Stanley Black & Decker Aktie

Great. Thank you. Good morning, everyone. Welcome to day 3 of the Morgan Stanley 14th Annual Laguna Conference. It's my pleasure to have with me up here this morning, Chris Nelson, CEO of Stanley Black & Decker. Before we kick things off, I just need to read some quick disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative.

So Chris, maybe if you have any prepared remarks, anything you want to level set for us before we dive into it, take it away.

Well, thanks. Thanks for having me. It's great to be here. I just -- it's about coming up on a year into being in this role and just a little bit of an update when you -- at the beginning, as I was stepping in, laid out 3 key priorities for our organization. First was to make sure that we really activated our brands with purpose. And we, last quarter, reported growth in our 3 core brands of focus. So we feel like we're making nice progress there with the investments and the focus that we've made in the brands.

The second one was to drive improved operational excellence. And we continue to march on in what is not the most robust volume environment, march towards our margin objectives. And this year, we're feeling good about where we're -- where we've guided to on our margins and progressing towards the 35% gross margin area that we have laid out. And then the third one was to really for the long-term lifeblood of the organization to accelerate our pace of innovation. And not only have we -- by the end of this year, we'll have improved our cycle time of our innovation cycle by 30%. But with -- it's really showing up in a robust pipeline of new products we've got coming out in DEWALT, Stanley and Craftsman. So I really feel like the team is organized and rallied around those objectives, and we're making nice progress and it's showing up in the financial results as well.

Great. Well, let's unpack some of that, Chris. As you said, it's been now almost a year that you've been in the seat. I guess, how would you say the company has performed versus your original expectations? Any major surprises or challenges over that time?

No, I feel like we're kind of on pace for where I would have expected to be. We have our say-do ratio has been high, which is really what I needed to make sure we saw happen organizationally coming out of the gates. And so I'd say that kind of on pace for what we've laid out, we still feel really good about the 3-year plan that we laid out at our Investor Day a couple of years ago. Probably the environment has been -- the market has not been as robust as we would have liked.

And I'd say that certainly, the volatility that we've seen has been higher than I would have anticipated from everything, from geopolitical trade policy, et cetera. But where I feel like we're ahead of the game is that I think that we have -- due to a lot to the volatility and the market environment. We've built a team and a resiliency and flexibility to be able to adjust and continue on towards our objectives regardless of the environment, which I think is really the most important thing to build in an organization.

Got you. You touched on the volatility in the market, and yet many people would take a step back and argue that the macro has been fairly static over the past year. But how are you thinking about demand across your various end markets? And is there any material improvement from a year ago in either pro or DIY?

Yes. So I'd say we did -- we expected our overall market to be in the flattish range when we've laid out our 3-year plan. And maybe up a tick or so, but kind of we're still in that same world. What I would say is that probably the construct therein has been a little different. The commercial and industrial professional, I'm sure that's not a new theme from what people have been hearing has been very strong for us. And our presence and progress in that marketplace has been solid. So I think that, that side of the professional has been strong. We haven't seen any real appreciable inflection in -- no surprise to anybody in the housing market.

And I'd say that the consumer in the DIY world remains surprisingly resilient in today's world. Now it's not anything that is driving a significant amount of growth, but it's also -- it's kind of -- it's stabilized and allowing those other -- certainly on what we see in commercial and industrial to be more reading through.

Interesting. I guess as you think about that dynamic right now between the commercial professional and the consumer still being relatively resilient, can you talk a little bit maybe about the progress on the core brand strategies across DEWALT, Stanley and Craftsman? And which of these 3 do you feel most confident about or which do you still see most at risk in today's market?

Yes. So -- well, I'll start with DEWALT. And when I -- I've been with -- for those of you who are just new to the story, I've been with Stanley Black & Decker for call it, a little over 3 years, been in the seat for about a year. But when I came in and was asked as COO to lay out what was going to be our growth in kind of transformation strategy from the go-to-market brands as well as operationally. No surprise to anyone, we started with DEWALT. DEWALT, it's the largest franchise. It's about half the revenue of the company. It's very strong in the professional ranks and in the end markets that we saw being the most attractive from a growth perspective in the short to medium term.

So really what that came down to was like redoubling our efforts to not only win with the professional but expand from what has been our traditional strength in the residential or carpentry trades into increasingly investing in from both a product perspective as well as a go-to-market channel perspective in more of the commercial, industrial mechanical, electrical, plumbing, concrete so that has been an ongoing multiyear effort to which we've been growing consistently above market. We've been taking share, and we really, really like not only the progress we've been making in that market, but certainly, when you look at the buildout that's happening in data centers or with energy, we like the longevity of that story as well.

So feel really good about where we are from DEWALT. And then we also, at that point, laid out what our 3 core brands that we're going to really focus our efforts from a capital and resource perspective on and it was going to be DEWALT, Craftsman and Stanley. If I go to Stanley next, we really wanted to define what Stanley was going to be as a brand and it kind of -- let's just say it hadn't -- people hadn't paid a bunch of attention to it. And therefore, it had kind of lost its way as kind of like more of a retail kind of DIY-ish brand, certainly in North America and was still strong in Europe, but I'd say under-resourced.

So we, several years ago, started down the path of defining that as that's going to go target the smaller residential contractor as well as some of the DIY or in the workflows being layout, measurement, cutting, more hand tools. And put a lot of time, effort and resources into a full product refresh, which is just launching this year into next year as well as changing our channel structure in North America to give us more access to different markets other than just the DIY and to certainly have positioned the product line accordingly.

And then in Europe, where it's actually the majority, over 60% of the business in Stanley is European. And as a hand tool brand, that goes through wholesalers there, we didn't have a sales force as strange as that may sound. We didn't have a sales force that was really dedicated to growing that Stanley brand. And it's just a different sales motion than DEWALT and power tools. You got to be with those wholesalers. You got to be helping them merchandise their walls. And so we have, over the past couple of years, been adding those dedicated resources and as a result, now we're seeing good growth.

And I think going into next year, we're going to be -- I would be assuming Europe stays relatively stable, we'll be seeing consistent growth out of that brand. We feel good where we are there. The third is Craftsman. And Craftsman, we acquired the brand back in 2017. It was acquired as a brand without a product line. So the first course of action was to give it a product line and which we did. But what we didn't do at the time was to really say what that brand was. And we defined it as a DIY brand. And it's a well-known, well-respected. It has the best reputation out of any DIY brand in the world, but it didn't have the right product line for that mission.

So when we took Craftsman after we acquired it and turned it gave it the products, it was really donor products. So what we had was a DIY brand selling at DIY price points with professionally specified products. So we have, over the past 2 years, really in defining that we wanted to go after the mechanic in the garage. We wanted to go after lawn and garden as well as the home renovation market for the DIY, gone and recrafted that product line so that it is properly specified and costed for selling into that DIY market. This year, we will see the largest product launch cycle that we've had since we acquired the brand.

And that's going to continue into next year. So I think as we go into next year, middle of next year, we'll be seeing that consistent growth as well. So starting with DEWALT and then kind of building on the other legs, I feel like by the time we're kind of middle of next year, we'll have kind of that consistent, repeatable and really the growth we can count on, which is a key part of the strategy.

Got you. Interesting. I'll come back to that point because I think that momentum in both Stanley and Craftsman into next year is something that I think it warrants a little bit more time but you mentioned something there on DEWALT that kind of caught my attention that you have been growing above market, you have been taking share. But what gives you confidence you can continue to outgrow the market consistently here? Is it product refreshes? Is it the go-to-market strategy? How are you kind of thinking about the confidence you have there to continue to grow share?

Well, I think that the beauty of what we're doing in DEWALT is that we have a lot of opportunity to really continue to not only grow in our -- what I'd say is our core verticals, but gain share in some of the ones in the -- whether it be mechanical, plumbing, concrete. And the consistent approach is what is the most important with that brand in those markets. And that is -- by that, I mean, we need to continually make sure that we're building out the product portfolio that our professionals need for their entire workflow and then redefining what innovation looks like in that workflow.

So with the large professional enterprise user, there is a relatively -- there's relative price insensitivity because what you are selling is you're not selling a tool, you're selling labor arbitrage. If you can innovate and turn a 1 person -- or a 2-person job into 1-person job or drive your power of your tool that it gets done quicker, that is -- you just think about it in the context of a data center. They're looking for hours and days. If you can do that with your tools, you have a willing audience. So consistency in that targeted product development approach. And then we know that in order to be successful in those -- specifically those enterprise commercial markets, you need to make sure that you have the support on the ground for the training, the product swap outs, the availability, all the above.

And we know that there are continued -- that we have a continued investment list of where the next markets are that we can continue to invest and grow above market. So the combination of that from a consistency perspective, it's continuing to do what we have seen and what we have seen work well and that we know that we -- where we go next with the innovation and the investments in the go-to-market.

Got you. Maybe let's switch gears a bit, obviously. This has been coming up a fair amount at this conference and arguably, it was coming up even last year's conference. But for good or bad, you guys have been in a position to need to proactively navigate the fluid tariff policy and the changes over the last 18 months. Do you feel right now that you have the right manufacturing footprint to adjust for future tariff policy changes? And are there changes that still need to be made to be more flexible and/or resilient as you kind of navigate this environment?

Yes, you're right, it has been good for good and for bad. And the good has been that it has been a crucible that has helped our organization evolve and be flexible very quickly. I think what we've accomplished over the past couple of years of really optimizing our production footprint in a challenging environment as well as taking the right steps to secure our supply chain and our pricing to continue the margin journey has been, I think, really a proof point for what this company can accomplish.

Now as far as where we are in that journey, I do feel like we have -- we're close to being at equilibrium of where we need to produce. I had said that by the end of this year, we would be at or about 5% from China consumed in the U.S. We're on pace for that. Additionally, we had talked about being at or above industry norm levels for USMCA-qualified product, which are obviously currently tariff exempt. We're on pace or ahead of that. So we feel good about that.

Now what is the next step is that we moved production into facilities, existing facilities in the right location to maximize or, I guess, minimize the tariff exposure. A lot of that meant moving what was consumed in the U.S. back to North America. What the next step is now that we've gotten to the locational equilibrium will be to make sure that we consolidate and scale and reduce the number of rooftops that are producing those in the individual markets because that, by nature, makes us more flexible. If we have fewer components, fewer rooftops and more -- any changes that come in the future, we will be increasingly flexible to move quickly.

But I feel like our general geographic footprint is where it needs to be for the current environment. And our capabilities and skills that we've built over the past couple of years lends itself well to being successful in whatever environment comes down the road.

Got you. Let's maybe move over to margins. You've made strong progress on your adjusted gross margin targets to date. But what do you see as the main drivers to go from 32% to 35% for a full year?

Yes. So first of all, when we laid out that plan in that objective, we -- just for everybody in the background, we laid it out with the assumption that it was going to be in a fairly flattish market environment. So we're not counting on a big market recovery or a lot of volume tailwinds. So it's all volume -- flat volume productivity. If you look at what has taken us to where we are thus far, we had the $2 billion cost-out program. A lot of that was essentially driven by more centralization and scaling of our sourcing capabilities. And then really reinvigorating or restarting what had been fairly dormant engineered cost reduction, material cost reduction program.

So that was, by and large, what the majority of the $2 billion out was for that time frame. Going forward to get us from the 32% to 35%, there's really 3 key levers. One is, we have been working very aggressively in the background to increasingly platform our product designs, meaning that we have reduced the number of components in our library for motors, controllers, transmissions, everything that goes into our products. And we're building our products and designing our products off of those, let's, for the sake of argument call them LEGO blocks. Now what we see going forward is that our opportunity to drive further engineered material cost reduction based on that platforming program, is pretty significant.

And this year, call it, roughly 50% of the savings that we're driving from material productivity are enabled by that platforming program. I expect it to continue to accelerate. The second thing is we, over the past couple of years and as part of the transformation, we laid out much more of a rigorous lean operating system in our facilities. That is allowing us now to benefit from taking labor content out of the production process, not only through continuous improvement, but we are increasingly, as we've kind of commonized some of what we're doing, we have room to do point type of automation that will continue to take that labor content down. That's another big thing.

And then the third is what I referenced earlier is that we still have a pretty big opportunity to rationalize our footprint and therefore, be able to flex better with volume with a smaller, more concentrated footprint from a rooftop perspective. It's not a question that I haven't fielded before, as you might imagine. And what I always wrap up by saying is like of all the things that keep me up at night, having the levers and the opportunities from a productivity standpoint to be able to drive to that 35% margin is not one of them. We have clear road maps or activities that are within our control, and we've built the team and the capabilities to get there as well.

Got you. Maybe let's just double-click on that for a moment, right? As you think about those kind of 3 constituents there of what could drive margin upside, what inning would you say you are in across those 3 right now? Is it -- are they all kind of running in parallel to one another? Or are you further ahead in one than the other right now?

I'd say we're further ahead in platforming. And so we're not to the seventh inning stretch, but we're past the midway point. And that's good because you need to have that. Now we're starting to go. We have it well embedded in what we're doing for new product development. And now we're going back into our existing product lineups in order to platform that out. I'd say we're -- next, we're kind of probably furthest along in the lean journey, building those capabilities and the disciplines and tools in our facilities to be able to continue to drive that labor productivity year-over-year from a continuous improvement standpoint.

And then just by the nature of the fact that all the engineers and operators who would be -- would have been working to consolidate our footprint, have been working to move our production all over the world in order to make sure we optimize our tariff footprint. We have the most opportunity in that area to think about how we consolidate. Now we've been making good progress this year, but we got a lot in front of us. So we've got plenty of levers to pull, and we've got teams organized to make that happen.

Got it. Well, I guess following on that, you've recently completed a significant global cost program reduction. But what are the productivity levers that still remain to drive the annual 3% gross productivity, you think?

Kind of what we just talked about. Really -- we talk a lot about -- if I just go back to the product platform as well as the footprint moves. Certainly, those will drive productivity that you talked about the 3% year-on-year from an operating cost and input cost perspective. But what gets really exciting as well is that all of those things will make us more -- much more productive with our working capital and our cash as well.

And when you think about reducing the number of components going to a reduced number of SKUs in a reduced number of facilities, our ability to operate with lower working capital on the front end, it becomes a lot more feasible. That, I think, that we're -- we've made nice progress. Obviously, we've done a lot with the balance sheet. We've made more progress with working capital. But I'd say we're still in our early innings of being able to drive that productivity with our working capital. Now we want to make sure that we're doing so, I never want to harm our customers. So we're going to make sure that we have the inventory that they need, but there is opportunity over the next number of years for us to continue to drive that cash productivity as well.

Great. Well, in today's inflationary environment, I'd be remiss if I didn't have to ask you about pricing. So how have your '25 pricing actions held up in the market? And what do you think the industry can do to get to a place where it becomes easier to take price?

Yes. So starting with '25. So we've been very happy with how the pricing has turned out. I mean like what we put in the market from a list price perspective, it's in the market and it's sticking and it's -- obviously, it's helped us to navigate what we couldn't mitigate from a production change or other tariff mitigation opportunity to keep our margin journey moving along. We -- as I commented coming out of last year into this year on one of our earnings calls, we made -- not only do we reprice the -- our list prices, but we changed our promotional mix as well. Our promotional like when you have a kit that you're promoting. We had to refigure what those prices were as well.

We did a great job coming into this year of learning from the market and seeing what the elasticities look like and just tweaking the promotion pricing and specifically focused to a lot of our power tools and they are nice margin, they are accretive, making sure that we are driving volume there. So that part of the pricing has gone very well, and that's a lot -- you saw what we had from a power tool growth perspective last quarter. I think the combination of what we've done in a list and how we've gotten smarter on promotion has been great to see.

If I think about going forward, there are a lot of moving parts. Not only do we have inflation coming in right now, we have -- obviously, everybody has been looking at oil, but there -- everything being equal right now with tariffs where they are, we're kind of okay-ish right now with where we need to be. The big question mark becomes what happens with tariffs. And the next 301 kind of study has not been released. Our assumption is that, that will then return the tariff environment kind of where it was under IEEPA. It remains to be seen. I think that that's going to be now the when is the big question. So when we have all those facts in our hands, we'll make the right decision for what we need to do to continue our margin journey because it's vital for us to make sure that we have the margins where we need so we can invest how we need to invest so we can continue to support our end users.

And I'm confident that everybody in the industry is going to be seeing those same set of facts. We're not unique by any stretch of the imagination.

I guess from an industry perspective then, I mean, do you think the industry itself can get to a place where it's easier to take price? Is there anything needed to change under the surface there?

I think that you've seen the industry has been taking price. So -- and like I said, everybody is kind of looking at the same kind of scenarios. So I have been -- I think that you would -- I would expect that to be the case going forward. I know we're going to continue to look at it the same way because we have to, for the long-term viability of our business and our -- what we want to make sure is that we're continuing to drive the investments in innovation that make -- at the end of the day, if we innovate successfully and we help our end users be more productive and safer, they're going to want our products and be relatively price insensitive. So we need to keep that going.

Makes sense. Let's switch gears maybe and take a closer look at the portfolio. Is there any more pruning to be done there? And when do you start to reconsider M&A again? And what does bolt-on M&A mean to you?

Okay. As far as like the big kind of structural portfolio moves, we're at the kind of at the end of that. We just announced the divestiture of Excel the other day. We still love that outdoor zero-turn professional gas market. We just could cover it with Cub Cadet and didn't need another -- we want to continuously simplify and focus. So that was pruning to make sure that we can continue to focus on the market we like. We're going to continue to look kind of product line by product line and decide are there things like we did with walk-behind mowers where we moved it over to a licensing model. We'll look at things like that.

But as far as the big structural things, I think we're -- that's kind of behind us at this point. We did say that we're now -- we mentioned -- I said earlier, our balance sheet is in a much better place. We can be more on the front foot with our capital allocation. Certainly, our bias in the near term while we build the pipeline is going to be for buyback is going to be the -- probably the first port of call, but then as we build that pipeline and continue to improve the scale and efficiency of our platform, we are going to be thinking about likely in the tools world where are there brands and/or technologies that could help us accelerate our organic story in the key verticals that we want to grow in.

So there -- we're not going to be thinking about any bolt-ons or there wouldn't even be bolt-ons, but any acquisitions that would be diversifying or another leg of the stool or anything like that. We know who we are. We know what we're good at. We have a strategy that's working. We know what we're doing. We know what professional end markets we want to serve. If there are assets that would help us accelerate that, we would look at that as we build out the pipeline.

Got you. I guess just following on that, right? As you kind of think about your portfolio mix right now and you're spread across the 3 brands. Do you feel like you have the right mix? Or is there one of the segments you are more focused on kind of growing and amplifying as you look forward?

I think that we believe that -- all other things being equal, the more that we invest in the professional, the better we're going to be. So when I have a decision to make where the next marginal dollar will go. Many times, that will be going to something that is related to a professional. I just feel like it's what our core is, it's what our market is. It's what's growing. And then from that, you then have the opportunity to use that scale to benefit yourself in the DIY world. And that's kind of how we think about it is we're going to emphasize professional and then we're going to use that scale to benefit our cost position to be successful in the DIY world as well.

