth investments as part of our $300 million to $500 million target over the next three years is intended to accelerate market share gains. As we drive these investment priorities, we are also maintaining our commitment to return value to our shareholders. And to that end, our Board of Directors approved a modest increase to our quarterly cash dividend amounting to $0.81 per share. Shifting now to our second quarter performance. We demonstrated that we are continuing to advance our transformation journey and ahead of the planned program. Specifically, we reduced inventory by nearly $400 million in Q2, which brings our aggregate program to date reduction to $1.4 billion since mid-2022. Our Global Cost Reduction Program delivered $230 million of pre-tax run-rate savings in the quarter, on track for the expected $1 billion in annualized savings by the end of this year. Adjusted gross margin for the quarter was 23.6%, a sequential improvement of 50 basis points, our second consecutive quarter of gross margin expansion. And all of these actions translated into $200 million of free cash flow in Q2. Second quarter revenue was $4.2 billion which was down versus the prior year due to lower consumer Outdoor and DIY volume, as rising interest rates have tempered consumer spending in addition to the negative year-over-year impact of the oil and gas divestiture completed last year. That said, demand remains solid for the professional side of the market, which represents roughly 70% of our Tools business. As it relates to the end markets, the US retail point-of-sale for our Tools and Outdoor products remained in a growth position this quarter versus 2019 levels, bolstered by price and healthy pro demand. Both Tools and Outdoor POS through the first four weeks of July is growing versus prior year, a potentially positive signal for the back half of 2023. We're also encouraged by a stabilizing residential construction market, despite the rising interest-rate cycle. US homes starts are running at a pace of 1.4 million units in June, a strong signal that demand for housing remains sound. This is complemented by US permits to build single-family homes rising to a one-year high and positive trend in housing completions. Additionally, contractor backlog in the US remains healthy for repair and remodel activity. The European markets are experiencing similar trends with softer DIY markets balanced with a healthier level of construction activity and professionals with backlogs through the end of this year. And then finally, our channel partners continued to be focused on optimizing inventory levels and we expect that to be a modest headwind throughout 2023. Across our Industrial end markets, we are seeing continued strength in global automotive and aerospace. So while the end markets across Stanley Black & Decker remain relatively stable with pockets of strength, we are monitoring the demand environment and continue to plan for a range of outcomes and we will respond accordingly if we see current trends shift. Operationally, we continue to be focused on the prioritization of inventory reduction and cash generation, with 2Q adjusted diluted EPS coming in at a loss of $0.11 which was better than our plan. Due to the solid progress we have made on our key financial goals in the first half, we are narrowing our 2023 full-year adjusted diluted EPS guidance to a range of $0.70 up to $1.30 and narrowing our free cash flow range to $600 million to $900 million. Pat will provide more color on this later in our presentation. Now let me walk through the details of our business segment performance. Beginning with Tools and Outdoor, total revenue was $3.5 billion down 5% organically versus prior year, that favourable price realization was more than offset by volume decline. We continue to make progress on the Tools and Outdoor adjusted operating margin, which was 4.5% up 150 basis points sequentially driven by benefits from volume leverage and cost control versus prior year our operating margin rate was down as price realization was more than offset by selling through high-cost inventory, planned production curtailment costs and lower volume. I would now like to provide some more detail on our various Tools and Outdoor geographies. North America was down mid-single-digits organically weighted by lower consumer Outdoor and DIY tool demand as well as modest customer destocking. Organic revenues were stronger sequentially as we lap tougher comparables and saw benefits from better order fill rates with our customers while leveraging strength and professional demand. Our European revenue was down 1% organically with bright spots in the UK and Southern regions as they both posted high-single-digit organic growth. The emerging markets' performance was down 3% organically. However, when you exclude the impacts from our Russian business exit, the remaining countries had high-single-digit organic growth. This was led by strong demand in Brazil, particularly within the professional channels. Moving to our strategic business unit performance, we experienced an Outdoor organic revenue decline of 12%. As widely reported by many in this industry, the challenging start to the outdoor season persisted for the entire season. And we did experience notable softness in POS and replenishment in the quarter especially surrounding higher price point retail products. The hand tools business was flat organically versus prior year and overcame softer DIY volume