Got you. Well, we're coming up on time here, but I guess one kind of question in closing is as you look forward a year, what excites you most? Is it -- like we were discussing earlier, the momentum you're seeing from the product refresh side in Stanley and Craftsman. Is it the productivity levers, but what would you like to share with the investors here that really gets you excited about the next 12 months?

Well, I think that when I look at the next 12 months or 12 to 24 months, certainly would be that I feel really, really good about the productivity engine that we've built. That should have come through in my comments to everyone that we know what we need to do and we have the actions in place. We're starting to see the green shoots and the evidence that the commercial engine is starting to gather that same level of confidence and consistency. The combination of those 2 things as you start to see that growth engine and the commercial engine match what we've done on the productivity engine, and then you look at what that does to our ability to drive real significant EBITDA growth and generate nice cash as well allows us some offensive kind of capital deployment options that we have not had in a while.

So I think that really seeing that the growth match the productivity opens up a lot of not only just straight out growth from an EBITDA perspective that is attractive to investors, but then also it opens up more optionality than we've had given where we are with the health of our balance sheet.

That's great. Well, thank you, Chris. Thank you to the Stanley Black & Decker team. We'll wrap it up there.

All right. Thank you very much. See you.

Welcome to the Stanley Black & Decker Second Quarter Earnings Call. My name is Shannon, and I'll 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 Vice President of Investor Relations, Michael Wherley. Mr. Wherley, you may begin.

Good morning, everyone, and thanks for joining us for our second quarter earnings call. With us today are Chris 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 11:00 a.m. Eastern Time. This morning, Chris and Pat will review our second quarter results along with our updated outlook for 2026, followed by a Q&A session.

During today's call, we will be making some forward-looking statements 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 actual results may differ materially 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 filings. Additionally, we will also discuss non-GAAP financial measures during the call. For applicable reconciliations to the related GAAP financial measures and additional information, please refer to the appendices in today's earnings release and supplemental presentation.

I'll now turn the call over to our President and CEO, Chris Nelson.

Thank you, Michael, and thank you all for joining us today. Stanley Black & Decker delivered a solid second quarter. Through disciplined execution of our strategy, we are delivering profitable organic growth and remain on track to achieve full year sales and margin targets. We are confident in our strategy and in the team's ability to continue to execute and deliver results. Total revenue for the second quarter was in line with prior year and up 3% organically. This was slightly ahead of our expectations, driven primarily by volume strength in the U.S. across both retail and the commercial and industrial channels within Tools & Outdoor.

Our adjusted gross margin rate of 33.7% was up 620 basis points year-over-year, largely supported by gross productivity and product mix. We also received tariff refunds during the second quarter, which contributed to adjusted gross margins. We will use tariff refunds to accelerate growth investments, and we have incorporated the net impact within the revised EPS and cash flow guidance that we will outline today. Second quarter adjusted gross margins included a benefit of approximately 250 basis points from these net tariff refunds.

Adjusted EBITDA margin of 11.3% was up 320 basis points year-over-year, slightly ahead of our planning assumptions for the period. Adjusted earnings per share were $1.57, $0.37 above the midpoint of our guidance range. Below the line items contributed about $0.20 and net tariff refunds contributed about $0.17. Pat will discuss this in more detail as well as our underlying guidance assumptions for the balance of the year. Following the sale of our aerospace fasteners business early in the quarter, we were able to deploy those proceeds plus additional operating cash flows to pay down debt by $1.7 billion and buy back 3.2 million SWK shares for $250 million. We are continuing to advance our strategy with a focused portfolio, balance sheet strength and a thoughtful approach to capital allocation. Our priorities remain to invest in growth, support the dividend, repurchase shares and pursue M&A if and when appropriate.

Turning to second quarter operating performance by segment. I'll start with Tools & Outdoor. Second quarter revenue was approximately $3.6 billion, up 3% year-over-year. Organic revenue was also up 3%, comprised of 3% volume growth from strong demand generation and flat pricing versus the prior year. Currency was a 1% benefit in the quarter, which was offset by the impact of the previously announced strategic transition to a licensing model for the gas walk-behind outdoor products. We were encouraged by the organic growth we saw across our 3 global priority brands, DEWALT, STANLEY and CRAFTSMAN in the quarter. Supported by well-executed demand generation, Tools & Outdoor second quarter adjusted segment margin was 11.8%, which was up 380 basis points year-over-year. This was predominantly due to net productivity gains and favorable product mix. Net tariff refunds also contributed approximately 150 basis points.

Now for additional context on the top line performance by product line in the second quarter. Power tools organic revenue increased by 8% and hand tools, accessories and storage organic revenue increased by 2%, which were both driven by strong market activation and global priority brand performance. Outdoor organic revenue decreased 7%, pressured by fewer replenishment orders as a result of weather-related demand softness. As for Tools & Outdoor performance by region, in North America, organic revenue increased 4%. U.S. retail was up mid-single digit as a result of strong demand generation. This includes strength across DEWALT, STANLEY and CRAFTSMAN and improved penetration and presence with channel partners.

Momentum across the U.S. commercial and industrial channel accelerated and revenue in this channel grew low double digits in the quarter with the continuation of key investments complementing strong market demand, which I will elaborate on in a moment. North America point of sale in aggregate was broadly consistent with reported home improvement consumer credit card data with strength in power tools and softness in outdoor. In Europe, organic revenue was down 2%, although growth continued in our prioritized investment markets, including Eastern Europe and Iberia. This was more than offset by challenging market conditions in France and other parts of the region. The Rest of the World organic revenue was up 3%, led by double-digit growth in Latin America with strength driven by innovation and investments in pro channels. Across the rest of the region, there were broad-based contributions, partially offset by pockets of market softness and disruption from the Middle East.

Turning now to Engineered Fastening. Second quarter revenue was down 18% as the Aerospace Fasteners divestiture reduced revenue by 21%. On an organic basis, the segment grew 3%, with volume contributing 2% to growth and higher pricing contributing 1%. Currency was flat. Organic revenue performance was driven by low single-digit organic growth in Automotive Systems and Fasteners, which outpaced the market as well as broad-based strength across global industrial markets, resulting in high single-digit organic growth for that portion of the business. Adjusted segment margin for Engineered Fastening was 13% in the quarter. Year-over-year expansion of 220 basis points was largely driven by net productivity gains and favorable volume and mix in automotive. Net tariff refunds contributed approximately 50 basis points. Segment margin continues to be favorable on a year-over-year basis.

In summary, through effective market activation and demand generation and consistent execution of operational cost improvements, we delivered second quarter top line and margin performance for both segments slightly ahead of our expectations, and we are confident in achieving our full year targets. Before I turn to our brand and strategic highlights for the quarter, I want to take a moment to remind everyone of our guiding ambition, and that is to empower our end users to conquer their greatest challenges through groundbreaking solutions and becoming their partner of choice. Accomplishing this requires a commitment to quality, agility and innovation. That ambition is shaping how we focus our portfolio, where we invest and how we execute. It is also at the core of the strategic imperatives guiding our company, purposeful brand activation, operational excellence and accelerated innovation.

As we continue to build a world-class branded industrial company, the progress we are making across DEWALT, STANLEY and CRAFTSMAN is a reflection of our strategy in action. Across all 3 brands, innovation and platforming are helping us to move faster and serve end users more effectively. We are directing investments towards the markets with the best prospects for growth, working together with our channel partners to serve end-user categories where we see the greatest opportunity to activate each of our brands, deepen market penetration and generate attractive returns. And underpinning all of this is our continued focus on operational excellence, which is enabling us to execute with discipline in what remains a geopolitically uncertain environment.

I'll start with DEWALT, which continues to lead as our growth engine focused on the Pro. In a world with limited supply of skilled trade labor, our professional end users are looking for solutions that help them to work more productively and with greater confidence while remaining safe. That need is increasingly relevant in nonresidential construction, where the market context is strong, especially in areas like data centers, power generation and prefabrication manufacturing. The majority of the professional needs in this space are served through the commercial and industrial distribution channel. Against that backdrop, we expect our U.S. commercial and industrial channel annual sales to approach 10% of total Tools & Outdoor sales in 2026, assuming roughly double-digit organic growth this year.

Our ambition for DEWALT is to be the partner of choice for the professional end user. This means serving the full cycle of design, construction and operations for large-scale commercial projects. This is more than a statement or an aspiration. It is the direction that has been guiding our investments to drive demand with the professional, including strong penetration within the U.S. commercial and industrial channel. Projects predominantly served by this channel represent trillions of dollars of committed capital spending over the next 5 years. The expectations are demanding. The time lines are tight, and the owners and project managers have no tolerance for downtime. To succeed in this type of environment, holistic solutions are required to support our customers and end users every hour of every day. Over the past 2 years, I have spoken about the investments we are making to strengthen our go-to-market capabilities and expand our field presence.

Let me talk about how that comes to life in the U.S. commercial construction market. We have hired professionals with deep experience in large job site processes and project management and dedicated them full time to specific large construction sites. As project solution managers, their role is to serve as the primary point of contact for the general contractor, ensuring DEWALT shows up as a coordinated partner to support successful project execution. Take a look at Slide 6. The person pictured in the center is one of our DEWALT project solution managers. I spent a day with him recently at a major data center project. Our project solution managers are the central hub of all DEWALT activity happening on a project site. In addition, DEWALT assets and capabilities encompass the commercial construction ecosystem and our approach to full-scale project life cycle solutions.

We always begin with safety and productivity. Our Perform and Protect product line of over 200 end user-oriented solutions are designed to defend against one or more of the following: dust inhalation, loss of torque control and tool vibration without sacrificing the performance that professional end users demand. These safety features are especially important when we are working with the owners and general contractors at the mega construction sites. We support the end-to-end workflow through an integrated hardware and software portfolio. For example, our anchor and fastening solutions are valued by our end users as part of our comprehensive offerings, which span the design, construction and operations of a job site. DEWALT construction technology, digital solutions also complement our hardware portfolio and all work together to support a safe, productive and profitable job site. We also partner with local distributors to offer on-site product availability, allowing us to serve the professional end users directly on the job site.

Next is training. We provide on-job site training resources in partnership with the general contractor. We align with the project schedule to provide tailored application-based training for the specific tools and work being done each day. We take a 360-degree approach to training and recently launched DEWALT On-Demand, which allows users to scan a QR code on a tool and access multilingual manuals and resources online whenever they need them. To surround and engage with the end user, we have invested in hiring hundreds of trade specialists that work with contractors in the market to ensure that they are familiar with and have access to all DEWALT solutions designed for their particular trade. We bring the newest innovations to them and help them operate from their fabrication shop to the job site. We have also hired salespeople to call on the distribution channel to ensure that our products and solutions are always available to end users, contractors and job sites.

Further complementing the Global DEWALT brand strategy, including the efforts of our trade specialists in the field and our sales and distribution resources, our global DEWALT No Quit marketing campaign is ramping up across digital channels and our global influencer network continues. We are seeing indicators that this campaign is having a measurable impact on demand generation. We also invest in trade schools to help build a well-trained workforce. Over the last 3 years, we have invested $27 million through our DEWALT Grow the Trades program. and we're committed to investing $60 million by 2030. These efforts support the critical need for skilled tradespeople and are also synergistic with our business strategy. At the same time, we work with the owners and developers of mega construction sites to understand where and how they will need skilled tradespeople for future projects. We then bring these learnings back to trade schools to help build, educate and upskill workers for the future.

Through our full ecosystem approach, DEWALT makes sure the right products are in the hands of well-trained end users at the right time. Taken together, these capabilities and initiatives continue to deepen DEWALT's relevance to help improve safety, productivity and profitability for our end users while strengthening our position as a trusted partner. It also further reinforces DEWALT's role as a key driver of profitable organic growth. In addition and just as encouraging is the performance across the STANLEY and CRAFTSMAN brands. While there is work ahead, we believe positive organic growth in the second quarter for both brands is an important indicator that the actions we are taking are translating into results. In the case of STANLEY, a brand revitalization, product refresh and commercial actions are building STANLEY's position in the market and creating a more durable platform for consistent growth over time.

Our international field resources are focused on working closer with channel partners to refresh in-store walls and optimize shelves in ways that help improve sell-through, broaden assortment uptake and strengthen conversion into our brand. Similarly, CRAFTSMAN brand positioning and portfolio expansion is resonating with consumers, and the new V20 advanced batteries have been well received and supported strong V20 platform performance in the quarter. CRAFTSMAN continues to strengthen its role within our business portfolio with an improving margin profile and a robust product road map, including the wave of new products hitting shelves now and through the balance of the year. There is an exciting runway for continued growth ahead. None of this would be achievable without the commitment of our teams around the world. I want to thank them for maintaining a customer-centric approach and for continuing to advance our vision of building a world-class branded industrial company. Their focus, resilience and execution are what make our progress possible.

I will now pass the call to Pat to discuss more detail on the performance in the quarter, to outline our 2026 guidance and to share progress on a few key performance metrics.

Thank you, Chris, and good morning to everyone joining us today. I will start by providing a bit more detail on our adjusted EPS outperformance in the second quarter and then turn to guidance. As Chris noted, second quarter adjusted EPS was $1.57, exceeding the midpoint of our April guidance range by $0.37. Above-line operating performance was largely in line with our expectations with the outperformance primarily driven by below-the-line items and the net tariff refund benefit. The below-the-line items made up approximately $0.20 of the outperformance, with roughly half of that from discrete tax items, along with lower interest expense and other factors. The tax benefit was purely timing, and we still expect the adjusted tax rate to be at 19% for the full year.

Relative to our expectations for 2Q, interest costs came in lower due to strong operational cash flows, which meant less short-term debt on the balance sheet. On a year-over-year basis, interest expense was lower due to the debt reduction following the CAM sale in the quarter. The remainder of the outperformance came from a net tariff refund benefit in the quarter. This net benefit reflects the Phase 1 tariff refunds we received during the second quarter, partially offset by variable incentive compensation, growth investments and taxes associated with those refunds. While a portion of the costs offsetting the refund landed in 2Q, the remaining portion will flow through in the second half of the year, primarily in the form of incremental growth investments.

This is why we are not adding the full $0.17 benefit realized during 2Q to our full year EPS guidance as the incremental investments will be reflected in 3Q and 4Q EPS. But the bottom line is this, tariff refunds provide us with the flexibility to accelerate investment in our strategic growth priorities, and we have already started making such investments in the second quarter.

Now let me talk you through some of the key underlying assumptions embedded in our updated guidance. First, consistent with the prior guidance assumptions, we maintain our view that the new Section 301 tariffs, including those implemented just last week, are likely to be introduced during the next few months at the same level as the old IEEPA tariffs, which means our underlying run rate tariffs costs are expected to return back to the prior IEEPA levels within a few months. This is our current expectation, but as policies are finalized, we may update our assumptions as appropriate. Second, a temporary period of lower tariff rates continues to persist as the Section 122 tariffs were lower than the former IEEPA tariffs and the subsequent 301s are not yet fully implemented. This temporary tariff tailwind, however, is still being offset by persistent inflationary pressures from battery metals, tungsten, oil and oil derivatives.

For 2026 guidance purposes, we expect these to neutralize each other. Given inflationary pressures remain persistent, it appears more likely than not a price increase will be necessary by 2027. Third, as we think about the full year, we are only including the tariff refunds we have received during the second quarter, along with the partially offsetting costs and taxes. We have not included any possible second half tariff refunds in guidance because the timing and amounts remain too uncertain to include.

Moving on to our guidance metrics. For 2026, we are raising and tightening adjusted earnings per share to be in the range of $5.20 to $5.80 representing year-over-year growth of 18% at the midpoint and $0.20 higher than the midpoint of our prior guidance range. Approximately $0.15 of the increase is below the line, reflecting lower interest expense due to better cash performance, the share repurchases we did in the second quarter, which will reduce our weighted shares to around 151 million for the year and lower expenses on the other net line from the first half. The remaining $0.05 reflects the expected net tariff refund benefit. We continue to expect our revenue outlook to be consistent with our prior guidance framework. Total company revenue will be about flat compared to last year, and organic revenue is still expected to grow by a low single-digit percentage year-over-year, split about evenly between volume and price. This outlook reflects our continued focus on pivoting to growth and our confidence in seizing the share opportunities across our key markets.

Moving to gross margin expectations. In line with prior guidance, we anticipate full year adjusted gross margins will expand by approximately 150 basis points year-over-year, exclusive of the net tariff refund benefit. This is primarily driven by net productivity with additional contributions from pricing and product mix. We estimate that the net tariff refund will add an incremental 60 to 70 basis points to our full year adjusted gross margin forecast. We continue to have conviction in achieving 34% to 35% adjusted gross margin in the second half, and I will talk more about that on the next slide. We now expect SG&A as a percentage of sales to be around 23%, which includes about 60 basis points of incremental costs from compensation accruals and growth investments related to the tariff refunds received. We will continue to manage SG&A thoughtfully, allocating capital to strategic investments that position the business for long-term share gains.

Keep in mind, this allocation of refund dollars to growth investments is incremental to the $75 million to $100 million of growth investments we planned for 2026 at the start of the year. They will further advance our robust innovation pipeline and fuel market activation with the goal of enhancing brand health and accelerating organic growth. Free cash flow ranges have been raised to incorporate tariff refunds received in the second quarter. With that, we expect to deliver within the range of $600 million to $800 million, including projected taxes and fees associated with the CAM divestiture. Excluding such payments, free cash flow is expected to be in the range of $800 million to $1 billion. Our free cash flow performance is supported by a disciplined approach to working capital management, progressing inventory towards pre-pandemic norms while remaining attentive to our ongoing tariff mitigation and footprint optimization initiatives.

We were pleased to make progress on inventory reduction in the first half. Looking at our segments, we reiterate our plan for organic revenue growth and segment margin expansion in both segments. Tools & Outdoor is still expected to deliver low single-digit organic growth in 2026, led by market share gains in what we anticipate will be a roughly flat to down market. Through the remainder of 2026, we expect our demand generation initiatives, new product launches and strategic investments in the brands will position us to grow the top line with a focus on outperforming the market. Adjusted segment margin is expected to improve year-over-year, driven primarily by productivity gains, tariff mitigation and thoughtful SG&A management.

Engineered Fastening continues to be on track to grow low single to mid-single digits organically, and we expect both our auto and industrial pieces will outperform the market. Adjusted segment margin is expected to improve year-over-year, primarily due to volume leverage and continuous operating improvement.

Turning to our other 2026 assumptions. Our GAAP earnings guidance of $4.60 to $5.45 includes pretax non-GAAP adjustments ranging from $0 to $40 million, inclusive of the second quarter CAM gain. Our full year interest expense is now expected to be about $255 million, which is slightly lower from prior guidance, resulting from a lower debt profile and strong free cash flow performance year-to-date. We now expect other net to be about $230 million, owing to lower cost in the first half.

Now for the third quarter guidance. We anticipate net sales to be around $3.7 billion, which will be flat overall due to the portfolio moves, including the CAM divestiture and transition of gas walk-behind mowers to a licensing model. On an organic basis, we expect sales to be up 3% to 4% for the total company as well as for the Tools & Outdoor segment. Adjusted earnings per share are expected to be approximately $1.50 to $1.60, including the incremental investments directly related to the second quarter tariff refunds. Our adjusted EPS for the quarter assumes a planned tax rate of approximately 22% and a share count of about 150 million.

Turning now to Slide 8. Our path forward on margin expansion and capital deployment remains consistent with what we outlined previously. In the first half, we overdelivered on the year-over-year improvements we anticipated, whether you include the net tariff refund or factor that out. We are encouraged by this and see it as further evidence of our ability to navigate a difficult macro environment and still meet our targets. As we look to the second half, we continue to have conviction in adjusted gross margin reaching the 34% to 35% range for the half year, a long-standing objective that continues to guide our efforts and priorities.

This target assumes no meaningful impact from the tariff refunds received to date since that benefit landed in the second quarter AGM and most of the related second half investments are landing in SG&A. This second half improvement is expected to be driven by productivity and tariff mitigation initiatives, the latter of which should make a meaningful contribution as we continue to make progress on USMCA compliance and shifting production for our U.S. tools business from China to North America.

We continue to target 35% to 37% adjusted gross margin by the end of 2028, as we stated on our last earnings call. On capital deployment, we closed the CAM transaction on April 6. We have used the vast majority of the net proceeds towards debt reduction of approximately $1.7 billion in the second quarter. We also executed $250 million of share repurchases during the quarter, as Chris mentioned, we will pursue share repurchases opportunistically. Such repurchases will remain a capital allocation priority for the near term. We are firmly on track for net debt to adjusted EBITDA to be at or around 2.5x by year-end, inclusive of buybacks. Free cash flow outperformed in the first half, landing at approximately $250 million, which included positive contributions from both operational cash flows as well as tariff refunds. We remain committed to disciplined capital allocation and accelerating value creation for our shareholders, including funding organic growth, returning excess capital to shareholders efficiently and if and when appropriate, considering bolt-on M&A.

All the while we strive to maintain an investment-grade credit rating. With our sharpened portfolio, disciplined cost and capital allocation and a relentless focus on our customers, we have the foundation in place to respond to market dynamics, deliver growth and create long-term value for our shareholders.

Thank you. I will now return the call back to Chris.

Thank you, Pat. As you heard this morning, we are focused on what we can control, i.e., executing our strategy. We are confident in our path forward and our ability to activate our brands to generate demand, drive operational excellence for efficiency and productivity gains and accelerate innovation to serve our end users. We remain committed to driving towards our near-term targets and long-term goals. Through disciplined execution of our strategic priorities, we are strengthening Stanley Black & Decker's ability to deliver sustainable, profitable growth and create long-term value for our shareholders.

We are now ready for Q&A, Michael.

Thanks, Chris. Operator, we can now start the Q&A.

[Operator Instructions]

Our first question comes from the line of Tim Wojs of Baird.

Maybe just first question, Chris, just could you add some color on the rebound that you saw in the power tools business this quarter? I know it's been weaker the past few quarters. So maybe there's some catch-up there. But I think 8% growth in that line of business might be the strongest growth rate we've seen in several years. So just could you talk about kind of what changed and how sustainable that type of growth is?

Yes. So first of all, nice to hear from you, Tim. I think it would be obvious to say that we're excited about that trend in the business. And when we think about all the things that we've been talking about doing, not only in the professional segment, but also as we've been working with our retail and channel partners, we really believe that, that is all starting now to come to fruition. We did see increased placement with our -- with a lot of our key channel partners as they have seen the benefits of our pipeline for product development coming through, not only in DEWALT, but also STANLEY and CRAFTSMAN, as we referenced earlier. And I think that it should be noted that as we noted in -- I think it was our previous earnings call, we talked about wanting to really sharpen our focus on how and where we were promoting. And those promotions have been very strong for the company and accretive as you saw as it came through in the margin line. So really excited about the momentum we have. And the nice thing is to see that we're seeing the growth across all 3 of our core brands as well.

Okay. Great. And then maybe just as a follow-up, Pat, it sounds like in the guidance, the IEEPA kind of tariff assumptions are kind of offsetting raw materials. But then it also sounds like at some point, you're going to have to kind of take price. So is there any way to kind of bucket or size what the raw material kind of annualized inflation impact might be at this point?

Yes, there's a lot of moving parts, Tim. So I think IEEPA, I wouldn't conflate with inflation, at least not the IEEPA refunds. The IEEPA favorability that we've had this year, meaning that those particular tariffs stopped after the February court ruling and then were replaced by lower level 122 tariffs. They provided favorability this year. And as we've said on the last earnings call, inflation in battery metals, tungsten, oil and oil derivatives have created inflationary headwinds. I'd say the order of magnitude in this year's P&L, roughly kind of $100 million each, right, $100 million of tailwinds, $100 million of headwinds, and those are offsetting. On the actual IEEPA refunds, those are netting out at about $0.05 on the full year. They were $0.17 in the quarter. And the difference between those 2 things are just the timing of the growth investments. The preponderance of the growth investments will take place in the third and fourth quarter.

So I know a lot of moving parts. But I would say, in the year, this year, the headwinds and tailwinds offsetting and IEEPA refunds allowing investment. I'd say as we look into next year, you're probably looking at a run rate inflation that's probably roughly equivalent to that headwind, somewhere around $100 million or something like that. But obviously, as we go through the back part of this year, we'll be looking at all the factors that affect '27, and we are very committed to our margin targets and our pivot to growth. So everything will be formulated for the '27 game plan. We'll address inflation as necessary with an eye towards achieving our margins and still driving growth.

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

Chris, I just wanted to maybe just expand on Page 6, where you laid out some of the investment priorities. I guess the spirit of my question is on -- in the second quarter, the big pickup in SG&A, it's not easy to efficiently invest so quickly. So I'm just curious, are we seeing here kind of more investment in new product vitality engineering? Are we -- are you hiring more people? Just curious how you're deploying the kind of the investment spend so efficiently? That would be my first question.

Yes. Nice to hear from you, Nigel. It's a great question. I think that our confidence in investing and where the investments have gone have been into the core areas that we've been talking about for a while now, specifically in the go-to-market activation with feet on the street. We talked a little bit about what we're doing with enhanced investment in social media for our brand activation as well as the new product pipeline that we've been pushing. I would say that over the past few years, we have been, I'd say, judicious and moderated in how we have been investing those dollars to be able to build the infrastructure and muscles to be able to absorb and take advantage of and then be able to drive accretive growth with those investments. And we have seen not only the growth and the ability to do so, but also the results.

And what we did and what we have been doing as we've accelerated that investment, specifically with some of the refund dollars is really doubling down in those areas where we know the market is ready for the investment. Our company has the structure and the leadership to be able to take advantage of those investments. And we've already seen positive progress and payoff to those investments as we've been tracking the ROI as we've gone along. So it's really just taking a look at how we could accelerate and think about pulling forward some of what we already knew we were going to do and with an eye on really focusing on those areas that we have seen the success already. So we feel very, very confident about where we're investing those dollars.

That's a great point, Chris. So you mentioned pulling forward some investments. Does that imply that we're seeing some 2027 investment here being pulled into 2026? And then just kind of related to that is, I'm guessing your sort of total tariff refunds could be considerably more than $100 million or thereabouts. So I mean, it doesn't feel like maybe do you further accelerate investment spend if you do get more tariff refunds in the second half of the year? Or are there other things that you can kind of invest in to kind of absorb that benefit?

So to answer the first of the follow-up questions would be, yes, there is some acceleration. And as we get into kind of planning out our '27, I think that will come through. But clearly, we have been building a multiyear road map on where we wanted to grow and where we wanted to invest. So there was no kind of dearth of opportunities for us to take a look at where we would be willing to accelerate. And then as far as the future tariff refunds, I think at this point, as Pat stated, none of that is in our guidance. And candidly, at this point, it is -- the amount, the timing and whether or not anything or what will come through is a little bit too fuzzy to see right now. So we're not really banking on or including that in any of the guidance. Should there be follow-on, like I said, we've built a road map. We would know what we would do and when and how we would do it. So I feel confident that, that would not be a bottleneck in the process.

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

I wanted to kind of follow up on your answer and you touched on the prior one. On the growth reinvestments as you've kind of gotten the tariffs and you're reinvesting in some of the stuff, is it just that your marketing is more effective than it was? I don't know how much of these are kind of price discounts and maybe the market is more price sensitive and you're seeing a bigger return there. It just seems like you put together the power tools, 8% and the comments you just made that you're seeing pretty good return. And I'm curious what's changed, whether it's more price sensitivity, whether it's more innovation, whether it's more targeted marketing, and I'll stop there.

Yes, Rob, thanks for the question. Yes, I would say that at -- really where we're seeing is that we've been building a lot of momentum in the background as we've been very consistent over a number of years of investing in the people, the go-to-market, the products and the innovation that we need in order to be successful. And as we have now had those in place and as we continue to build upon them, I think what we're seeing is what the opportunity that lies ahead, especially when -- as I mentioned and spent some time in the U.S. commercial and industrial channel, where the market context is so strong, I think that we have our strategy in preparation meeting a very nice market. I do think that there -- it is clear that the consumer is generally more motivated by promotion right now. And thankfully, for us, and how we've laid it out, the products that we want to promote and the products that the consumer is motivated to buy from promotion are also in line with the -- strategically, the products we want to sell and the products that drive the best return and margins for the company.

So it's -- there's really no one answer, and it is not a moment in time. I think what you're seeing is a number of quarters of hard work and consistency starting to pay off. Now there's a lot of hard work ahead, and there's going to be a lot -- the macro, I'm sure, will remain volatile. But I am confident in our team's ability to not only continue our consistent approach to the marketplace, but be able to make the decisions that are required in order to continue not only our growth, but our margin journey. And Pat referenced what we have as we look at the back half of the year and inflation that is impending, and we'll make those decisions on how we continue the margin journey accordingly with growth as we go through the back half of the year.

Our next question comes from the line of Adam Baumgarten of Vertical Research Partners.

I just had a question on the year-over-year promotion benefit. Do you have a sense for how much that impacted the volume growth in Tools & Outdoor in the second quarter?

No, Adam, I wouldn't say we do. I mean, I would say, as Chris said, I think the growth we're seeing is part of a multiyear game plan. And obviously, as an enterprise, we continue to work to build momentum across each of the brands with a mix of innovation and marketing levers. I would say we did start talking about as far back as the third or fourth quarter of last year and certainly the first quarter of this year of the fact that we had competitors taking price the first third of this year. And then we were certainly tailoring our promotions a little bit differently this year. But we haven't changed list prices.

We don't have kind of an intention to do that on the downside. And all we've been doing is kind of dialing in promotional activity as we've learned more about elasticity kind of in this post-tariff high inflation environment. But I wouldn't say there's anything more going on in that regard than just learning the lessons of consumer level elasticity at the SKU level and deploying that. And as Chris mentioned, we're going to keep on a longer-term investment journey in the form of innovation and brand building to drive continued growth going forward.

Okay. Great. Good to hear. And then just switching to Engineered Fastening, just on the industrial side, maybe the pockets of strength you saw in terms of end markets there would be helpful.

Yes. I think in the Engineered Fastening business, first of all, I'd like to give credit to Thomas and the team and really the hard work that they've put in. And it has been less of the headline, but the same type of work has been going on in Engineered Fastening as has been going on in Tools & Outdoor, where we made a conscious pivot in the past 24 months to really focus on the industries where we believe that we had a differentiated advantage that we're going to be growing and that valued our products such that they would drive high margins. And we've been able to invest and succeed in growing above the markets, particularly we noted the success that we've been seeing in automotive. In the industrial segment, we have really been seeing some nice level of success in the solar world as well as there are a lot of the products that are used in data centers as we are working on that in the tools business, the Engineered Fastening comes along with it as well.

So I think that the team has not only done a great job at identifying and targeting those high-growth verticals where we would be able to drive above-market growth and at nice margins, but have really shifted our resources, our innovation and our application engineering and our processes to be more reactive to customer needs to be able to be successful in building a better pipeline in those areas as well. So it's really -- I think we're in the early innings of that, but it's good to see some of the progress that team has made.

[Operator Instructions]

Our next question comes from the line of Jonathan Matuszewski of Jefferies.

This is [ Andre Simon ] on for Jonathan. In the past, you've spoken about STANLEY and CRAFTSMAN turning positive by midyear and in the second half of '26. With both brands turning positive organically in 2Q, is it fair to say that those brands are exceeding the time line that you had set? And then looking ahead specifically for CRAFTSMAN, can you talk about how the new product in V20 is setting that brand up to capture share when the DIY demand market recovers?

Yes. So I'll start and say that I think that we're still on pace for the STANLEY and CRAFTSMAN progress that I've laid out. It is encouraging to see that all of the 3 core brands grew nicely in the quarter, and we want to highlight that. But there's a lot of hard work ahead in all of the brands that we're going to keep on putting in. I think that the time lines that I laid out about kind of back half of the year for STANLEY and going into '27 for CRAFTSMAN for consistent performance, I think, are still the relevant benchmarks and what we're planning on and what we're holding ourselves and our teams accountable to.

As far as it pertains to V20, really, the V20 as we've been improving and launching more advanced batteries and then the products that, that DIY needs alongside those batteries, I think that it has set us up for success as we -- it's kind of one of those things that you -- as you build out a very desirable ecosystem of products, it kind of builds on itself where we get the right products at the right performance point, at the right price point going forward in CRAFTSMAN, I think you're going to see continued momentum.

And with the amount of emphasis we've put in the product development in that area, we're going to continue to see the momentum of those new product launches continuing to expand our addressable market with that DIY as well. And I would be remiss to say the amount of work that our channel partners have put in with us to help position that brand and the excitement that they see in the new innovation and as well as the expanded product V20 platform there is exciting, and it's a big part of the equation as well.

Our next question comes from the line of David MacGregor from Longbow Research.

I guess I just wanted to ask about working capital. You've guided to $600 million to $800 million. Just how much of that is working capital contribution? I think you'd indicated $200 million last quarter. So I guess I'm just looking for an update. And then I guess related to that, to the extent that you're starting to invest in a lot of these other programs and presumably, that continues into 2027 to the extent they're productive, why wouldn't they? But will they require working capital support? And how will that influence that cash flow?

Yes, David. Yes, for this year, on a full year basis, we're still targeting $200 million of working capital reduction contributing to the overall cash flow for the year. Nothing material has changed in that regard. And as we look forward, I would still say we're still working to get to the 135 days on kind of a run rate days sales and inventory level, which is kind of towards our pre-COVID threshold. And so obviously, we still have some footprint things ahead of us, and those transitions can cause some ebbs and flows, but I don't see anything on the horizon that kind of knocks us off that trajectory. And in fact, I think we'll be a good portion of the way there by the time we get to the end of this year.

Our next question comes from the line of Brett Linzey from Mizuho.

Lots of moving pieces here. I guess as it relates to the 2Q performance, well ahead, including the gross refunds, but below on an underlying basis, at least versus my forecast. Were there cost or productivity actions that you had planned to take in 2Q that you might have shifted to future quarters as your visibility on refunds began to form? And I guess just how did Q2 underlying performance come in relative to your internal forecast?

Yes, Brett, I would say our 2Q was very much in line with our expectations. You could pick kind of nits and nats, but there's nothing in Q2 that wasn't material. And in fact, as the key metrics of growth, adjusted gross margin without the tariffs and operating income dollars, we're kind of right there or thereabouts on all of them. And in fact, kind of slightly ahead on the growth at AGM. We got benefits in the quarter from a mix of the tariff benefits that came in ahead of the investments we'll make in the third and fourth quarter. And then we had some below-the-line items, interest expense, some pension expense, and a few other items and then a discrete tax item that was about $0.10. So I kind of look at it as operationally on the mark with some positives around sales and gross margin and then below-the-line favorability and tariff refund favorability.

The back half of the year, we'll invest a portion of that tariff refund favorability. So what was a $0.17 net in the quarter goes to $0.05 net on the year just through growth investment. And we give you all the nontax benefit that happened below the line and the tax benefit is just timing within the year. So I think, to your point, lots of moving parts. It can be difficult to keep them all straight. But I would say, look, we planned for a tumultuous year for better or worse, that's kind of what we're living.

We're expecting both in the quarter and the year to deliver the year operationally, and we hadn't planned for a conflict in the Middle East. So I think that says a lot about our ability to navigate challenges, including new challenges. So operationally in the quarter and the year, delivering -- we have some favorability below the line. We're carrying that forward in our guidance range. And then we have some tariff refunds, which we didn't plan on. We're using most of that to invest in growth, and there'll be a modest amount that nets out. And really, the change of $0.20 on the full year is 3 quarters below-the-line benefit and $0.05 of tariffs. So lots of moving parts, but I take it as all positive that we continue to deliver in a challenging environment. And we're trying to use those funds to both make this a good year and set up future growth.

Our final question comes from the line of Sam Reid of Wells Fargo.

This is [ Eric ] on for Sam. Appreciate the time. You kept the second half gross margin guidance of 34% to 35%. I was just wondering if you can talk to sort of the cadence of how you're looking at Q3 versus 4Q. And then with the rising sort of still elevated costs and tariff changes, does that change sort of how you're thinking about the sequencing or the puts and takes within Q3 or Q4?

Yes, Eric, I would say both of the quarters are going to be in that range, 34% to 35%. Q4 might be slightly ahead of Q3. Recall for our income statement, a lot of what flows through COGS in a given quarter or half year was put on the balance sheet 6 or so months ago. So a lot of what effectively are going to be our cost of goods sold in the back half of the year were cost of goods sold that were put on the balance sheet in the first half of the year. And so while inflation that is unfolding in real time right now has a modest effect on a current quarter, it mostly gets put on the balance sheet and comes off the balance sheet next year, at least the second half inflation does.

And so the inflation dynamics we've been talking about, we're just talking about to make people aware that we see them clear eyed, and we're designing plans and actions to make sure that '27 stays on the trajectory we have been telegraphing and that we continue to deliver growth and margin improvement in '27. I think a lot of what is to come with third and fourth quarter gross margin delivery is largely been on our balance sheet and the variances from one quarter to the next are going to have a lot more to do with things like product mix and how much of the holiday season shifts at the end of the third quarter versus in the fourth quarter and those types of dynamics or things like promotional mix within the quarter. But at least the structural cost elements to deliver that 34% to 35% are already in place.

That is all the time that we have for the Q&A. We'd like to thank everybody for their 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. You may now disconnect.

12:45 here in Chicago. My name is Sam Reid, the homebuilder, building products and distributor analyst at Wells Fargo. Joining me here today is Chris Nelson, President and CEO of Stanley Black & Decker. I'm really excited to have Stanley here today. This is my first opportunity to meet with you all on a public setting like this. So great to connect, Chris, and looking forward to some good dialogue.

Absolutely. Very excited to be here, and it's been an exciting year and part of an exciting journey for the company. We wrapped up our, kind of, our transformation coming into this year, punctuated by the divestiture of our CAM asset, and that allowed us to really put our balance sheet in good position and be front-footed for executing our strategy going forward. And that's really all about activating our brands with purpose, the core Stanley DEWALT and CRAFTSMAN brands, making sure that we drive operational excellence throughout the organization to be able to fuel the investments back into the business and then really working hard to innovate our pace of innovation because this is an industry that rewards innovation with higher sales and higher margins. So we're excited about that. We've made a lot of progress, and we're looking forward to the years to come as well.