with international growth and certain categories strength. Notably, DEWALT storage solution growth including the expanded softline and TOUGHSYSTEM 2.0 portfolio offerings introduced earlier this year. Power tools declined 4% organically as softer consumer market demand persisted and customers remain cautious with inventory levels. This result was notably better than the first quarter as we saw continued Pro momentum, coupled with positive impacts from a healthier supply chain, leading to better service levels and increased promotional opportunities, particularly with DEWALT and CRAFTSMAN. Now shifting to our industrial business, which had 3% organic growth in the quarter. The total segment revenue declined 5% versus 2Q 2022 as price realization was more than offset by last year's oil and gas divestiture and currency. We improved the adjusted operating margin by 370 basis points versus prior year, including continued price realization and cost actions to deliver adjusted operating margin of 13%. This represents strong execution and a great financial outcome this quarter for our industrial team. Within this segment Engineered Fastening organic revenues were up 8%, including aerospace growth of 31% and auto growth of 15% as we captured cyclical rebounds in these markets along with share gains. This favourable performance was partially offset by industrial fastening and attachment tools' organic revenue declines, primarily as a result of customers destocking to optimize their inventory levels. While long-term fundamentals for growth remain solid, we believe temporary channel inventory reductions will continue to impact these industrial businesses in the second half of the year as well. In summary, the team continues to navigate market conditions with several pockets of strength in a few areas of pressure while we continue to improve our margins. I want to thank the entire Stanley Black & Decker organization for your focus on our key priorities. The progress to date is very encouraging and energizing as we take the next several steps of our business transformational journey. Turning to the next slide. I would like to underscore the importance of the strategy that we launched a year ago to transform Stanley Black & Decker to accelerate market share gains and drive consistent organic growth. Our teams around the world are gaining traction and executing on our primary areas of focus. One, streamlining and simplifying the organization as well as shifting resources to prioritize investments that we believe have a positive and more direct impact for our end-users and various channel customers. Two, accelerating the operations and supply chain transformation to return adjusted gross margins to historical 35% plus levels, while improving fill rate to better match inventory with customer demand. Three, prioritizing cash flow generation and inventory optimization. And four, continuing to advance innovation, electrification, and global market penetration to achieve organic growth of two times to three times the market. Our business transformation is our path to continuing to enhance our customer and end-user experiences while delivering on our financial commitments and enabling the pursuit of strategic growth investments behind our iconic brands, innovation engine, electrification and commercial activation. Key investments in innovation, coupled with market activation are being accelerated to maximize the impact of our product launches with our global customers and end-users. For example, our fully integrated CRAFTSMAN campaign was built to drive traffic to our key retail partners, instant repeat purchases, and engage new users. To-date, we've shown strong initial results breaking through the industry clutter. Since the campaign launched in the second quarter, we've driven both online and offline traffic to retail and demonstrated improved tools point-of-sale run-rate versus the prior year to support brand market share growth. We're excited to see continued positive momentum from this exciting CRAFTSMAN brand campaign. We are also leveraging the strength of our DEWALT brand with a Pro-inspired product roadmap to expand core innovation as we released enhanced product offerings to improve the End-User experience. We recently launched two new DEWALT Sealed Head Ratchets. The 20-volt MAX XR as well as the extreme 12-volt MAX options, delivering power, versatility, and durability engineered with the professional in mind, particularly, automotive, electrical, and mechanical tradespeople. The innovative design meets the needs of Pros across industries on any job site. The new DEWALT 20-volt MAX XR Brushless Cordless Rivet Tools were also introduced this quarter. Design for precision fastening and pre-fabrication, assembly, HVAC, roofing, and automotive applications. These tools have features such as on-board nose piece storage and a mandrel collector to catch rivets after each shot. Lastly, we introduced a new DEWALT 25-foot LED tape measure, a great example of core innovation within our Tough Series product line. Our engineering team continues to advance our innovation roadmap with best-in-class products and solutions for our end-users as we electrify and enhance safety on the job site as well as push the balance of power and performance across our categories. Let me now turn the call over to Pat to share the latest progress updates and our transformation, financial insights on the quarter and our latest outlook.