Absolutely. You sort of front ran my question, but -- so I'm going to re-ask it maybe a slightly different way.

Maybe I'll answer more interestingly.

You already answered it perfectly interestingly. So -- but in terms of the transformation, just to take a step back, you've gone from being a multi-industry company to really more of a pure-play building product type company. Talk through kind of what's gone -- how that transition has come in line with expectations versus perhaps some of the surprises that might have come up along the way?

Well, as you know, we have, as a part of the transformation, really honed our portfolio to really -- we're a Tools & Outdoor and Fastener business that is really focused on making our end users more efficient, more productive and safer on their job site, whether that's a construction site, an automotive factory, whatever it would be. So as a part of that focus, we then really needed to make sure that we were focusing on what we were going to do to win within that. We like the end markets. We love the construction end markets. We think we have a great position in those markets. We think that they're long-term durable and are going to be growth oriented as well. And we think we like the competitive structure and the margin structure they're in.

So, making sure that we understood where to focus, how to focus, how to play was the first thing. And that focus has really allowed us to hone in on our strategy and making sure that we really worry about our core brands, our DEWALT, which is about $7 billion of our sales. And we've invested significantly in that brand, not only in the technology, the product development, but also the market activation, working closely with those professional end users, revitalizing the Stanley brand with new product lines, new design language, new technology and a focus on that smaller rescon contractor and then CRAFTSMAN focused on the DIY.

So that is -- the good news is a lot is going well, and there haven't really been many curveballs that I've seen, and I've been with the company for 3 years now as far as the strategy, how to execute and then our road to execution, making sure that we hit all of our kind of checkmarks along the way. And we've been doing that with the balance sheet. We've been doing that with our margins. We've been doing that with pivoting to growth, and we've been really, really excited with what we've accomplished. Of what has been the biggest kind of, as you said, the unknown or the surprises have really been the macro has not been what we anticipated. And certainly, when you look at whether it be the housing market, the extended issues there and then certainly, as we entered into the tariff regime that was some things that we needed to react to.

And I'm very happy with the way the organization has reacted and shown our execution chops through that. And now as we kind of navigate what's going on in the Middle East, I'd say it's an interesting kind of perspective to have because while it has been a lot of things to navigate and it's been unexpected, I would say that in the long run, it's going to make us a stronger company because as we've been able to navigate that, execute and continue along our path through those unexpected twists and turns, I think that we've become a leaner, more focused, better-execution company, and it's going to make us better in the long run. And certainly, then when we start to see those more stability and a little bit more tailwind in some of -- certainly in the housing market, I think it's going to be a nice upside as well.

Absolutely. We'll probably have some questions on that a little bit later, so stay tuned. But when I think about your growth outlook, you look at Stanley, I think you guys are targeting something closer to mid-single-digit growth in the context of low single-digit industry growth. So just talk through kind of, one, what's underpinning those assumptions? And then two, kind of where the share gains potentially would be coming.

Yes. So really, as you referenced, I mean, we're thinking -- we don't have a lot in our 3-year outlook. We're not counting on much, if any, market help. So then it comes down to growing above the market. And really where we've been focused is on those core brands. When I first started with the company, I think we had gone through kind of looking back at history, we had gone through a lot of acquisitions, had a lot of complexity in the company. And I think maybe had kind of diversified our focus too much. So really honing in and saying we're going to put our resources, our capital and our efforts behind 3 core brands that we believe are well positioned in the marketplace. We're going to focus on being a brand-led company. We reorganized ourselves as opposed to product-based. We now have for our 4 brands, we have a DEWALT GM. We have a CRAFTSMAN GM. We have a Stanley GM. We have an organization. That's how we think about it. That's how we talk to our customers.

And then within that saying the decision -- it wasn't that difficult to figure out, but starting out with DEWALT. DEWALT is about a little bit more than $7 billion of the sales of the company. It's very well positioned with a professional end user. And the professional markets are certainly performing better than the DIY markets. And I thought that there were things that we could do to accelerate that performance. Specifically, we've decided to take a step back and take a look at the core -- what we thought the core trades were that we needed to invest in and continue to build on our strength in carpentry, continue to launch products to penetrate the concrete trade and then really focus on accelerating working out the workflow for our key battery ecosystems in the mechanical, electrical and plumbing spaces.

So that first step on really reorienting all of our product development to a trade-driven end user-driven approach, while it may seem simple, before it was much more from the standpoint of thinking about a channel-focused approach, going after the highest volume products as opposed to the products that really the end user needed to be able to round out their suite.

So the product development change, and then we have, over the past 2 years, put more than 600 salespeople in the marketplace, specifically for DEWALT to work with the contractors, work with the end users and be there every day, not only seeing the things that they needed from a product perspective, introducing them to our products, technology, supporting them in the training and the technology and launching our new products with them. And that has been -- the momentum has been great. We're certainly growing above market with DEWALT. We believe we have a big roadmap and to be able to come and continue that growth. So that was the first step.

And then the second, I'd say, in the line was then what were we going to do with Stanley. And Stanley was something that I think had been -- although it's in the company's name, had been, by and large, neglected for a while and had lost its way, didn't have a really well-defined end user that it was going after. So we said it's basically a hand tool business, have some power tools in it. But by and large, it's a hand tool business. It's focused on that smaller residential construction and kind of contractor. And we went and rounded out those product lines and everything that needed to be over the past 2 years from what it takes to lay out, measure, cut, et cetera, from a hand tools perspective.

And then once again, Stanley, which is about 60% of its sales are in Europe, a little bit more than that. We revitalized the sales force in Europe as well to be able to specifically focus on driving Stanley growth with those wholesalers that merchandise the professional hand tools. and then making sure that we updated the look and feel of those products as well. So that is actually going really well, and we expect to pivot to growth as we go into the back half of this year.

And then the third key area of the share is going to come from was really taking a look and saying, what do we need to do in order to get the CRAFTSMAN brand to where it needs to be. It's our DIY brand. We have said very specifically that we're going to target that DIY end user. When we acquired the brand in 2017, we acquired a brand with no product. So getting the brand product was first out of the gate. And then what we didn't do was really define what customer we're going after or what end user. So I would say we had an overspecified professional product selling into a DIY market. So for the past 2 years, we've been working to really purpose design those products at the right spec level, the right cost level for the DIY market. And that will not only help our ability to hit the right price point, but then with the margin structure that we like as well. We're going to be launching more products this year in CRAFTSMAN than we have any time since the acquisition of that business. So I think going into next year, we'll be pivoting to growth there.

So those are really the 3 core building blocks of where the share will come from. Two of them with STANLEY and DEWALT are really playing in a nice market with the professional end user. CRAFTSMAN being more in the DIY world is something that we believe we can certainly grow share in. And then as that market continues to recover a little bit, we'll see some tailwind there as well.

Switch gears and talk a little bit about pricing. You took pricing perhaps a bit earlier than some of the peer set. Just talk through kind of the rationale for that. And then also walk through how you tweaked your promo strategy as some of your peers have pushed through more price.

Yes. So while -- I mean, we hit the same thing as everybody else did with the tariff shock. And we had been for months and months before that running different scenarios of what we needed to do in order to mitigate that issue. And first and foremost, we want to make sure we had the availability for our customers. And then we said we were going to continue to support our increases in margin regardless of the tariff environment in order to be able to fuel the investment that we needed for the brands. And we knew that it was going to be something that was going to everybody was being facing. We could obviously analyze everybody's cost position and their manufacturing footprint and everybody was going to be similarly affected.

We made the decision, and I stand by it, and I think -- I would do it all over again the same way of coming out aggressively and quickly on pricing. We believe that's the right thing to do to make sure that we protect our shareholders and not permanently impair any of the structural margins that we have in the business. At the same time, we have been working with our channel partners to let them know what it was going to look like, and we have a good back and forth there. We came out a little earlier on pricing, and we expected the industry to kind of hit its equilibrium over the next several months. And in fact, this year in Q1, it kind of did was there were some larger pricing increases coming through from competitors and everybody is kind of now, by and large, at the same equilibrium level.

What that allowed us to do as well was not only that as the pricing environment normalized, we, having come out early, we were able to really take a look at what the by-SKU tactical elasticities look like as we went through and analyzed our pricing. And coming into this year, given that we were resetting the promotional environment from what was a difficult year last year, we were then able to tweak individual SKUs to say what would be the right way for us to maximize our price volume trade-off there, specifically in the promotional world.

And we talked about it that we were going to be doing it in Q4 of last year and then the fact that we had come out of the gates in our Q1 earnings and talked about it. And those are -- those actions and the results are progressing right along our plan.

Let's maybe switch gears and talk a little bit about inflation. Highly topical for just about everybody in the space. And you faced your own set of inflation, whether it's battery metal, tungsten, petroleum. Maybe just talk through kind of how you're managing through those inflationary pressures, hedging mechanisms, et cetera.

So I would say that the interesting dynamic we're facing or we're managing through right now is that, yes, we have those inflationary elements coming into our business, which interestingly are almost exactly dollar-for-dollar offset with a temporary lull in tariffs. So as we look at what's been happening over the past several months or for a 6-month time frame with the lower level of effective tariffs in the 122, it's essentially offset it almost dollar for dollar. Now the question becomes and where we're really going to have to, and we are spending the time right now is understanding what we think the environment is going to look like Q3 going into Q4 because that's when Q3, Q4, our model and our assumption, and we've talked about this publicly, is that on January -- I'm sorry, July 25, the 301 tariffs are going to come in and essentially replicate what IEEPA was.

So you're going to go back to right where you were. So that means the pricing we put in is the right amount of pricing, and we haven't changed that. The only variable now is going to be what inflation remains and what dissipates, if at all, based on what we're seeing with the potential resolution in the Middle East. When we have that data in the Q3, Q4 time frame and get ready to head into 2027, we'll make the judgment of what we need to do. I think the important thing to note is that order of magnitude, we're talking much, much, much, much lower numbers than we were faced with when we had the tariff shock. And if we look at the way that we've been able to bolster our productivity pipeline, the answer to the question of what will we do with inflation is going to be much more productivity than price going into next year. And any price that we would do would be likely more targeted in nature.

If you think about the areas that we see inflation in battery metals, if everybody is seeing battery metal inflation, you would expect everybody to have some level of pricing actions in batteries, tungsten is the same way. And I think the interesting thing is going to be to see, obviously, what happens with resins. But we don't know exactly how things are going to look coming out of Q3, but we do know we're -- just like we were before, we're on top of it, and we're going to be poised to move decisively to continue our margin journey that we've been on.

Absolutely. Maybe let's double-click on some of those productivity initiatives a little quickly. When you say productivity, can you just walk me through maybe 1 or 2 examples where you think you can bring some additional production out of the business?

So there's really 3 areas that I'd say that we're very focused on. And if I take a step back, one of the questions I get asked the most is, boy, you just went through this transformation. You took $2 billion of cost out of the business. How much more could there possibly be? Well, the interesting thing was that the majority, more than 80% of the dollars we took out during the transformation was kind of what I'd say, basic blocking and tackling sourcing. So working with suppliers, aggregating spend and driving better acquisition costs.

I have not been with the company all that long, 3 years. And I came from -- I spent a long time at United Technologies, which had the continuous improvement kind of DNA very deeply embedded into it. And I would tell you that my view of where we are as a company in driving to that level of execution performance, we have a lot of runway. So 3 specific areas. One is our ability to really implement and drive lean on the shop floor at a much more holistic level to continue to take labor content out of our products is one key area.

The second area is we are aggressively moving to reduce our manufacturing footprint. We have a lot of capacity, and we have been moving quickly to more rightsize our capacity in the region that the capacity needs to be resident. That has been a little bit up until kind of the beginning of this year, a little bit delayed because we needed to trigger all of our production moves for tariff mitigation. And it's difficult to consolidate plants when you're moving product lines all over the world. But we have now started to hit a steady clip there. So there's a nice pipeline of opportunities for us to take our fixed cost base down.

And probably -- and the third and kind of most consistent and largest lever we have going forward is I refer to it as overall material productivity, and that is through engineering design and platforming to continue to reduce the input or the overall material cost for our products, which is, call it, 80% of our cost. So that's the biggest lever to pull. By way of explanation, we were very much a siloed product development organization, where you had individual product managers that were paired with their own team of engineers.

So you'd have a drill -- a team that did drills and circ saws and impact wrenches and they'd all be separate, which is great from the standpoint of being able to work together to come out with a new product and really being best-in-class there. What we were giving up was the fact that essentially across the landscape of tools, all the components and inputs are very similar across the categories. And we were not -- we were designing the perfect motor for a drill and a different perfect motor for a saw. And if you think about not only the way that you could commonize those key components, use the scale to then leverage with your supply base, but then also from a speed of innovation, you cannot have to requalify all your new motors and design new motors.

So that's a huge lever that we've been able to, on a very regimented basis, put in a program. It really didn't exist in any real way until the past couple of years. And now we're starting to see all that pipeline of savings flow through from those initiatives. So those are the 3 areas that we've got a lot of the productivity lying ahead of us.

Awesome. And then on tariffs, you've got a few initiatives that you've been working through over the past few years, China sourcing and then USMCA compliance. Just kind of curious the state of the union on both of those.

Yes. So in our copious free time, we are -- we are then -- we were publicly -- we said that we were going to be at or below 5% of products produced in China for U.S. consumption by the end of the year. And we're on pace to do that. Now that is -- there's been a lot of great work with -- between the engineering teams, operations teams, product teams to make that happen. And we're ahead of our ramp there. So that's been going well. And then similarly, once we would move the products from -- or concurrent with moving the products from China into our North American manufacturing base, we have then been working to take up the level of USMCA qualification.

By way of kind of baselining, when we started this kind of Q1 of last year, I believe it was, we were roughly 30% USMCA qualified. They're just -- candidly, there wasn't that much of a financial incentive in our case to be so. The average industrial kind of baseline or USMCA qualification percentage is in, call it, the 75% to 85%. And we said that we'd be able to be there within a couple of years. We're well ahead of that. We would expect to be kind of running around that average by the end of this year.

And then switching gears, you made some moves on your walk-behind mower business earlier this year, moving that more to a sourced model. Just maybe talk through the rationale for that? And are there any opportunities to do more of that type of transition in other areas of the business?

Yes. So taking a step back from it, I would say that to answer the question that wasn't asked is that the CAM divestiture, I would think, is the last big portfolio shaping thing we're going to do. But then things that are what I'd say is more pruning around the edges, we're going to be doing as we take a look at every aspect, every subcategory, every part of the business that we are in, making sure that we are in the categories and the product lines that we believe have the best long-term growth and margin structure and competitive structure going forward, specifically, the area that we spend a lot of time is making sure that we believe that we're in the right areas of the outdoor business.

Outdoor in general, is a really good business. We like the long-term growth characteristics. We like the synergy between our tools and our outdoor products when it comes to a battery platform perspective. I would say that not all parts of that business do we love. And so we went and did a full analysis of what we thought the subcategories were within outdoor that we thought were going to be a growth above market that we're going to have the right competitive structure, the right technology structure that would drive the right types of returns going forward. And now we've been pruning around the edges.

One of the things that we did along those lines was, as you said, we've got -- we're getting out of the manufacturing of the gas walk-behind, it's a fairly commoditized, low-margin, low-growth business that we think is moving into electrified. So we didn't want to be deploying any of our capital there. Similarly, I'd say that there are different parts of the portfolio we are taking a look at around the edges to get that outdoor portfolio down to what we think is the right structure, but nothing big. It's more on a product line-by-product line basis.

Absolutely. And maybe moving down the P&L a little bit. Let's talk gross margins. There's some exciting gross margin targets that you all have outlined, getting to 35% and then 35% to 37%. Maybe just bridge the margin today relative to that near-term 35% target and then the 35% to 37% longer term.

So if I think about where we're going to be in first half of this year to the climb that we have in the back half of the year, where it's -- we talked about it on the earnings calls as we go exit close to that 34% rate. Really, the bridge is 40% of that bridge is driven by what I'd say is the enhanced productivity portfolio that we see coming through. So all the things I was referencing earlier. 40% of it is really driven by the fact that we -- as we saw the volume come down last year due to the market as well as from the elasticity due to our pricing changes, we were -- we moved to take the excess capacity and structure out at the end of the year coming into this year. Part of the reason was it's difficult to take your capacity down while you're moving things all over the world, and I didn't want to be reducing capacity in Mexico temporarily only to build it back up and ramp back up as we move product over.

So -- but the way that our P&L works with what goes on the balance sheet, that kind of manifests itself as being an H1 problem for margins. So 40% of it is just going to be having the adjustments we made coming into this year to reduce our fixed cost from our capacity. And then 20% of it is really continuing along the accelerated road to tariff mitigation. So that puts us in the neighborhood of kind of, call it, the 34% at the end of the year. As I think about moving into next year and wanting to have a full year that is kind of getting into that kind of 35-ish range, that's where we're going to need to make sure that we make the right calls coming out of the year on where we sit from an inflation perspective and what productivity and pricing we may need to put in.

Longer term, what I'd say is the 35% level, that's kind of all on us. Our ability to drive productivity, our ability to execute, that with very little, if any, market help, we will get there. And then it's -- to get to that 37% type of mark in a couple of years, that's going to require a little bit of a market recovery, but we'll be able to kind of chip away and continue to be at or above that 35% range as we go forward.

Sounds exciting. You've got a great Fasteners business. You obviously divested a part of it this year, but there's a lot of great stuff that's still there. So talk through the outlook for the Fastener business and kind of how you see that evolving over time.

Yes. So it's interesting. Our Fastener business, and like you said, divesting CAM to me was just a natural thing to do in our portfolio evolution. Aerospace is not a business you can really dabble in, and we are kind of dabbling in it. So I think strategically, it made a lot of sense. Obviously, we got a good number for it. The number helped us get our leverage ratio to where we want to be. But we have a pretty sizable fastener business that is in our Tools business as well, the anchors and fasteners. And it's essentially a Tools and Fasteners business in nonconstruction settings is what we do in our Stanley Engineered Fastening, meaning that we are figuring out we have tools and fasteners to be able to take labor and drive productivity into the automotive assembly world.

Right now, that's very, very, very topical for what's going on in automotive in both Europe and the U.S., and we're seeing a lot of progress there. So really, our application expertise, our automation expertise in that automotive world and our market position puts us in a great position to continue to drive that efficiency for end users and continue to see growth. We really like that business.

And then in the industrial fastener business, really making sure that we continue to focus our business on the highly differentiated, higher-margin portions of the business, whether it be -- we work with the solar field installers to figure out how -- think about you need big tools that can do all kinds of fastening out in remote areas to put up these solar fields. That's what we do for those folks. And they are on strict time lines and they don't ever have enough labor either. So it's really the same or similar business in a different setting. And we want to make sure we're going after those high-growth verticals, nuclear, solar, power generation, et cetera. So we really like those businesses.