Thank you, and good morning, everyone. As Don mentioned, we made meaningful progress on our transformation in the quarter and first half of the year. Our cost reduction program is on track to deliver $1 billion of pre-tax run-rate savings in 2023 and is modestly ahead of plan year-to-date. Our simplification and prioritization efforts coupled with our supply chain transformation delivered $230 million of run-rate savings in the second quarter totaling $460 million year-to-date and $660 million since program inception. Approximately half of our 2023 savings were manufacturing costs related and as such we'll begin to see these benefits turn through inventory, off the balance sheet, and on to the P&L starting in the second half and continuing to build in 2024. Our organization is bringing our vision for the supply chain of the future to life with persistent sustainable progress. Strategic sourcing is a major contributor of 2023 savings and is ahead of plan. We have the capabilities in place to ensure changes are executed successfully and we are currently activating additional RFPs to secure further savings. The momentum behind the SBD operating model along with lean manufacturing practices is yielding sustainable productivity efficiencies such as alleviating manufacturing bottlenecks as well as reducing process waste and production downtime. This will become an important source of savings in the coming months and quarters. Our manufacturing and logistics network optimization remains on track, as we work to improve the efficiency and utilization of the asset base. Finally, as it relates to our complexity reduction, the SKU rationalization initiative is progressing in an orderly fashion. At this stage, we have approved the reduction of approximately 70,000 SKUs. We are working with our customers to assist with their transition to replacing products over the coming quarters. We have now decommissioned over 20,000 SKUs. We believe that as we exit the remaining 50,000 offerings, we will have suitable substitutes that will mitigate effectively all of the potential revenue risks which we size at less than 50 million annually. We believe managing this in a methodical way creates value via complexity reduction, without undue disruption to our customers or loss of share. We are pleased with the progress of our global cost reduction program and are confident in our ability to capture $1 billion of run-rate savings by the end of 2023 and $2 billion of run-rate savings by the end of 2025. Turning to our inventory reduction progress and gross margin trajectory. In the second quarter, we reduced inventory by $375 million bringing our year-to-date progress to $575 million. Over the last 12 months, we've achieved approximately $1.4 billion in inventory reduction through the improved supply chain conditions and planned production curtailments instituted during the back half of 2022. To contextualize our first-half performance, the $575 million reduction compares favourably to the average pre-pandemic first-half inventory build of approximately $400 million. We are expecting our full-year 2023 inventory reduction to be between $700 million and $900 million, which represents the DSI, that is about a 155 days. We remain committed to ongoing inventory productivity improvement to generate cash flow that will be used to strengthen our balance sheet while supporting our long-standing commitment to return value to shareholders through cash dividends. Turning to gross margin. The pace of improvement has been modestly ahead of expectations as transformation execution and freight deflation are favourable to plan. Second quarter adjusted gross margin was 23.6%, up 50 basis points sequentially versus the first quarter of 2023, the impact from liquidating high-cost inventory and the production curtailments represented approximately 400 basis points to 500 basis points of margin headwinds in the second quarter. Moving forward, we expect continued sequential improvement in adjusted gross margin driven by a lower impact from turning high-cost inventory and an increased benefit as our cost transformation improves the P&L. Assuming the demand levels and other assumptions that underpin our guidance, we expect adjusted gross margin to be 27% to 29% in the second half, a strong improvement versus recent quarters. While this is a significant step up from the front-half performance, we have line-of-sight into the cost-savings already generated and on the balance sheet that corresponds to lower-cost of sales and margin improvement in the coming quarters. To conclude, we're starting to reap the benefits from the inventory reductions and supply chain transformation and we'll remain focused on delivering our targeted adjusted gross margin of 35% plus by 2025. Now turning to 2023 guidance. Our