We have a few minutes left here. I want to make sure we give the audience time to potentially ask a question. So if anyone has something they want to lob our way, go ahead. Otherwise, I've got 1 or 2 left.

All right. Well, if you guys do, you're always welcome to raise your hand. But I wanted to quickly touch on capital allocation, and that does tie back into the CAM divestiture to a degree. So you've articulated a target to get to, I believe, closer to 2.5x. Maybe just talk through kind of where you see your leverage targets over the longer term.

Yes. So I think that 2.5x is really the right level to be at for this business and especially where we are in the cycle right now. Moving forward, we've expressed that with where we are, we are going to continue to support our dividend and grow it moderately over the years as well. And then we believe our earnings will grow back into the proper yield ratio from there. Our first priority for capital deployment is going to be continue to invest in the core things that we need to drive organic growth. We believe we have great end markets, great brands, great technology. We need to continue to invest and drive that organic growth and execution. That will be number one.

Second, we're going to look at continuing to accelerate shareholder value creation through buybacks, through targeted buybacks. We were authorized for and talked about coming out of the last Board meeting, a buyback there. So we're going to continue to look at that as a way to return value to our shareholders. And then really in the near term, M&A doesn't have a big place in what we are going to allocate capital towards in the near term. I look around our portfolio, and we have everything we need to be successful. We have the brands, we have the technology. We have the resources. We have access to every geography, every market. We need to just make sure that we're executing well and driving value for our customers and our shareholders.

And then on down the road, if there are opportunities we see in a couple of years to think about bolt-ons, if there's a new technology we need, if there's a new geography or access to geography or channel, we could talk about that. But really, right now, it's going to be organic growth and then being able to take a look at those targeted buyback opportunities.

Chris, I think we've made our way from top to bottom across the P&L. Thank you so much for taking the time to talk with us today.

Okay. Absolutely. Thank you.

Awesome.

Welcome to the Stanley Black & Decker First Quarter Earnings Call. My name is Shannen, and I'll 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, Michael Wherley. Mr. Wherley, you may begin.

Good morning, everyone, and thanks for joining us for our first quarter earnings call. With us today are Chris 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 11:00 a.m. Eastern Time.

This morning, Chris and Pat will review our first quarter results, along with our updated outlook for 2026, followed by a Q&A session.

During today's call, we will be making some forward-looking statements 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 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 filings.

Additionally, we may also refer to 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.

I will now turn the call over to our President and CEO, Chris Nelson.

Thank you, Michael, and thank you all for joining us today. I am pleased to report that Stanley Black & Decker delivered a solid start to the year, outperforming our expectations on the top and bottom lines in the first quarter as we demonstrated continued progress on our strategic priorities. We are confident in our strategy and in the team's ability to continue to execute and deliver results.

For the first quarter, revenue was up 3% overall and flat organically. This was ahead of our expectations, driven primarily by a well-executed outdoor products preseason. Our adjusted gross margin rate of 30.2% was down 20 basis points year-over-year, essentially unchanged. Adjusted EBITDA margin of 9.2% was down by 50 basis points year-over-year, slightly ahead of our planning assumptions for the period. Adjusted earnings per share were $0.80, $0.20 ahead of the high end of our first quarter guidance range of $0.55 to $0.60. Pat will unpack this further later in the call.

Additionally, on April 6, we announced the successful completion of the previously disclosed agreement to sell our Aerospace Fasteners business. This portfolio change is consistent with our strategy to focus on our core business and commitment to enhancing shareholder value. The vast majority of the approximately $1.6 billion of net proceeds have already been applied towards debt reduction. We are now positioned with a stronger balance sheet and have unlocked the ability to deploy capital to accelerate shareholder value creation. We expect our capital allocation strategy to be biased towards share repurchases, which the Board has authorized.

Turning to our first quarter operating performance by segment. I'll start with Tools & Outdoor. First quarter revenue was approximately $3.3 billion, up 2% year-over-year. Organic revenue was down 1% as a 4% benefit from targeted pricing actions was more than offset by 5% of volume pressure. Currency was a 3% benefit in the quarter.

As we discussed in February, our base case assumption was that top line volatility, especially within the North American retail channel, would persist through at least the first quarter. Consistent with our expectations, competitors continued to take price and we honed our approach to promotions for select products. Also, as expected, our results this quarter reflected a decrease in volume, primarily driven by lower retail activity in North America. This was partially offset by a strong initial sell-in for outdoor products as we approach the peak selling season.

International growth and prioritized investment markets such as Eastern Europe, United Kingdom and Latin America was an encouraging outcome. Additionally, increased sales generated by professional end user demand in the U.S. commercial and industrial channel indicates that our growth investments are building momentum in the market. Tools & Outdoor first quarter adjusted segment margin was 8.7%, which was consistent with our plan.

Now for additional context on the top line performance by product line in first quarter. Power tools organic revenue declined 2%, and hand tools, accessory and storage organic revenue declined 3%, which were both driven by factors consistent with the broader segment performance. Outdoor organic revenue increased 1%, driven by encouraging preseason sales for spring 2026, particularly for ride-on and zero-turn mower offerings. While we are still in the early stages of the outdoor season, our performance thus far reflects strong execution by our team, including effective order fulfillment.

Now Tools & Outdoor performance by region. In North America, organic revenue declined 2%, reflecting trends we discussed for the overall segment. The U.S. commercial and industrial channel delivered high single-digit organic growth, demonstrating a strong return on our targeted investments in brand activation for the professional end user. I'll talk more about this in a moment.

Point-of-sale performance in the quarter was aligned with our expectations and broadly consistent with reported home improvement consumer credit card data. In Europe, organic revenue was up 1%. Growth in prioritized investment markets, including the United Kingdom and Eastern Europe, was partially offset by softer market conditions in other parts of the region. The rest of world organic revenue was flat, with double-digit growth in Latin America, offset by pockets of market softness in Asia and the Middle East.

Turning now to Engineered Fastening. First quarter revenue grew 10% on a reported basis and 7% organically. Revenue growth was comprised of a 6% volume increase, 1% higher pricing and a 3% currency tailwind. The Aerospace business continued its strong performance, achieving 31% organic growth in the quarter. The automotive business delivered 4% organic growth, outpacing the market, driven by strong North American demand and strength in global fastener systems for auto OEMs. General industrial fasteners organic revenue declined low single digits.

Adjusted segment margin for Engineered Fastening was 12% in the quarter. Year-over-year expansion of 190 basis points was primarily due to improved profitability in Aerospace and favorable automotive volume and mix.

Overall, through disciplined execution, both the Tools & Outdoor and Engineered Fastening segments delivered revenue on a reported and organic basis that was better than expected despite the challenging operating environment. Segment margin rates were also in line with expectations this quarter through disciplined execution, operational cost improvements and targeted refinements to promotional strategies.

We believe the results are evidence of the momentum we're building. We have conviction in our strategy and are confident that we are taking the actions required to ensure sustainable growth and shareholder value creation into the future. Thank you to our team for maintaining their customer-centric approach and for advancing our vision of building a world-class branded industrial company.

Our ambition is anchored by 3 core strategic imperatives: purposeful brand activation, operational excellence and accelerated innovation. I would like to share a few updates regarding how our efforts are taking root.

Starting with DEWALT. You've heard us talk many times about safety as a core end user priority and value proposition of the products we deliver. Our Perform & Protect lineup is designed to provide product features to defend against dust inhalation, loss of torque control and tool vibration without sacrificing the performance that professional end users demand. DEWALT has over 200 Perform & Protect solutions that are attracting professional end users and converting them into users of the DEWALT platform.

These types of end user oriented solutions, combined with our ongoing investments to expand our field service and sales teams contributed to the strong commercial and industrial performance in the quarter, including professional contractors fully converting from competitor offerings to DEWALT cordless solutions and lead construction contractors outfitting large new project job sites with DEWALT.

In addition, last quarter, we indicated that the STANLEY brand was positioned to return to growth in 2026. I'm pleased to share that our targeted investments are supporting new listings, largely driven by the initial phase of our product refresh and new product introductions. We are seeing green shoots and are on pace to return to growth with the STANLEY brand by midyear. Our expanded field team and trade specialists serving the professional end user are driving meaningful traction with our global channel partners, building demand as we grow together.

I will now pass the call to Pat to discuss progress on a few key performance metrics and to outline our 2026 guidance.

Thank you, Chris, and good morning to everyone joining us today. Before we jump into the guidance, let me start by providing a bit more detail on our adjusted EPS outperformance in the first quarter, which, as Chris noted, was $0.20 above the high end of our guidance range from February.

Above-the-line operating outperformance made up about half of the outperformance, driven by Outdoor. The remainder of the outperformance came from below-the-line items, most of which didn't change our full year view on those items materially. For example, our forecasted first quarter tax rate was 30%, and that landed at 26% due to the timing of a discrete tax item. But we have not changed our view on the full year tax rate of 19%.

Now let me walk you through our updated guidance and other assumptions for 2026. There are a few key updates embedded in this guidance you should be aware of. First, the CAM deal closed on the early side of the anticipated window. Practically, that resulted in us removing CAM's expected second quarter contribution from our guidance. that 1 quarter adjustment lowers our expected Engineered Fastening segment pretax profit by about $15 million, but it also lowers second quarter interest expense by a similar amount, meaning it has essentially no impact on second quarter or full year adjusted EPS guidance.

Second, there have been numerous tariff policy changes since our last earnings call, which prompted new assessments and assumptions. We expect that all-in, these tariff policy changes and our updated tariff assumptions equate to net tailwind for us this year on a gross basis compared to our assumptions at the beginning of the year.

In the near term, we have a temporary period of lower tariffs since the replacement Section 122 tariffs are lower than the former IEEPA tariffs. Our base case assumption is that new Section 301 tariffs will be introduced at the same level as the old IEEPA tariffs, which means our underlying tariff costs would be virtually the same by August as they were prior to the Supreme Court ruling in February. This is our current expectation, but that is subject to change as policy is finalized, and we will update our assumptions as appropriate.

Third, since the start of the conflict in the Middle East, we have seen inflationary cost pressures in resins and freight. Last, we have also seen meaningful inflation in recent months in battery metals and tungsten, which is applied to the tips of our sawblades and drill bits for increased durability and heat resistance. We believe the combined impact from these inflationary pressures roughly offsets the benefit from the tariff tailwind in the year.

Moving on to our actual guidance metrics. For 2026, we expect adjusted earnings per share to be in the range of $4.90 to $5.70, representing growth of 13% at the midpoint and remaining consistent with our original adjusted earnings guidance. We now anticipate total company revenue will be about flat compared to the last year, which is slightly lower than prior guidance because of the removal of CAM from the second quarter expectations.

We still expect organic revenue to grow by a low single-digit percentage year-over-year. This outlook reflects on our focus in pivoting to growth and our confidence in seizing the share opportunities across our key markets. We continue to expect 50 to 100 basis points of full year benefit from foreign exchange, which should predominantly land in the first half.

Moving to gross margin expectations. We anticipate adjusted gross margins will expand by approximately 150 basis points year-over-year, consistent with prior guidance. This is supported by top line expansion, price, ongoing tariff mitigation efforts and continuous operational improvement. We believe we are firmly on track to meet this target, and I will talk more about it on the next slide.

We plan to continue growth investments in 2026 to further advance our robust innovation pipeline and fuel market activation, with the goal of enhancing brand health and accelerating organic growth. We expect SG&A as a percentage of sales to remain around 22%. We will continue to manage SG&A thoughtfully, allocating capital to strategic investments that position the business for long-term growth.

Free cash flow is expected to be in the range of $500 million to $700 million, including projected taxes and fees associated with the CAM divestiture. Excluding such payments, free cash flow is expected to be in the range of $700 million to $900 million, consistent with our original guidance. Our free cash flow performance is expected to be accomplished through a disciplined and efficient approach to working capital management, progressing inventory towards prepandemic norms, while remaining attentive to our ongoing tariff mitigation and footprint optimization initiatives. We were pleased to deliver progress on inventory reduction in the first quarter.

Looking at our segments, we are planning for organic revenue growth and segment margin expansion in both segments. Tools & Outdoor is still expected to deliver low single-digit organic growth in 2026, led by market share gains in what we anticipate will be a roughly flat market. Organic revenue in the second quarter is expected to be up in a low single-digit range as our recent commercial efforts continue to gain traction and as we start lapping the promotional disruption that started in the second quarter last year. Throughout the rest of 2026, we also expect to see sales trends improve from our new product launches and commercial initiatives, with a focus on outperforming the market.

Adjusted segment margin is expected to improve year-over-year, driven primarily by sustained pricing actions, tariff mitigation, operational excellence and thoughtful SG&A management.

Engineered Fastening is expected to grow low-single to mid-single digits organically, which is slightly lower than our prior guidance, reflecting just 1 quarter of contribution from CAM rather than the 2 in our original guidance. Adjusted segment margin is expected to improve year-over-year, primarily due to continuous operating improvement and volume leverage.

Turning to other 2026 assumptions. Our GAAP earnings guidance of $4.15 to $5.35 includes pretax non-GAAP adjustments ranging from $10 million to $65 million. This GAAP guidance is higher than prior guidance due to an expected $260 million to $280 million gain on the sale of our CAM business, which is largely offsetting charges that are primarily related to footprint actions.

Our full year interest expense is now expected to be about $270 million, which accounts for 3 quarters without CAM and the resulting lower debt profile as well as lower interest in the first quarter.

Now for second quarter guidance. We anticipate net sales to be around $3.9 billion, down slightly year-over-year due to the sale of CAM, but up by a low single-digit percentage on an organic basis. Adjusted earnings per share are expected to be approximately $1.15 to $1.25. In the second quarter, the benefits of pricing, tariff mitigation and productivity initiatives are expected to deliver an approximate 300 basis points year-over-year improvement on adjusted gross margin, offsetting the continued impact of volume deleverage from the second half of 2025. Additionally, our adjusted EPS for the quarter assumes a planned tax rate of approximately 20%.

One additional comment to make on tariffs has to do with 232 tariffs, which were altered by a policy change on April 6. The way 232 tariff policies are applied is complex, and broad industry headlines are not always good barometers of our profit-and-loss impact. Although there was much speculation in the market about our outsized exposure to these higher 232 rates, we assess the incremental headwind to be just $15 million on an annualized basis and less than $10 million for 2026. But recall, the net of all the 2026 tariff changes, inclusive of 232 tariff changes, and our updated assumptions for the rest of the year, indicate that tariffs are going to provide a tailwind relative to our prior assumptions and will be offset by inflationary impacts caused by the war, battery metals and tungsten.

Turning now to Slide 8, let's take a step back and look at our expected implied first half and second half adjusted gross margin performance on a year-over-year basis in accordance with our full year and second quarter guidance. We expect meaningful progress for each half of this year, with roughly 150 basis points of implied improvement in the first half and roughly 200 basis points of implied improvement in the second half.

In the first quarter, we were essentially flat on AGM, down 20 basis points year-over-year due to the timing of the tariff cost realization and volume deleverage offsets we had anticipated and called out in February. As a reminder, we saw peak tariff expense and volume deleverage in the second half of 2025. The impact of both these elements rolls off our balance sheet and into our first half 2026 income statement. We expect tariff mitigation will make a bigger contribution to margin improvement as the year plays out as we continue to make progress on USMCA compliance and shifting production for our U.S. tools business from China to North America.

Looking ahead, we remain fully committed to achieving adjusted gross margins of 35-plus percent, a long-standing objective that continues to guide our efforts and priorities. We anticipate reaching this milestone by the fourth quarter of 2026, and we continue to target 35% to 37% adjusted gross margin by the end of 2028, as we stated on our last earnings call.

The other important topic on this slide I want to cover is the debt reduction that resulted from our closing the CAM divestiture to Howmet Aerospace for $1.8 billion. This is not reflected in our first quarter financials because the deal closed on April 6, after the end of the first quarter. However, this has dramatically improved our intra-quarter balance sheet and also provides us with a clear opportunity for a more flexible capital allocation approach.

Net proceeds from the CAM transaction were approximately $1.57 billion, net of projected taxes and fees. We have used the vast majority of these proceeds to reduce debt in the second quarter. We said we would target 2.5x net debt to adjusted EBITDA. The closing of CAM and our EBITDA growth focus will deliver this result. The only reason we aren't there today is due to normal seasonality of operational cash flows. But we are firmly on track to be at or around 2.5x by year-end.

Achieving this critical financial milestone provides us with greater capital allocation flexibility. We are now well positioned to respond to market dynamics, invest in growth and enhance shareholder value creation. We remain committed to disciplined capital allocation and accelerating value creation for our shareholders, including funding organic growth, returning excess capital to shareholders efficiently, and if and when appropriate, considering bolt-on M&A, all the while we strive to maintain an investment-grade credit rating.

In the near term, we are firmly focused on accelerating organic growth and using excess cash to opportunistically repurchase our shares. The recent authorization from our Board of Directors for $500 million in share repurchases provides us with the flexibility to do so.

In summary, 2026 is set to be another important year for our company. With a strong foundation set, a sharpened portfolio, disciplined cost and capital allocation and a relentless focus on our customers, we are well positioned to deliver growth and create long-term value for our shareholders. Thank you, and I will now turn the call back to Chris.

Thank you, Pat. As you heard this morning, our success will be determined by how effectively we execute our strategy, which is firmly anchored by our 3 strategic imperatives: activating our brands with purpose, driving operational excellence and accelerating innovation. As Pat outlined, we are focused on continuing to proactively manage factors within our control to effectively navigate evolving market conditions. We remain committed to driving towards our near-term targets and long-term goals.

As we look ahead, I am energized by the opportunities that lie before us and I'm confident in our strategy and the team that is executing it. We are building on our hard-earned momentum to serve our end users, and we are now positioned to accelerate shareholder value creation.

We are now ready for Q&A, Michael.

Thanks, Chris. Operator, we can now start the Q&A.

[Operator Instructions] Our first question comes from the line of Nigel Coe from Wolfe Research.

I'll try and keep the first one simple. I wondered, can you maybe just unpack for us the improvement in gross margin from first half and second half, about 4 points. I'm guessing there's a bit of CAM benefits, you mentioned tariffs -- sorry, USMCA compliance. I think there's some productivity. Maybe just help us unpack that 4-point improvement.

Yes. Nigel, great question. It's a long-term focus for us. So we have every intent on hitting it. And the good news when we talk about the third quarter in particular is we could see effectively that gross margin percentage already on our balance sheet. And from here, the only things that could really change that is if sales change meaningfully down or there was some very big new spike in inflation. So I mean, we can see the 34-and-a-fraction percentage gross margin for the third quarter already in our balance sheet.

And when you think of that stepping up from the first half to the back half, you're talking about really 3 big factors that go beyond normal seasonality of outdoor or the CAM issue that you mentioned, because these are really the ones that are going to sustain it and drive it long term, which is it's about 40% of the delta is net productivity benefits from our ongoing continuous improvement initiatives, another roughly similar amount from adjusting our fixed cost structure to the current volume environment that became apparent in the back half of last year after tariff pricing. And then the final portion, so about 20% of the delta, is just the ongoing tariff mitigation efforts.