expected GAAP earnings per share range has been narrowed to negative $1.25 to negative $0.50 from negative $1.65 to positive $0.60, inclusive of one-time charges, primarily from the global supply chain transformation and outdoor integration. The current pre-tax charges estimate was narrowed to $300 million to $325 million with approximately 25% of these expenses being non-cash. The 2023 quarterly profile of GAAP taxes and GAAP earnings per share is significantly impacted by the pre-tax loss in the first half and the interim tax impact of certain benefits factored into our annual effective tax rate assumption. However, as we expect to generate pre-tax income in the second half. This interim tax benefit will reverse and we expect our full-year tax rate to be relatively consistent with prior guidance. In parallel, we are also narrowing our full-year adjusted earnings per share guidance range to $0.70 to $1.30 from our previous guidance range of zero to $2. We are keeping the $1 midpoint consistent with the prior guidance framework versus our previous expectation, we have assumed modestly lower organic growth offset by better gross margin. At the midpoint, this results in an improved full-year adjusted operating profit and margin. This stronger operating performance is offset by an approximate $0.25 impact from higher interest and other expenses below the line, of which, 40% to 50% is interest-rate driven. We are narrowing our full-year free cash flow range to $600 million to $900 million from $500 million to $1 billion. We expect second half cash flow to be supported by positive net income, a further reduction in inventory, and the normal Tools and Outdoor seasonal benefit from working capital. We are planning for total company organic growth to be down mid-single-digits for the year. In terms of the business segment outlook, Tools and Outdoor total organic revenue is expected to be down mid-to-high single-digits for the year, incorporating the softer outlook in Outdoor as well as expectations for continued DIY softness and channel inventory conservatism. We are expecting to regain Cordless Power Tool promotions in the second half, reflecting our improved supply position. And as such, pricing is assumed to be relatively flat to slightly negative consistent with these activities. We continue to see the Pro tool user holding strong. And at this point, we believe the range of outcomes for volume covers some variability for the US consumer and DIY demand balance with the potential for stronger professional demand in the back half. In Industrial, we expect flat to low-single-digit organic growth on a full-year basis supported by a cyclical rebound in aerospace and auto. This is modestly lower than our prior outlook as we incorporate an assumption for continued customer destocking in attachment tools and industrial fastening. Production normalization and the pace of growth investments will both be flexed based on demand. We are planning for production to normalize in the fourth quarter recognizing the lower volume. We remain disciplined and flexible in our approach to reinvesting to drive organic growth. Our focus is to deliver on our financial expectations while utilizing gross margin improvements to fund growth investments. Our outlook assumes approximately $125 million of annualized investment with a goal to ultimately deploy $300 million to $500 million over the next three years. Clearly, our willingness to invest increases as we progress along our gross margin expansion trajectory. We expect second half adjusted operating margins to be in the mid-to-high single-digit as our cost efficiencies offset volume pressures. Turning to the important remaining elements of guidance. The expectation for the third quarter would be a sequential improvement in operating profit, primarily from the benefits of our cost reduction initiatives and a lesser impact from destocking. Adjusted EPS for the third quarter is planned to be approximately 80% of the full-year adjusted EPS amounts. And due to losses within the first half, the back-half adjusted EPS will be more than a 100% of the full-year total adjusted EPS. So in summary, we are exiting the first half with strong momentum across our cost-savings and cash generation initiatives with some of the more significant impacts from our inventory reduction now in the rear-view mirror, we are focusing on driving the items within our control to deliver further margin improvement and to fund investments. We continue to manage the business with the long-term in mind and we believe we have the right strategy in place to successfully navigate our path forward as we remain focused on driving above-market organic growth with margin expansion and enhance shareholder returns. With that, I will now pass the call back over to Don.

Thank you, Pat. We are pleased to report another quarter of meaningful progress related to our transformation journey. Successful execution against our plan gives us the confidence to increase our focus on reinvestment toward faster growth as we fuel our team with more resources to unleash the power of our amazing brands, strengthen the innovation machine, and stimulate demand with enhanced end user activation. We believe our actions to reshape, focus and streamline our organization as well as reinvest in our core businesses will enable us to deliver significant shareholder value over the long term via robust organic growth and enhanced profitability. I am proud to be alongside the best people, the best brands, and the most powerful innovation engine in our industry. As we continue to focus on what we can control to be successful, I am confident that we are recreating a significant market share gaining machine. With that, we are now ready for Q&A, Dennis.

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

Thank you. [Operator Instructions] Our first question comes from the line of Tim Wojs with Baird. Your line is now open.

Hey guys. Good morning.

Good morning.

At risk of being yelled at, I'm going to try to ask a two-parter. So I guess the first question, just as you're looking at gross margins kind of first half to second half, if, Pat, maybe you could give us some color on the bridge in terms of how you go from kind of low 23s in the first half to that 27% to 29% in the back half, how much of that is production versus some of the cost savings that you're seeing there? And then I guess second, since we've got, Chris, on the call, maybe just hoping to get a little bit of his kind of early thoughts and observations as you've gotten into the business.

You know, I'll start, Tim, with gross margin. It's a meaningful step up, but it's an important part of our journey. And we're confident in delivering it for the back half of this year. A big chunk of it is the roll-off of high-cost inventory. I'd say, you know, the bridge from roughly at 23%, 24% up to 28%-ish number is about 100 points of production curtailment fading away slightly and the balance is a mix of both cost savings generated by our transformation and dissipation of the high-cost inventory over the past, probably, equal parts of each in that regard.

This is Chris. Tim, thanks for the question. And I just wanted to start by saying how honored I am to join Don and the entire Stanley Black & Decker leadership team to help bring the company's long-term strategic vision of accelerated organic growth to life. As you well know, Don and the team have made meaning -- meaningful progress on this ambitious plan and I'm just grateful for the opportunity to help drive the company's transformation forward. As I've come on board, as you might expect, it's been a lot of taking time to learn and listen. And I got to say, it's been quite a whirlwind thus far in the first six-ish weeks. Then, seven factories spent at least today with every major business unit going through market trends, the products, the product roadmaps for the future, bend all the key design centers in North America, and had several key customer meetings. And through this process, what I'd say is that, the three real key observations and opportunities stand out. First is the long-term commercial opportunities exist due to the impressive strength of Stanley Black & Decker's brands and products. Simply put, our customers really, really like our products and our brands and want to grow with us. And that's something that cannot be underestimated for the future. Secondly is that the innovation engine within Stanley Black & Decker is amazing and I do believe it is a differentiating capability. Our ability to start with -- work with the end-user to understand their environment as well as the issues that they are trying to solve and then rapidly be able to turn that into design and implementation of products and solutions to help our customers solve their problems and become more efficient is really going to be an important future catalyst for growth. And then third is, as I've been out and spent time in the factories and in the operations, seeing the amount of traction that exists on the operations and supply chain transformation. There are obviously real benefits accruing through the P&L and Pat referenced those earlier, but as importantly, I can see the foundation that is putting -- being put in place that will make this a sustainable and long-term opportunity for the company. And it's also clear that the -- that there's ample future runway and that we're in the early innings of the transformation and that the future savings will be able to be reinvested back in the business to continue to fuel growth as well as margin expansion. So really the combination of these three key observations and opportunities really -- it has been very excited as far as the opportunity for long-term value creation within Stanley Black & Decker.

Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Your line is now open.

Hi. Good morning and welcome to Chris. Maybe just my question was understood just now that bridge from first half to second half of this year, but just wanted to check on any color you could give on the bridge from this year as a whole into next. And I suppose, if we look at your second half guidance for this year, it's about including some sort of outdoor seasonality assumption. It's maybe 3.50 of annualized EPS based off your second half guide at the midpoint. You had talked about a $5-ish EPS for next year previously, so I just wondered sort of any updated thoughts on that EPS step-up into 2024. And sort of related to that, it looks like your inventories will still be well above historical norms at the end of December, but you talk about production normalization during Q4, so I just wanted to sort of square that away when thinking about next year. Thank you.

Thank you for the questions. And I'll kick it off and then pass it over to Pat for a little more detail, as far as our perspective on next year. We have talked about in previous calls a $5 -- or a $4 to $5 range for 2024 for EPS. Given what we're seeing in the back half and what we're currently projecting for revenues, the improvement in the gross margins, we're making some investments in SG&A that will plant some seeds for future share gain activity. We do think we're positioning ourselves to be in that $4 to $5 for next year, depending on a couple of factors. Does the revenue maintain itself or grow? Or do we see continued pressure due to economic reasons? And how much more investment do we want to do to really drive that share gain opportunity across the globe? Those are questions that we'll figure out in the back half of the year. And when we provide guidance in early '24, we'll give more insight, but we think we've built a foundation that allows us to achieve that range I mentioned. I'll pass the inventory portion of the question over to Pat and let him give you a little more sense of where we think we are in the journey of inventory and where we go from here.