So 3 levers of continuous improvement, adjusting to the current volume environment and then the ongoing tariff mitigation drives us there. And we have every confidence we'd get there. And sustaining it will be continuing to keep our cost structure attuned to the volume environment and dealing with inflation as it plays out the balance of the year on however the war unfolds and however kind of battery metal situation unfolds.

Okay. And just a quick follow-up on the tariffs. You made it very clear that the temporary benefit from IEEPA is offset by raw material inflation. But I'm just wondering if the -- the IEEPA benefit seems like it could be quite material. So I'm just wondering if it does create some temporary benefits in the P&L during the year, then washes out, so is that washed in pretty much every quarter?

Nigel, this is Chris. I'd say that if you look at the benefit that we see right now, it's -- we think about it, as Pat outlined in the comments, as being a temporary benefit because we do expect the 301 to be reinstated at similar levels to IEEPA. And the assumptions that we have in for that intervening period, while all in with all the changes that were mentioned, are a net tailwind, they do offset some of the inflation that we're seeing right now not only in battery metals, but what we're experiencing due to higher -- some higher input costs that we'd say are driven by the conflict in the Middle East.

So net-net, there is a bit of a tailwind, but the base assumption is that we are going to see a tariff environment that is roughly equivalent to what we left in IEEPA as when the 301s are put in.

Our next question comes from the line of Julian Mitchell from Barclays.

Just wanted to home in a little bit more on the Tools & Outdoor volume environment. The outdoor pickup, I suppose, is encouraging. Just wondered kind of what you thought underpin that and how you're expecting the T&O volumes to play out over the balance of the year given there's some market share efforts but also maybe a slightly more muted consumer demand backdrop in total?

Yes. This is Chris, Julian. I'll start with outdoor and say that I'm very proud of the team and encouraged by the way that they were able to execute in our -- what we would consider to be our preseason time frame. And the ability to fulfill orders, I think, positions us to be able to have a nice selling season.

It remains yet to be seen which direction that selling season is going to be, but we think we're well positioned to be in a good position for whatever that selling season looks like. So we could experience some upside if we see increased sell-through.

Overall, in the Tools & Outdoor environment, what I would say, and I'll say that really we haven't seen any material changes to what we would say underlying demand to look like. We did -- last call, we talked about the fact that we expected to see an inflection in Q2, partially due to the previous year comps where we -- where as you understand, we had disruption in normal promotional volumes and timing.

So those coming on this year is going to be a net tailwind as we think about volume relative to last year, as well as the fact that when we talked about what we're going to do to hone some of our promotional strategies in those periods versus what we had in Q4, we expect those tailwinds to be kicking in in the second quarter. And we're excited to see that they are on pace for performing as we would have expected them to.

But the underlying demand, as we came into the year, we thought about it being relatively flattish, and we still see it as being relatively flattish. But we feel good to be positioned from a relative basis year-over-year to be able to see the growth in quarters 2 and 3 that we had outlined as a part of our plan.

That's great. And then just when we're thinking about price and cost movements, as you said, there's a lot sort of moving around in terms of costs within the year because of tariffs and your own price initiatives. I suppose, any more color you could kind of give us on how you're thinking about that price net of cost delta in that gross margin guidance that you laid out on Slide 8, as we go through the year? And how is the sort of elasticity on price to volume playing out year-to-date?

Yes, Julian, I would say we haven't really changed our viewpoint materially for the year on price. I mean as we've said on many calls in the past, we can have deltas of up to 100 percentage points, or 100 basis points rather, in any given quarter on how promo mix dominates or not volume, and that can cause a 100 basis point swing in our reported pricing in a given quarter. But in terms of the price we plan to execute and the adjustment to promotions or select targeted opening price point, hasn't changed in any material fashion from the start of the year.

And I just would remind you, in this environment, most of the price we took -- we obviously took last year to dollar-for-dollar offset estimated tariff costs. And then we would reclaim our margin relative to those tariff costs by tariff mitigation and that is still very much our game plan.

So the structure of everything stays the same for this year. As you heard, we have some tariff tailwinds, largely from 122s being lower than IEEPA's, and then we have some inflation from battery metals, tungsten and oil derivatives from the war. And those roughly offset in the year. Obviously, those things can change on us during this year because there's more trade talks going on this year and there's obviously still to see how the war plays out. And if and as those inflationary factors become more apparent in the back half or the middle of the year, we'll decide what that means for pricing in the latter part of the year or to set up 2027.

But right now, if you asked us, our 2026 price plan is consistent with our opening guidance and everything is playing out in accordance with that, and any inflationary factors from this year that affect the go-forward, we'll deal with in the back half of the year or the early part of '27?

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

Thanks for all the details. Maybe just to start out, Chris, you mentioned -- I think you guys kind of went through the wall a little bit more with price than some of your competitors. And now some of those competitors seem to be kind of implementing more price as we're kind of coming through into 2026. And I'm just kind of curious if you're starting to see any sort of shift on the ground in terms of how that's impacting just kind of your relative POS performance in those various categories.

Yes. So as we talked about last call, we were seeing and we're expecting to see more competitive price movement in Q1, and we did, in fact, see that. So I'd say that, combined with the actions that we had taken as we did the view of what we needed to surgically adjust in our promotional and kind of some of our pricing on more of our elastic items, we have seen what I'd say to be, for lack of a better term, more of an even playing field on pricing as the competitive dynamic has played out.

In addition to that, as we have adjusted our pricing and promotions coming into the year, as you might imagine, we're tracking it SKU by SKU to understand the impact and is it in line with what we anticipated and what we modeled out. And to date, it has performed in that manner.

So we're encouraged by what we're seeing going into Q2. Now I will say that the majority of those promotional repositionings do come in in Q2. So we're keeping a close eye on that. And once again, we are going to see more promotional activity versus last year in that area. But right now, we are seeing it react as we anticipated. And once again, to reiterate what Pat was talking about, that that would be -- that we're confident in being along the lines of where our guidance was on price with the understanding that it could vary a little bit quarter-to-quarter based upon promotional uptake.

Okay. Great. No, that's really helpful. And then just I had a follow-up just on CRAFTSMAN. I think there's plans to do a bigger relaunch of that product later this year. I was just kind of curious about the timing and kind of if that could have a more material impact on sales and margins.

Yes, it's a great question here. So the way we have kind of scripted out has been that, obviously, going back several years, we started really putting investments and dollars behind the brand health and the go-to-market and sell-through in the DEWALT brand. And we continue to see and are very encouraged by what we're seeing there, particularly in the professional channels, as I think we referenced that we've seen -- and where we saw last quarter high single-digit sales in our professional North America construction and industrial channel, which is very encouraging.

Next from there, what we have, and we highlighted this a little bit in the prepared remarks, is that we have been working over the past couple of years to also refresh the lineup in the STANLEY brand, which we have started by launching our measuring and layout SKUs. And we'll continue to see this year more on the V20 platform coming out in the STANLEY brand. So we're in a position, we're encouraged by what we're seeing there as well as the dedicated selling resources we put in place in Europe, that we're in a place where we expect to, as scheduled, inflect into growth by mid-year.

CRAFTSMAN is the one that we were spending a lot of time repositioning the cost on it from a platform perspective. And we've been now launching -- we have one of our largest-ever launch -- NPD launch cycles this year for the CRAFTSMAN brand since we've owned it. And we expect by year-end to have a lot of that in market and see the benefit in -- by the end of the year going into 2027 as we move into growth on the CRAFTSMAN brand.

So yes, you I guess I answered more than you asked, but that's how we've been thinking about it for our core brands and that we should see that CRAFTSMAN momentum by year-end and certainly going into 2027.

Our next question comes from the line of Sam Reid from Wells Fargo.

I just wanted to maybe drill a little bit deeper on the status of your USMCA tariff initiatives, and then also maybe just talk through kind of the status of the China tariff mitigation as well?

I'll take that one, I guess. So if I think of USMCA, we had talked about how we wanted to make sure that we were getting towards or exceeding the industrial averages for what USMCA qualifications look like. As we had talked about at the beginning of this, I guess, early last year, we were well below average with roughly 1/3 of our products USMCA qualified. We've been making tremendous progress there and are a little bit ahead of pace on those activities. And we will certainly expect to be at or exceeding that average in the not-too-distant future. So we're on pace to a little ahead on the USMCA front.

And then just to reiterate, we had stated that we intend to be less than 5% of our sales in the U.S. coming from China-sourced product by the end of the year, and we are as well on pace for that. And we -- even with all the changes that we've seen and modifications in tariff policy with IEEPA, 122s, et cetera, we have continued on the same path of the strategy that we had initially laid out, which was to, first and foremost, take care of our customers, making sure that we have availability, and then to make sure that we are able to, through operational moves and leveraging our global footprint, continue to mitigate the cost of those tariffs to ensure that we are driving towards a margin position that allows us to continue to invest in the innovation and brand health that we need to be successful.

And we've been -- I give great kudos to the team for the way that they have been working tirelessly to ensure that those projects move on pace or ahead of pace that we expected. So we feel good about where we are there.

Our next question comes from the line of Jonathan Matuszewski from Jefferies.

This is Andres on for Jonathan. First, you called out stronger outdoor sell-in ahead of the spring season and higher conversion in the pro channel. Can you expand on what's driving those trends and the sustainability of outdoor demand from here?

Well, I think that from an outdoor perspective, we have a channel where people are optimistic about seeing good season. Inventories were at a level where people were making sure -- we're in a position to want to be in a good position to have the proper inventory for when the selling season came. And our team was able to produce and execute and fulfill those orders in a timely fashion.

We're at the very, very beginning of the key outdoor season, so we'll see how it plays out. But we are in a position to take advantage of any upside that the market may offer. And I think that's the best thing we could hope for at this point. So once again, congratulations to the outdoor team and what they've been able to accomplish.

Now what we've been able to see in the growth in the professional channels, both in the U.S. and in rest of world, and we referenced, and I did earlier, the high single-digit growth in the U.S. commercial and industrial channel, that's really been driven by a multiyear strategy for us to invest in the workflows that we need, with the products that we need for those key trades that we're focused on. And we've been -- we continue to round out that product offering. And I referenced a lot of what we're seeing with the momentum in our Perform & Protect product line in the DEWALT brand.

And then we continue to invest in our go-to-market and our service and sales force around the world. And I think that the combination of those 2 things as well as the activity level that we see in the professional channels bode well for us to be able to continue to grow, we believe, above market rates with -- in those professional segments and particularly with the DEWALT brand.

Our next question comes from the line of Joe Ritchie from Goldman Sachs.

This is Aanvi on for Joe. I wanted to spend 1 minute on like the CAM divestiture. Recognize there's been some shift in the guide because of the timing on the close. So if I understand it right, it's $15 million as a net impact for the year. Can you help me understand what -- you said that it would not have a significant impact on Q2. So just any puts and takes around the interest offset as well as the profit for the second quarter and the year?

Yes. When we gave initial guidance for the year, obviously, we had the uncertainty of the specific timing of the CAM transaction. And so we indicated at the start of the year that every quarter that CAM is in our results, it's roughly $110 million to $120 million of net sales and roughly $10 million to $20 million of pretax profit. And the year played out very much in line with that.

So taking CAM out of the second quarter for virtually all but a day of the second quarter resulted in roughly $110 million net sales reduction and roughly a $15 million pretax operating profit reduction. But as we indicated in the call, there is a reduction in second quarter interest expense that's roughly equivalent to that. And so those things, the loss of contribution relative to the loss of interest expense, roughly offset each other on a pretax basis, and that leaves the quarter and the year unaffected.

Obviously, the CAM transaction provides net proceeds of just below $1.6 billion, which we use towards debt paydown in the quarter. And so you'll see, all else equal, our leverage being down by that amount in the second quarter. Also some working capital will come out. CAM was a pretty working capital intensive business, but that was expected in our year-end results anyway.

And so those are really the big puts and takes. There's kind of no other big puts and takes on that. And what was uncertain at the beginning of the year is, would that happen inside of '26, and when. And obviously, we know the answer to that now.

Got it. That's helpful. And just as a follow-on, since you've been talking about the impact from CAM as well as the [ OPG gas walk ] together. If you could like provide some color on what -- why this change [ is instated ], what it really means? And I know you've quantified it as well, but anything we should keep in mind for the quarter, in particular?

Yes. Well, you're referring to for select gas walk-behind product in outdoor. We transitioned to a full manufacturer on our own model to certain products being licensed, and that's how we provide those to our channel partners to have a full rounded-out product offering.

That really occurs the back 1/3 of this year. So it has very little to do with this spring summer selling season. It has more to do with kind of the end of that season and how the early parts of '27 play out. And as we recall, that's really a change on the top line of a couple of hundred million dollars that net-net is accretive on the bottom line.

And that's a project plan that's ongoing and is tracking as we expect at this point. So there's no real big changes to that. And we called out that along with CAM at the beginning of the year just because they were things that we anticipated would really change our reported versus our organic sales in the third and fourth quarter of this year. And that's the only reason we talked about them together, is the impact they had on reported versus organic sales for the back half of the year.

Our next question comes from the line of Brett Linzey from Mizuho.

My question is just regarding the pro and the tradesmen replacement cycle on battery platforms. I've always thought about that as really a 5 to 6-year churn, but curious what you see as a life cycle there. And then how are you seeing the next pro replacement cycle setting up for some of those pandemic units starting to churn? And then anything from an innovation standpoint that's maybe activating some of that demand and what the milestones might look like internally there?

Yes. It's a good question. I would say, honestly, we think about the replacement cycle as being a little bit more applicable in more of the DIY segment in being that kind of time frame that you're talking about. Because the reality is that the professionals, they have such a high intensity of use and that it's usually accelerated and not as applicable for that time frame, as well as the fact that often they are going to kind of tool up all-in for a new job site as they go job site to job sites.

So what we have seen is that the strength that we see in certain areas in the commercial and industrial world, specifically with data centers, we see great demand there on our battery platforms to support the growth going forward.

Now as it pertains to what we see in the DIY, we think that that is kind of behind us from a -- what could have been seen as a pull-ahead of volume that needed to needed to shake out over time. I think that's behind us. And what we're seeing from the DIY world is more of an overall effect of the depressed consumer and lower-than-average kind of project and renovation and repair work going on.

As far as what we see for the products that we have been making sure that we drive in order to continue to build out that battery platform, there's really a couple of things that we've been doing, is, one, working with each one of our core battery platforms at the 20-volt XR level, FLEXVOLT, and then launching POWERSHIFT so that we have then 3 core platforms that we can build around in the professional segment. And then making sure that we are really building out all of the tools that each key trade could need and would want to optimize and make them more efficient and safer as a part of their workflow.

So we've been making sure that we not only drive and optimize those 3 core platforms, but then also the tools around them to ensure that we take advantage of what we see as a really strong installed base for our professional batteries and tools around the globe.

[Operator Instructions] Our next question comes from the line of Chris Snyder from Morgan Stanley.

I wanted to ask about the competitive environment. It sounds like some of the competitors took price action in Q1. But I guess, do you see any changes in the competitive environment as we look into the back half of the year? And the reason I ask is because it seems like while you guys are seeing a tailwind or a tariff offset from the move from IEEPA to 122, I would imagine a lot of the Asian competitors in the market are seeing even a more significant tariff offset on that rollback. So just wondering, what does that mean to you guys around potential price competition in the back half of the year?

I think there's a couple of things in there. Once again, our calculus and baseline would say that we think that the 301s are going to largely replace IEEPA. So in the back half of the year, we're not anticipating there being a significant change in the environment, as one. So I think that that would be kind of more of a steady type of environment as a result.

So that's kind of anything that would happen in the near term would be temporary in nature. And as we look at the combination of our strategies and how it stacks up versus our competitors and what we have for our global footprint and how we're driving towards really high percentages of USMCA qualified product, which have a much lower tariff exposure, we believe that we are at parity to probably mildly advantaged as we think about going forward in that environment as well.

So what you did reference, which I think is important to note, is we have seen the pricing environment play out more in line with what we thought it would. And we did see those moves in Q1 in the competitive set that I think is important as we move into Q2 and the strategies that we said that we're going to be following to make sure that we see the opportunity for us to pivot towards growth in Q2 and Q3.

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

It seems like the overall consumer trend is stability in the world feels a little bit more unstable. So I wonder if you could comment on trends through April for Europe and the U.S., just to see if that has continued.

Yes, Rob, we -- obviously, we can't start talking about the end of Q2 as we just wrapped up Q1. But I would say what we've experienced through the end of the first quarter, is consistent with the back half of last year, which, as you hint, in a really challenging global macro backdrop, I would say the pro and the consumer hanging in better than one might expect. Obviously, there's been softness in the back half of last year as tariff pricing went into effect and volumes adjusted to that pricing around a 1:1 elasticity, and that continued into the back half -- or the front half of this year. And our outlook anticipates that while the buyers will continue to be challenged, they kind of hang in there where they've been the last 3 quarters. And that's what our outlook is based upon.

We'll see as the war plays out if that changes. And if it changes, we'll adjust to the upside any production that we need to produce if the consumer heals up a bit. And if the consumer ticks down a bit, we'll be mindful of managing our total cost structure while preserving the long-term investments we want to grow the business and pivot towards growth.

But I would say your characterization is where our guidance is, which is, in a challenging world, kind of buyers being relatively steady where they've been in the last 3 or so quarters.

That is all the time that we have for Q&A. We'd like to thank everyone again for their 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. You may now disconnect.

Thanks for joining us. My name is Mike Rehaut. I'm the senior analyst covering the homebuilding and building products sectors for JPMorgan. Really thrilled to have with us Stanley Black & Decker. And to my immediate left, Pat Hallinan, CFO. And we also have from the IR team, Michael Wherley and Christina Francis.

So thanks, everyone, from SWK for joining us. I'm going to kind of conduct essentially like a fireside chat. But I'll turn it over to Pat for just some brief introductory comments and intro on the company.

Yes. Well, thank you. I'll assume that you know that we're a tools and outdoor products company with about 85% of our portfolio and industrial fastener with the balance, about 15% of the portfolio. But the few things I'd share with you is, obviously, with tariffs '25 was a challenging and interesting year, but we made important progress, important progress on margin, on our balance sheet and recovering the health of our brands. And we take a lot of pride in being able to deliver progress in challenging environments.

We'll see what this year brings. But we remain confident that we could stay on our margin growth and cash journey, even if the macro remains flat to low growth, which is probably what's in front of us for '26 and if not some bit beyond '26. In terms of our objectives, our long-term objectives are consistent with those that we shared late in 2024 at the Investor Day.

Now they probably move out to the end of '28 instead of the end of '27, but getting the portfolio to mid-single-digit growth, getting gross margins to 35% to 37%, achieving EBITDA margins that are mid-teens and better and having the leverage at about 2.5x net debt to EBITDA, and we still feel very much like we're on that journey, and those are the targets we're chasing for '28. And then as far as the current, I'm sure Mike will be asking me some questions about the current environment. The first 2 years or 2 months rather, of 2026, January and February, very much in line with the expectations we had when we set guidance. And we'll see kind of where this war goes. Right now, it hasn't yet had a meaningful impact on the business.