Yes, Julian, I'll pick up where Don left off. I think, from an operating performance and productivity range, we're targeting towards that EPS level, but as Don said, as we get to next year's guidance, we'll look at the macro and we'll look at our investment level for long-term growth. And I think that will decide our EPS for next year. In terms of gross margin this year and into next year, following on that opening question, we can really already see on our balance sheet and already in our savings rhythm the gross margin levels that we're projecting for the back half of this year. So those rates of gross margin delivery are, for the most part, on our balance sheet already for this year. And then your question around how do we step that into next year. Think of every one of the next few years going through the end of 2025 as $500 incremental million of COGS savings off of our revenue base. You're talking 200 to 300 basis points a calendar year of gross margin improvement. And so we continue to track on our long-term cost transformation. And so if we finish this year at 28-ish percent gross margin in the back half of the year, you could kind of expect that 200-plus basis point level of gross margin improvement to be carried into next year. And that's the kind of momentum you should be expecting the next couple of years. In terms of inventory, we're going to make significant inventory progress this year, but you're correct to point out that, by the time we get to the end of this year, our absolute inventory dollars at the end of this year will be in the $5 billion-ish range, which is around 155 days-ish range, which is higher than our long-term history of inventory levels, which have obviously changed since we acquired an outdoors business from the legacy Stanley Black & Decker levels, but still below 155. We'll continue to make progress and we will talk about that more specifically when we give guidance for next year, but we will continue to make progress and be working towards a level that is below 150 across a multi or rather below 140 across a multiyear time horizon. Next year, our progress will be balanced against some of our network changes. We are bringing online some new DCs next year and a new DC footprint altogether, so while we'll make some progress next year, it will be balanced against some of the long-term decisions we're making to improve service and costs in our DC footprint.

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

Thanks. Good morning.

Good morning.

I'll try and make this question a bit punchier. Thanks, guys. And Chris, welcome. Good to hear you. So the EPS, $0.80 for, well, $0.80 roughly for 3Q midpoint. And so I think that implies 4Q down slightly, so just wondering how we should think about that gross margin cadence between 3Q and 4Q. I'd have thought that maybe some of the cost benefits would benefit 4Q more than 3Q. So just maybe just run through that. And then the comment about pricing flat to slightly negative, is that for the whole corporation, or is that just specifically for Tools & outdoor segment?

Yes, Nigel, I'd say all you're seeing in 3Q EPS to 4Q is really just a normal seasonal cadence, right? We tend to ship in, in the third quarter a lot of the product that is sold through the holiday season, so it's just a normal cadence that you would see from one quarter to the next. From a gross margin perspective, they'll roughly be even across quarters, if not the fourth quarter being slightly higher, so the margin journey will be on the right momentum track. And all you're seeing in EPS dollars is seasonality. I think, in terms of pricing, 85% of our business is Tools & Outdoor. And all you're seeing in pricing is the fact that this year we're back to a normal seasonal promotional cadence, especially around the Black Friday time frame, without new kind of gross price increases offsetting that introduction of -- reintroduction, I should say, of a normal promotional cadence. So it's just the dynamic of us re-entering a normal promotional cadence that will potentially take us below flat pricing, but it should be a real small marginal amount. That's all you're seeing with both of those dynamics.

And just a reminder recognizing that, as we launch new products at new price points throughout the year, the impact of the higher price versus the previous product that it's replacing does not flow through that price line, but it does flow through your margins. So you don't necessarily see the full impact of pricing decisions and processes that we have across the company because of that.

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

All right. Thanks. Good morning, everyone, and welcome, Chris. Wanted to dial in a little bit more into the change in your organic growth outlook for Tools & Outdoor. I think you kind of said it was driven by several different factors, softer outlook in outdoor, DIY weakness, channel inventory conservatism. I was hoping if you could kind of bucket those drivers in terms of what's driving the difference, if you can kind of tie it to the difference, I guess, which is maybe 3% or 4% of a change. And also if the POS turning positive, that was kind of part of your prior guidance because you said it could be a potentially positive signal for the back half. If that continues, would that drive any upside to the guidance?

Mike, we obviously had to think of a few moving parts as we outlined the back half of the year. And so I think where I'd start is our primary objective this year is to deliver margin improvement, working capital reduction in cash, obviously. And we want to keep competing in the marketplace. And the second quarter had many dynamics going on. I would say, in the second quarter, we saw consistently weak outdoor, especially for high-price-point items. And we saw the DIY consumer be under a bit more pressure and on the margin both in tools and outdoors and in subsegments of our Industrial business, channel conservancy -- conservatism on inventory. So all of those things were dynamics that played out. We anticipated them in the second quarter. And that's why, when we gave guidance at the end of the first quarter, we softened up our revenue expectations on the second quarter; and they played out about as we expected in the quarter. And we thought it best, given the fact that those dynamics have kind of stabilized and stayed with us, for the most part, to play those out in the back half of the year. And that's the adjustment you saw, so almost all the adjustment in the back half of the year was to anticipate a similar level of consumer price sensitivity with winter outdoor goods, a continued DIY consumer softness predominantly in North America and then channel destocking in our infrastructure business. And I'd say they've all been kind of equal drivers of us taking a couple hundred million dollars out of our back half sales forecast, but I'd say the good news is we feel like right now, absent a new macro change, our demand environment has stabilized. And that demand environment has stabilized around a strong pro and really strong aero and automotive in our Industrial business. Then I don't think there's any kind of new dynamic with the DIY consumer. Our intent is up for when student loan repayments start around October, but absent that bringing a new macro dynamic into the picture, we feel like our demand outlook has stabilized and we're feeling good about our back half. And then Don referenced there have been some bright spots, things like power tool POS at the very end of the quarter. And we'll see. Those things may emerge, I think, throughout this year given the fed actions. I'd say the broader demand environment has actually surprised us in the sense that it hasn't been more challenging. And so hopefully, those positive trends continue, and if they do, they present upside.

Thank you. Our next question comes from the line of Chris Snyder with UBS. Your line is now open.

Thank you. I wanted to follow up on the earlier commentary on the bridge into 2024. I understand, if you annualize the back half, you're at $3 EPS, but the back half is a seasonally low point. It feels like, if we adjust for seasonality, we're already closer to $4 of annualized EPS. And you guys also said, next year, it sounds like gross margin up maybe in the low 30s versus the high 20s. That's obviously a very significant EPS tailwind and it feels like that would more than offset the incremental step-up in growth investments, so can you just maybe provide some more color on that? Thank you.

Well, I think what I articulated and Pat added some detail to it and more robust detail to it is a pretty good summary of where we think we are at this point. And you could build a bullish case that the numbers should be higher for next year, but you do have to factor in the fact that we really want to make sure that we continue to invest in certain key things in our company. We have to get more resources out on the field, closer to our end users. We need to have more engineering resources in key pockets to drive additional innovation opportunities. We've talked about electrification. We want to continue to do that in certain categories that are changing very rapidly. We have to continue to invest in that space. There's more investing we need to do on the digital marketing front, around social media and the activities that we do with our products, to really make our end users as fully aware as to the great innovation machine that we have and what we're putting in the marketplace. Those are things that we have to continue to invest in and so we want to strike the right balance in 2024 of earnings in the sense and cash flow of what's the opportunity for growth as we look at the markets and evaluate that later this year going into 2024. We have a good sense of what's going to happen with gross margins, as Pat articulated. And then the other wildcard is really how much do we want to invest to really plant more seeds for share gain opportunities in the future. That's an important part of our business model that's going to ensure that we're successful for the next several decades, and we want to make sure we do it in the right way and the right level of balance. And that's why we think, as you think about next year, that range of $4 to $5 probably makes sense. If we change our perspective because of market conditions or how much we want to invest, we'll provide that as soon as possible, but I think it's the right way to think about next year at this stage.

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

Yeah, thanks. Good morning, guys.

Good morning

Maybe just a couple of follow-ups from prior questions that were asked. So on pricing, can you just characterize the competitive environment that you're seeing? Anything concerning out there? And then with respect to the channel inventory dynamics in the tools business, I think you guys talked about some channel adjustments this quarter. Is the expectation that, that kind of continues into the back half? Where are your inventories versus where you would like them to be in the channel? That would be great. Thank you.