It certainly creates certain inflationary headwinds around fuel and resins and freight. But fortunately, right now, those are roughly offset by the tailwinds of lower tariffs. and we'll see kind of where the war and the consumer goes from here. But with that, I'll kind of turn it back over to you.

Great. No. Thanks, Pat. And -- just to clarify the comments around the long-term objectives moving out to '28 versus '27, I believe that's something that you spoke to during the past earnings call as well, right?

Correct. Yes.

Okay. So maybe just to start on sales growth top line for 2026 and beyond. You talked about just before kind of thinking in terms of a flat to low growth backdrop where it's kind of baked into your guidance for this year and so far, I guess, kind of hitting that at least in January, February.

But if you -- just to kind of go a little deeper, a little more granular in terms of the different end markets. As part of that flat to low single-digit outlook, I think in general, the overall was low single digits was the organic growth guidance. How does that break down between U.S. new res, U.S. repair and remodel, Europe, maybe non-res? How does that low single digit, if you were to parse it out a little bit?

Yes. What I'd tell you, first of all, on a longer-term scenario, our macro tends to ebb and flow with GDP, right? And that 85% of our portfolio is construction-oriented, whether that's residential, commercial, industrial or infrastructure. And over the long haul, it tends to ebb and flow with GDP. I would expect the GDP for this year to be a bit like last year. Again, war aside, we'll see where the war does that. But last year, the GDP was reasonable, was around 2.5% or better, but our end markets were below that, right? Because GDP last year was driven by things like data centers and GLP-1 drugs and stuff that has very little to do with us. And what I would say when we came to this year around flat, I don't want to portray it as some hyper scientific regression model we have.

We put in 20 variables and it spits out flat. We had some good things and some bad things, right? I would say on the good side is I do think, again, war aside, there'll be modest growth in R&R. We would expect modest growth in durables generally. We would expect whether you want to call it market or just not the headwinds of tariffs that we had during the second and the third quarter of last year where manufacturers and retailers took promotions out of the market to deal with the Labor Day shop.

So those were the good side. I would say new construction housing, we were just assuming down 2 or 3 points, autos flat to down point or thereabouts. And so in the ebb and flow of this, roughly flat given we are very construction focused, and I wouldn't point to someone only like Home Depot, but with Home Depot guiding 0% to 2%, we're guiding flat. I'd say we're kind of in the same ZIP code, right?

Okay. Yes. No, I mean, that all makes sense. I think one of the standouts of the more recent -- your last quarter was the volume trends and obviously, talking about that volume down 9% in Tools & Outdoor due to maybe a little bit greater amount of price elasticity. I think it was discussed on the call and obviously a softer underlying market.

North American retail was kind of highlighted in terms of being a little more challenged on the opening price point in select promotional areas. So how are the trends in this more specific area progressing so far in '26? And what's the risk of some of the 4Q dynamics continuing over the next 6 or 12 months?

Yes. I think as we shared on the fourth quarter call, which was the end of January, beginning of February, we'll see a measure of that in the first quarter, but I don't expect it beyond the first quarter. And the reason why is, if I take us back to last year, in the May, June time frame and then again in the September, October time frame, you had to make pricing decisions in an environment that was pretty extreme and in an industry where let's be honest, the manufacturers in this industry haven't been on a regular price cadence. So it's not like a highly predictable environment. And our approach last year was, hey, we care about volume and share. But we're going to make sure we take the price we need to, to protect margin because we need to get back to 35% margin in a reasonable time frame to invest in growth. .

And so we were a first mover, and we were thoughtful but aggressive knowing we might do some things that put some pressure on volume, and then we'll adjust later. So since we took that price other competitors like Milwaukee have taken incremental price.

You also have the outdoor manufacturers that protected their '25 shipments but have put price into their '26 shipments, those things have played out. And then on our premium brands like DEWALT and even our DIY brands, Stanley and Craftsman, we've been adjusting promos at the pace we can.

Some of those happen in the first quarter, but more of those will happen in the second quarter. And then on opening price points like blacker vacuums at Amazon, that kind of stuff, we got those in as quickly as we can. I think you'll see a measure of that adjustment in the first quarter, but not full measure. And then by second quarter, you'll see the full measure of that adjustment. And I think by the second quarter, we should be starting to see the types of share and sales performance will need to get to a full year that's around 2%.

And that's for a full year price tailwind for the -- when you say 2% you're talking about.

Yes. 2% is organic. And yes, there's probably about 2 of price in there, but you also have some volume coming out of there, right? So I mean, it's I think that we'll be back to kind of an elasticity that's closer to that 1.1 by the time we get to the second quarter.

So kind of in a related question, given that there are a lot of moving pieces in this area. But when you think about the competitive backdrop overall, what -- where do you think we are in the life cycle of -- obviously, there's a lot of back and forth timing wise in terms of these price increases and the reactions in the market. But when you take a step back and you think about the competitive backdrop in '25, the level of intensity, the level of perhaps promotional intensity outside of the necessary price increases taken, where -- how would you think '26 at this point would compare to '25?

I mean, I think -- as you know, I'm like 2.5, 2.75 quarter a year into this chair. I would have said that this segment wasn't as disciplined maybe as some other segments in construction and building products kind of pricing dynamics. But I would characterize '25 and '26 as I would say, encouragingly kind of disciplined and rational across the competitive set.

I'd say where there's exceptions to that, they tend to be brands and/or manufacturers that are opening price point big box centric where they were very afraid of kind of a do or die in there. I mean, if you're kind of anchored to 1 or 2 big retailers and you're only opening price point. They were pretty reticent to take price or at least as much price as other people were taking just because it was a very big moment of truth where they don't have a big pro channel outlet for their products. And -- but other than that, I mean, if you look across our biggest brand, which is over $7 billion of our tools and outdoor portfolio, DEWALT, competing against Milwaukee, Bosch, Makita, Hilti, the pricing was pretty consistent across.

I mean, obviously, we took it at different times than that every SKU level, there can be differences. And we're all kind of dialing that in, but it was pretty rational. And I expect that to be the case for '26. I can't speak with other retailers. Obviously, you're probably going to get to some questions about tariffs.

But our long-term expectation is the administration is going to try to use 301s and 232 tariffs to effectively replace the IEPAs. Now it will take time to do that and it may play out differently by country of origin in product category.

But -- what I've observed so far as we and others are given where we think the long-term tariffs are going, we're not really thinking of everyday price adjustments in this. We need to know more before we even contemplate something like that.

So maybe just on a due diligence standpoint in terms of just hitting on tariffs, you mentioned what you had to go through last year. But as it stands today and year-to-date, and I think this was also kind of hit on, on the earnings call, but are you still looking at it like that some of the reductions in tariff rates are kind of roughly being offset by some of the increases in other material costs or freight or logistics or how does it all kind of shape out.

Yes. Well, what I'd say, I'll get to the change with IEPA. I would say, in general, with the tariffs that came on last year, right? We can price dollar for dollar for the tariffs and then getting our margin percentage back was about tariff mitigation this year, which was largely just changing the country of origin and/or USMCA compliance to get $100 million, $200 million of mitigation system to get your margin back. And we're still very much on that path. We have a meeting every other Friday, and we're tracking all of this progress as if nothing changed. Then you have a court ruling that took IEPAs off, but put a different tariff in place 122 that right now is at 10% threatening to go to 15%, but it's still a favorable headwind relative to IEPA.

The magnitude of that favorability right now in a short period, 2 or 4 weeks is roughly being consumed by fuel inflation for ground trade exportation, resins, freight inflation in Europe because that's really where that's occurring. And then some metals inflation like tungsten and lithium and batteries. Those kind of forces kind of roughly offset each other.

And so assuming this conflict is such that it doesn't affect the macro economy or the consumer materially. We're kind of still in the same ZIP code. If oil prices went away, then you'd probably just have the tailwinds of tariffs showing through. And those will go for the 150 days, and we'll kind of see where they go from there.

Right. Sure.

Regarding the tariffs, are you in the talks with the government [indiscernible] your refund. But do you plan -- there are counterparties who would offer you $0.70 on the dollar for immediate cash back? And then those kind of deals they're looking at that.

Yes, we were not interested in any of the selling our IEPA claims at a discount because we feel -- we feel like if there's a legal case, we have a legal case to stand on. And we've effectively cured our balance sheet issue with the sale of our aerospace fastener business. So we're not out there hunting for cash at a discount.

I would tell you, yes, we fully expect to -- and our legal team and our trade compliance team very much engaged in pursuing refunds. We're doing it in concert with other tariff-related activities, right? I mean we're having ear to the ground and are trying to put our viewpoint out there with maintaining USMCA either as is or something similar. And there are some things we're talking to the government about in metals tariffs. So we're pursuing it diplomatically, but it's our fiduciary responsibility to pursue it, and we would expect to pursue it by whatever means is the most effective means.

Right now, we're just working through normal channels with trade compliance and trade lawyers to do it. It wouldn't be our first choice to have a lawsuit. But if that becomes what's in our fiduciary responsibility, then I guess we'll have to at least contemplate that, but...

Moving on to market share and also kind of a competitive backdrop type of question, and I know this is something that you probably deal with almost every investor call. But also, I guess, just on the -- in the interest of being comprehensive in my questions.

Maybe you could just comment on your share globally in the U.S. over the last 5 to 10 years, how it's changed to the extent it has? And who have been kind of the other, let's say, winners or losers in this period? And maybe to first talk about the U.S. particular because I think that's where the most of the interested and if there's been any other notable shifts in your other key markets?

Yes. I would say -- I don't know that I could parse kind of U.S. versus globe, but I'll get at many of the things I think you want me to get at. I would tell you that I would think our share over the last 3 to 5, maybe even 7 years, it's kind of flat and what it's been is you've had a brand like DEWALT continuing to outperform the market, maybe not grow as quickly as Milwaukee is growing, but consistently outperformed the market, but you've had headwinds in Stanley, Craftsman and Black & Decker as kind of the 3 big brands maybe you at Irwin that pile, where anything that DEWALT was gaining, they were consuming and we were effectively running in place.

I think if you look at a competitor like TTI, I don't want to claim that I know them intimately. You probably know them better than I do as do many of these investors, but I think the Milwaukee brand has really been performing well.

They've been exposed to weakness in Ryobi because the DIY consumer has been kind of weak. But I think they've been gaining share and gaining share through their Milwaukee brand both in the U.S. and abroad. And then I think you have some other really quality brands in the form of Makita, Bosch and Hilti, we see those as very serious competitors. They can either be more niche focus like in the case of Hilti, where they've been getting all their growth out of anchors and fastening and kind of things that are adjacent to that, which has been favorable on a data center environment.

And then you have the Makita's and the Bosch's, focusing more on home geographic markets. And I think them with -- also with any of the other bit players have been kind of the net losers in this. But I think in the case -- again I don't want to claim I could speak for Milwaukee or Bosch. I think they've tried to focus their energies on geographies or parts of their portfolio that have made more sense.

And I think that account combined with some lesser players like skill or whomever that they've been kind of the share losers in that whole journey. But I think, Mike, the opportunity for us is we, at [indiscernible], we haven't been on our A game combining innovation, marketing and sales execution, and we're excited about the growth opportunity. We feel like we have opportunities to take DEWALT higher than it's been. We see the green shoots in the any turnaround. And with the product launches we have this year in Craftsman and a renewed alignment in that brand with Lowe's and with ACE, we feel like this will be the year we make the turn in the back half of the year on Craftsman. And I think we have growth opportunity across all 3 of those brands.

I mean that really kind of -- that's basically the next question that I have. And the question was around just in general, product innovation with the power tools, but maybe just to broaden it out and talk about -- you mentioned the Stanley turnaround. You mentioned some of the product launches in Craftsman. But when you think about DEWALT, Stanley Craftsman in terms of product innovation. Maybe you could just highlight across the 3 different brands, some of the top areas where you hope to move the needle in '26 and into '27?

Yes, I think it's unique to each brand because I think one of the key tenets of each of their growth strategies is as being hyper focused on the end users, and they're all focused on different end users. With DEWALT, it's about the Pro. And for us, it's expanding into areas that go beyond our traditional strength.

Our traditional strength into Wall is carpentry. We still have a leading position there. But whether you're talking mechanical, plumbing, electrical and concrete, those are the spots of innovation. And much of the innovation there is coming from 2 different types of productivity benefits.

If you're talking about something like grinders for welders, we've had a lot of great innovations around making things via battery that are both compact relative to the hydraulically powered or air compressor powered tools available today with a battery. So you kind of get rid of the cord and you get better compactness.

And I'd say around concrete, we have battery innovations and power shift where we're bringing battery technology to replace fuel products in concrete. That's an example of what we're doing in Dewalt very differently in Craftsman, when we bought Craftsman from Sears some years ago, brand, the Craftsman brand we acquired leverage the tool portfolio that Stanley Black & Decker already owned. And it borrowed probably maybe too many categories and at a cost structure that was probably higher than ideal for a DIY consumer.

And so the launches this year for Craftsman are much more focused on home renovation and outdoor all on a B-20 battery platform, which is consistent with the DIY who is looking to be a regular user of tools, but doesn't need the performance and is looking for a price point below DEWALT.

But we're not going to have -- we probably had too many SKUs in each product category when we first rolled out Craftsman because we were borrowing from a big catalog and that wasn't appropriate. And so we've really dialed in that brand. And then Stanley, as Americans, we all sit here and we know Stanley for tape measures and utility lives because they kind of have long led those categories, and it's a hand tools brand in the U.S., Stanley 2/3 of its sales are outside the U.S.

And outside the U.S., it's also a power tools brand, and it's kind of at that mid-price point mid-tier. And again, the Stanley launch, which is probably about 2 to 3 quarters ahead of the Craftsman turnaround has been around reinvigorating the innovation to make sure a tightness of SKUs, but a cost structure of SKUs that makes it more attractive price point, some ergonomics in industrial engineering across both the power tools and hand tools category and very different packaging and merchandising. So when you go into stores outside the U.S. you're seeing Stanley bays that are highly reenergized. And outside the U.S., packaging recyclability is a big thing and kind of leading in that range.

So these are all examples of just working end-user backed, what are people willing to pay for, how do you focus your innovation where you have a right to win and you can differentiate on productivity, safety or ergonomics. And then how do you tie in the marketing and the sales execution in a very tight alignment with that innovation.

And we -- as we were focused on acquisitions 5-plus years ago, we weren't doing this well. And I think we have a lot of opportunity when we execute it well.

Great. I have one more quick question probably quickly if -- and I want to turn it over to the audience as well. brand investment and maybe just more broadly, SG&A. You guided to a 22% SG&A for 2026, up a little bit from $21.5 million in '25. I think earlier in '25, it was even talked about more closer to '21, it kind of drifted up a little bit. What's that -- what's the right number over time? Is it a 22? Could it be a little higher? Because obviously, there's a lot going on, I think, around the product innovation around the marketing, around other areas to support the brand.

So how would you -- how should we think about that SG&A level?

I would say, looking at the next 3 years where we expect the macro to be at best flat to low. So the next 3 years, we would expect it to be 22 plus or minus 50, 75 bps. I -- and the way we get there, though, Mike, is we're still trying to put $50 million to $100 million a year of incremental growth and innovation investment in, which basically means in a low-growth environment, we have to go out and take cost out of the back office and other areas.

So if you look at '25 full year SG&A versus '24 full year, we were roughly flat dollar for dollar we put almost $100 million in for growth, but we stripped $100 million out of it. And I think that's going to be the formula for the next 1 to 2 years and until the macro turns. And then we get questions sometimes about hey, we feel like you really have a growth opportunity, which we feel like the same. Why don't you just throw more gasoline on the fire. But about 10 mayo $150 million a year. We could use the SG&A productivity productively and our channel partners will be receptive to what we're doing.

But you start getting beyond 100, 150, what's our ability to ramp head count productively, what's our willingness of channel partners to take new products or change merchandising or anything like that. So I mean, what challenging ourselves and try to push that envelope, but I think that's the world we're in is kind of a with us making the back office more efficient to fund growth in the front office.

Yes, makes sense. I'll turn it over if there are any questions from the group.

You mentioned the new products. What percent of sales come from new products you think this year and next?

You think this year and SP1 Yes, we don't do a vitality index. We may go down that path, but I don't know that we would be like in where you might want a long-term target of 25-ish percent.. But I don't know if we've ever said anything like that, Christina and Mike before, but I would imagine they're somewhere in the 10-plus percent for sure.

[indiscernible].

Yes. Do you think that's the same for the industry as well, the 10%.

I don't know. I mean I think a lot of developed world construction durables people are usually trying to be around 25% for products that are 36 months old or younger. My experience is when you use that metric, though, you have to be sure, you're not inspiring a lot of SKU complexity.

I mean I think the real question is how do you gain share and how do you gain share effectively and efficiently. And so as we go forward and think about metrics like that, if we're going to put vitality out there, internally, I would expect to hold our product developers so that we're not making lots of small volume SKUs because that just ends up complicating your manufacturing world.

Outside of the recent movements on resins and IEPA, just to level set coming into the year, what was the expectation around how much sourcing you'd get out of China, like your percent portfolio like footprint reduction as well as like USMCA compliance as you kind of work through the year?

Yes, yes. So as some of you may be familiar, we started 25 at about 15% of U.S. COGS from China. And by the end of '26, we're tracking to be down to very low single digits. I don't think we'll get to absolute just because there's always going to be some loose volume DEWALT SKUs that you're going to want to make a place for the globe and that one might be China and you just bear the tariff.

And we're very much tracking to that, so that by the end of '26, we're in very, very low single-digit percentages of COGS from China. And that's kind of -- we're on this path the long-term strategic path of being out of China, and we track it every week, and we're ahead of schedule on that.

I'd say for USMCA compliance, what we've been particularly thoughtful about not giving out specific percentages there because we feel that's a competitive advantage for us. What we have said is like appliance manufacturers and auto players that tend to be 70-plus percent USMCA compliant for products from Mexico, we would expect to be at that level or better and we're tracking to that as well.

Just one quick follow-up related to tariffs. On the refund question earlier, have you guys communicated how many dollars of...

We haven't. We'll -- if and when that becomes kind of a material thing that we have to, we will. But obviously, if we start shooting up big air balloons of hundreds of millions of dollars, somebody might come looking for them as well. So we'll be thoughtful when that day comes.

But it's a -- what we have said publicly is IEPA was the majority of the tariffs we were paying. That's what we've said publicly. And what we have said publicly is our run rate of tariffs before the court ruling that just occurred a few weeks ago was $700 million, $800 million a year on an annualized full year basis. So it's a big number.

Anything else? Yes.

On the tariffs again, if it jumps to 15% now, what would be the impact on the tariffs?

Yes. Because we don't know if and when that's going to happen, and we haven't kind of given an earnings call. We can't kind of go between 10% and 15%. Both are lower than the IEPA. So both are actually a tailwind to our guidance kind of irrespective of whether it's 10% or 15% because the IEPA, if you think of them are roughly around a weighted average of 20% to 25%, you're just talking what's the magnitude of the tailwind. It seems right now there's -- while there's a lot of rhetoric around 15%, there's actually no action around 15% right now.