Sure. So I'll take the pricing question and I'll pass the channel inventory question over to Pat. I think where we are is, we're seeing a lot of different things occurring around deflation in the freight space. So I think, when we look at freight, we've all seen freight costs have gone down dramatically. We're experiencing that. We're seeing that benefit in our P&L and we'll continue to try to leverage that opportunity as much as possible. On the metals side and commodity space, we're seeing a little bit of indication that things are starting to pull back, as far as commodity prices. And so we're chasing that opportunity, but overall the commodity basket for us is not moving down dramatically at this stage. Now we are pursuing these opportunities to ensure that we actually get the benefit when they do emerge later this year or into next year, depending on how that plays out, but also we have to recognize that we probably won't see much of that benefit here in 2023 just given the level of inventory we have on our books. And that will get hung up in the inventory and will read through eventually in 2024, so the question then becomes what does that mean to pricing. And so what adjustments do we need to make? What's happening in the market? And at this point, we feel like our pricing is where it needs to be versus market conditions and the competitors. We tend to want to be, especially with brands like DEWALT, at a premium versus many of our competitors. And we feel like right now the pricing position is in a healthy place, and so we don't see any need for any adjustments associated with that. If deflation becomes a bigger number as we go into 2024, we will continue to look at that and evaluate that. However, we do have to remember that, as we went through this historical inflationary cycle, we did not get 100% price recovery on that. It took many quarters for the pricing actions to get into our customers and so we experienced a lot of margin pain in that transition period. And so there has to be a tail at the back end associated with this deflationary cycle, whatever it is. And we're going to work with our customers in a balanced way to do the right thing for ourselves, our company and for them. And we'll continue to take that approach, as we've done in the past, and we think it's the right approach for this particular cycle. Pat, do you want to talk about where we are with channel inventory and where we're going?

Yes. Nicole, channel inventories. We look at our current level of channel inventories relative to history. We're very much at or right around normal levels of channel inventory. And so I think, if there wasn't macro uncertainty or if short-term rates weren't as high as they are, we would be biased to stay where we are or to the upside, but I think, because of the rate picture in particular, with our channel partners paying much more in short-term rates to support their inventory and the fact there is macro uncertainty, their bias is to keep things low and, if not, to try to find new lows. We don't think there's big moves out there ahead of us. It's something very modest. And I would say our back half guidance anticipates somewhere in the neighborhood of $50 million to $100 million of inventory reduction in our guidance, as we've talked here today, and we think that's a pretty good number for the back half of the year. I mean obviously it could range outside of that if the macro environment changes, but that's what we've considered for the back half of the year.

Thank you. Our next question comes from the line of Adam Baumgarten with

Hey, good morning.

Good morning.

Can you just talk about how demand trended throughout the quarter into July? It seems like it built throughout the quarter. And the July commentary is pretty encouraging. Just maybe some additional color there would be helpful.

Well, I think the markets are -- do have some volatility to them. However, when you step back and look at the trends that have been emerging in the first six months of 2023, we all know it was a very challenging outdoor season. And everyone in the industry experienced it. We experienced it to. And the higher-priced ticket items, as I mentioned in my presentation, continue to be a pressure point. There's no doubt that the outdoor business went through a bubble during the pandemic. And there was a lot of purchasing activity because people were at home, and we're starting to see the back-end effect of that here in -- we experienced some of it last year and we're experiencing more here again in '23, and then we'll see what '24 brings in the future. The trends in POS continue to be positive, and I said that in my comments. July has been a good start to the quarter. At this point, it's not something that is an indication that we already feel like we're going to outperform expectations. As Pat said, it's a potential upside for us to evaluate and monitor as we go throughout the summer. And we'll see where things are trending, but the consumer continues to shift a lot of money away from home improvement and we just have to make sure that we continue to monitor that and see what happens. So I look at it as an opportunity and a positive that, hopefully, evolves as the back half plays out, but I don't want to get too excited about three or four weeks of activity at this stage.

Thank you. I would now like to hand the conference back over to Dennis Lange for closing remarks.

Shannon, thanks. 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.