All right. I think we'll close it out here. So thank you very much.

Thank you, Mike. Good to see you.

Good to see you.

Great. Well, thanks, everyone, for being here. It's my pleasure to have up next Stanley Black & Decker. Chris Nelson, President and CEO. And Chris had been COO for a couple of years and became Chief Executive several months ago. So congratulations on that, Chris. I think Chris has a couple of prepared remarks, and then we'll go into the questions.

Well, thank you very much. And first of all, welcome to everybody, and thank you for the invite. It's kind of interesting. I was talking to a few people earlier, and it seems hard to believe that it's been almost three years. Time has flown since I've joined Stanley Black & Decker, but the thing that I've been certainly talking to everybody about, since I've moved into the CEO role is that our story and our -- kind of our go-forward mission is pretty straightforward, and that is we need to certainly be what -- be there for our customers every step of the way and provide to them the solutions they're looking for, and do that by, first and foremost, activating our core brands with purpose. And I think we've seen the progress there with the growth that we've seen on DEWALT and this year coming with a lot of the product launches and new activation on Stanley and CRAFTSMAN. I think we're going to continue to see that progress as well.

Secondarily is really driving operational excellence across the entity. And while we finished our transformation cost out program with $2.1 billion being taken out of the cost structure, I would say that we're still in the very, very early innings of what we can accomplish to drive productivity and operate as a world-class branded industrial. And between what we see from a lean capability as well as changes in footprint as well as what we can do with platforming and material productivity, our ability then on an ongoing basis think about how we drive 3% gross productivity out of our COGS every year is very much a part of our plan because that then fuels the ability to invest in the brands and drive that growth going forward.

And then the third key thing is making sure -- the beauty of this industry, it's an industry that rewards innovation with growth and enhanced margins. And we have set a course to make sure that we can accelerate our pace of innovation, and we've seen progress there. We took out 20% of the cycle time last year from the beginning of program to product production. And that is allowing us to now see many more incremental new product launches this year coming into this year, which helps with the first in activating the brand.

So it's a fairly simple formula, and we've seen a lot of progress, and we're very confident with what we see in front of us. And we have a lot within our control that we will continue to control this year and execute as we have been over the past 24-plus months.

Fantastic. Thanks for that, Chris. And maybe just set the stage for us on the kind of demand environment, the self-help seems to be firing on all cylinders, but how is kind of the demand outlook there and sort of volume trends and that type thing.

Yes. I think in our most recent earnings conference, we talked about the fact that -- just let me take a step back. We had, as everybody knows, a pretty large shock in the industry last year with tariffs. And we took the approach of wanting to be very proactive on how we mitigated those tariffs and saying that we wanted to be able to be dollar for dollar cash neutral as quick as possible to maintain our margin journey as well as our ability to invest in the long term of the business as well as invest in our customers. So we came out, and we did two sizable price increases, working with our channel partners. And that was great. It went very well. And I think you've seen with what we saw with only one backward step on a margin quarter, how that helped us continue the story.

Now what I'd say is very kind of predictably now we're working through how we continue to tweak and dial in those pricing levels, and we saw a little bit of, I think, a combination of a weaker consumer as well as some price sensitivity on some opening price points that we're going to be calibrating as we move into 2026. And I would say that we feel good about that -- the underlying opportunity there. Certainly, we're thinking that this year is going to be much more of a -- on a relative basis, much more stable and predictable. It'd be difficult to think about it being more volatile than last year. So we think about it as being much more of a stable operating environment.

And then similarly, we think that the story as it relates to pricing has -- it hasn't fully been told yet. And we've seen even coming into 2026 in the past month or so, other competitors now taking price as well and kind of everybody is getting on a similar playing field, which is encouraging to see as well.

Got it. And have you seen any shift in terms of market share within the industry, say in the Tools & Outdoor business amidst all the gyrations around tariffs and everything else?

I don't think structurally we've seen anything change. I think if anything, we've seen -- the entire industry kind of facing a similar challenge with similar types of playbook to reacting to it. Now I'd say in the short term, as all the volatility with different approaches and timing and pricing actions play out, and how people decide to -- what to do with promotions, et cetera. There will be blips and changes as people kind of -- as it kind of reaches its equilibrium. But we feel very encouraged by what we're seeing on our progress in our professional channels. I think we feel fairly confident that we continue to pick up share there. And then it's a matter of -- and what we're seeing as well in the investments we've made in our international businesses, specifically some of the things in the Middle East and Eastern Europe.

The progress were in those professional markets picking up share as well. And then it's just a matter of where the -- on the opening price point things that we're working through right now, those handful of SKUs in the retail world for the DIYer. Obviously, the DIYer has not been as healthy for a while now, and I don't think that, that's something that's going to -- we don't have forecast is recovering in 2026. So we got to make sure that we're dialing in the pricing there appropriately for those types of price-sensitive items.

Perfect. And if you're looking at the industrial side of the house kind of how you're thinking about volumes there? CAM is doing well now, then it will be sort of out of the portfolio in a few months. So how is that base industrial business looking?

Yes. Well, I mean, first of all, I mean, we're very excited about the CAM transaction. I think it's just -- it was -- it's a, how much a great buyer, and I think that, that business is going to a great owner, and we're excited for the team, and we're excited. From our perspective of looking at what that's going to allow us to do for our balance sheet. I'm sure we'll touch on that a little bit later. But when we talk about the two businesses that remain that being auto and the industrial part of Engineered Fastening, it's interesting because I get a lot of questions about what is that -- what do we think about that business? What do we think about that for the long term? They're great businesses that we think we can add a lot of value to. And actually, the businesses and the playbook is very similar to Tools & Outdoor. You're talking about two businesses in the industrial automotive that are really -- their Tools & Fasteners businesses that provide solutions to drive productivity for their end users.

The only difference is that in the automotive world, you're doing it in automotive factories to be able to drive productivity on the lines. And in the industrial world, you're doing it in key high-growth verticals. You think about one of our focus areas in solar, that's -- what are their biggest issues when you're putting out the solar field? How can I assemble and fasten things together in a remote environment? That's cordless tools and solutions and fasteners. This is a similar thing that we do in the Tools & Outdoor business. So we like the business, we like the fundamentals. What we're doing is we're really investing in sharpening our go-to-market to be able to have the application engineering resources that are tailor-made for the verticals that we're focusing on. Because ultimately, those businesses, you succeed or fail based upon your ability to work with those line engineers and design engineers to provide the solutions to take cost and time out of their processes. And so we're doing that with key focus verticals in the industrial business and then auto really making sure that we continue to grow share and bolster our share position, which is a very nice position in North America and Europe.

Fortunately, for us, with our product line, we are actually -- we're agnostic to internal combustion or EV. We just need to make sure that we're providing the fasteners that those automakers need in order to provide more output at more efficient levels. So we're not trying to figure out and bet one way or another. And I think that we're very excited about what we see as organic volume growth for this year in those two businesses.

Great. And switching back to Tools for a second. How is kind of the price elasticity of volume demand playing out? As you said, there had to be some price hikes and then a sort of recalibration now the tariff storm is dying...

Yes, I'd say that it's like I said, we went quick and we were aggressive for a reason. And I would say that what we're seeing now is it's anticipated, right? There's a little bit of softening that we saw or an increased level of elasticity above the 1.0 that we planned on in two specific areas in Q4. And that was I referenced earlier, it was in those kind of opening price point type of entry products where you've got -- and a lot of people have talked about in the consumer world, where you're getting a lot of trade down happening, where it's a decision between a branded or private label, and making sure that we have those handful of SKUs at that entry price point appropriately priced. And that -- we saw a little bit of a sensitivity there that we were working on tweaking, it's nothing material, but we're tweaking those prices, and they're kind of going in on those entry products in the next month or two.

The second area where we saw -- and it's once again not surprising, and it's kind of a little bit normal course of business. But when you're coming off of such a large change structurally in the amount of pricing that went in, how we think about our promotional calendar. So we, in Q4, saw a higher level of consumer and end-user buy on promotion, which is not surprising given the state of the economy and what we see right now. It was a little bit higher than what we anticipated, but nothing -- once again, nothing material. Where we're making our -- and once again, these are a handful of categories, where we're making our modifications going forward this year, would be in a handful of select categories where we decided -- just I'll make up numbers and say that last year, this category, we promoted at 229 and -- for this long. And as we thought about Q4 last year, we decided, well, with the price increases, we think we're going to be able to -- we're going to put that promotion level, once again, making up numbers, at 259. And that -- you always have to kind of figure it out and get the sensitivities, and what we saw was on a couple of categories, we probably needed to adjust down in this instance, maybe 249.

So we're -- this year, now we're kind of redoing some of those targeted very surgical points on promotion in Q3 and Q4 because we have -- there's a lead time to getting that. You'll see those kind of come through in the back half of the year. So we saw the sensitivities in places that it made sense. They're very manageable and narrow. And if we think about repricing tens of thousands of SKUs is what we did. We're talking about handfuls of SKUs that we're getting dialed in. It's what you would expect in any normal course of business. And I think that the only difference is because of the scope and scale of what we did from repricing, we just have probably more of them to sort through in a tighter window than we would normally as a course of business. But that's kind of what we saw in Q4, and how we're thinking about, what it means going into this year.

Great. And DEWALT has been a real success story on the market share expansion effort in getting kind of sales growth [Audio Gap] How do we think about the timing of kind of rolling out what happened there with some of the other brands in Tool & Outdoor?

So listen, as I mentioned earlier, it's coming up on three years that I've been here. And one of the first things we did was when I took the job in the COO role is thinking about the brand portfolio, where were we going to make our bets for investment as we kind of honed in on where we're going to focus our resources. It didn't take -- I'm not a rocket scientist, it didn't take much to figure out, hey, DEWALT, it's a big brand, it's got a lot of momentum, it serves a very attractive market segment. So we put a lot of our initial focus into the market activation, the sales force support and the product development and the focus on that brand out of the gate. And we've seen the progress as a result. From there, and over the past couple of years, what we've done next is we tackled, and I'll talk about them in this order, Stanley and CRAFTSMAN. And Stanley is a brand that I'd say had been largely untouched for a number of years from a product perspective. It didn't have a well -- necessarily well-defined end user segmentation, so who they are going after. And there is a lot of opportunity to invest in the go-to-market.

So over the past couple of years, we've undertaken what is the largest revitalization of that product line that I think is seen, and I don't even know how many years where we've changed the visual design language, the portfolio of products to more well aligned to its target segment, which is a small RESCON construction contractor. And then the tiering and visual design language in each and a lot of the package, and it goes with it. So that was starting to roll out last year and the meat of that will roll out over 2026 and 2027. So really exciting new refresh to that product line. And then couple that with the fact that Stanley, just for background is -- the majority of it is a European business, so it's roughly, call it, 2/3 European. And in that business and largely a hand tool or in that market and largely a hand tool business, that goes through wholesalers, where our brand awareness is off the charts. But what we were missing was the feet on the street to make sure we're working with the wholesalers to be merchandising to own the wall because essentially, you branded arrays, and it kind of sets up a little bit of a vending machine type of approach. We didn't have the feet on the street to set up those vending machines. And so we've gone back to dedicated resources in Europe for Stanley. And I think by the end of '26, we're going to be kind of approaching 100 folks that are kind of dedicated to that. And we've -- the results of that targeted approach to what the brand stands for, making sure, we understood our end user, getting the products lined up, refreshing it and then investing in the resources to take it to market, we started to see the inflection there. And I'm optimistic that we'll continue to see it.

I'm sorry, CRAFTSMAN is a little bit different story. And that was -- in all honestly, that's been the heaviest lift. So when we acquired that business, and it was a great acquisition back a number of years ago, we essentially acquired a brand with no product. So the first thing you want to do is get product for your brand, which makes perfect sense, and that was the decision that was made. But what was not done is we didn't do a good job of saying, what segment are we going after. So it was kind of somewhat professional, a little bit DIY, it was a little bit -- it wasn't well articulated or defined. And then we took what is more of a professional grade product and put it into more of a DIY type of price point. So was the product wasn't specified correctly, it was probably overperformance, and it was higher cost than it needed to be. So that not only creates a growth issue, but it creates a margin issue.

So a couple of years ago, we've kind of put a stake in the ground and said this CRAFTSMAN is a DIY brand, and we need to make sure that we design the products accordingly, meaning that if you think about the workflows that we think about for the professional user with DEWALT, that being a carpenter mechanical, electrical, plumbing, et cetera. In the DIY world, we need to make sure we have the right tools for people in their garage, in their yards and in for their projects and really redefine our product line that way. And then probably even more importantly, say, what does the performance of those products need to be because that defines what your cost position is going to look like and therefore, defines what your margin structure is going to look like. So through that process, and over the past couple of years, we have now been designing those DIY-specific products. And this year, we're going to be launching -- I'll just use an example, we're going to be launching a 5-tool suite of products that is kind of like the power tool -- 5 essential power tools that every DIYer needs, you got to recip, you got a circ saw, you got to drill impact, et cetera. And it's all off a new platform with new electronics, new transmission, new battery technology that is then driving at the right performance level at the right cost point.

So we'll be able to fill out that product line and then drive the growth at an accretive margin level. And that just comes from really kind of going hard core into how we want to segment this brand and getting our cost position in line with that. And I'm very optimistic. This will be the largest -- I believe, the largest product launch year for the CRAFTSMAN brand since we acquired it. I mean, obviously, we launched a bunch of products when we first acquired it because there were no products to -- so -- but since then, this is -- now we're kind of getting that prime -- the pump primed again. And that once again gets back to the importance of how it's so vital that we've been able to accelerate the rate at which we innovate and take that 20% out of the cycle time and look to take another 20% out because that is really the lifeblood of this business as we get everything kind of moving in the right direction. And I would expect to kind of finish the swing on that answer. I would expect CRAFTSMAN just for us to see that inflection point towards growth kind of towards the end of the year this year.

Great. And Chris, as costs of reinvesting these things. So maybe sort of help us understand the confidence in the gross margin trajectory not assuming a big volume upturn and assuming these ongoing kind of cost of reinvestment?

So the -- I mean, the margin story is -- I have a great deal of confidence there. Not only have we been able to demonstrate and execute, and I give a lot of credit to the team of being able to execute some very aggressive plans in a very difficult environment last year. But we've built the muscle memory to be able to continue. And our margin expansion really comes from, I'll call it, year-over-year three key things. First and foremost is going to be just taking the necessary capacity actions that we're taking at the beginning of the year as we've adjusted for the volumes that we saw in Q4. So there's a little bit of a hangover of the under absorption, we've adjusted accordingly, kind of that's just done. That's the thing you do.

Secondarily, then we have the continuation of what we're going to do to drive that every year, 3% type of productivity. Now we've built a lot of muscle as a part of our transformation program. But a lot of that was -- really, the majority of it was driven by pure sourcing activities. And now as we layer on what we can do for driving existing facility productivity through lean, combined with the opportunity that we have to reduce our footprint as we go forward. And that's an area that we haven't moved as far as I would have liked to at this point. There's a lot of opportunity there. And the reason is that last year, when you're trying to move production all over the world, it's very difficult to concurrently rationalize our footprint. So we need to get to the point where we're in equilibrium. So you combine that.

And then the third thing is, as we now get to more maturity on how we can have our productivity driven through design, engineering and ultimately platforming, and how we're seeing that continue to progress. It's just -- it becomes -- it's just a way you run the business. And it's every year, you have a pipeline. We're not waking up January 2 and saying, "Oh my gosh, we need to get things moving." We have an ongoing muscle and process that we have that pipeline that we build. So that's kind of the second part.

And then the third is going to be our tariff mitigation. And that is a combination of optimizing our location of production, and we've been public about saying that we're going to be out of China for all intents and purposes by the end of this year, less than 5%. And we're on pace. And actually, we've been moving a little quicker. So we're doing well there. And then secondarily, has been in achieving USMCA qualification. And I had said last year that we thought that we could in the medium term, get to kind of industry averages for an industrial, which is kind of call it 75-ish type of percent USMCA qualified. And I would say that now we've been making great progress, and I would say that we can be at or above that level for sure.

So now the productivity and the tariff mitigation while we have them as two different parts of that bridge, they're really similar activities done by a lot of the same people. So we've got a lot of activity underway, but I feel good about kind of the capabilities we've built over the past 12-plus months in the turmoil we've been through to continue that execution level. And with what we see is, we're not planning on an exceptional market backdrop. We feel good about where we're going to look for achieving those margin targets. And as I said as well, it means like, yes, we feel good about being where we need to be 35% at the end of the year, knowing what we know now, and we'll continue to execute to get there.

And the medium-term goal sort of mid high teens EBITDA margin kind of in 2028. What do you need top line wise at a minimum, let's say, to -- for that able to be...

We don't have a lot of volume in that equation. So it's kind of getting -- it's kind of this year is low single digits kind of getting to the maybe lower end of mid-single digits by the end of the time frame. But it's not a volume-based story. And when I talk about the productivity that we intend to drive. I'm talking about productivity on flat volume. And what I look at is saying that, that volume and that kind of organic growth is going to be a little bit of upside that we can look at. And I feel good about the 35%. And to me, the growth on top of that becomes where the 35% goes beyond 35%. And we said the long-term longer-term goals are the 35% to 37%. I think that that's very manageable.

For the organization, obviously, we need to finish the swing on getting to that 35% level because that's a healthy margin level that we think allows us to continue to reinvest in the business. And now it's -- when you go and talk to anybody in our organization, it's about, okay, how we are -- when -- how are we going to see the growth? Let's make sure that we're investing, make sure that we're driving that growth and the share gain as well. Obviously, we'd love to see all that hard work and structural cost change, be able to drop through with higher volume.

Perfect. And then last question, I think, before the audience response survey ones. Just around portfolio, CAMs going to come out soon, very helpful for delevering. How do you feel about sort of the rest of the portfolio? Does Outdoor need portfolio surgery, or do you think you can push the margin up without that?

I'd say the large answer is we like our portfolio. We'll continue -- we will, as always, continue to evaluate it. As it relates to Outdoor, we like the Outdoor business, but we're going to make sure and kind of look product line by product line and make sure that within the outdoor business, we are in the products and categories that we like. We like the growth trajectory. We like the industry structure, and we like the fact that they're going to -- those are products that are going to continue to electrify and therefore, we can grab more of the value chain and expand our margins. So we announced that we're going to be moving the gas walk behind to a license model, which is -- we'll still participate, but we don't need to be the manufacturer and that has -- that allows us to put our resources where we want in the Outdoor business. We'll look at other things like that around the edges, but no major portfolio kind of actions on the horizon in that area.

Perfect. Thanks, Chris. And with that, we'll switch to audience response.

Survey to first question around sort of current ownership of Stanley Black & Decker.

This is my report card, right?

Yes. Okay. So about 2/3 not owning it. It's pretty standard.

Second question is around kind of overall bias or sort of attitude to the stock at the moment. So fairly balanced.

Third question is around EPS growth, and that's versus the multi-industry average. So about in line to slightly below.

Next question is around usage of excess cash kind of following the CAM proceeds? So a real hodgepodge. It's slightly debt pay down and buybacks.

Then penultimate question on valuation, kind of where should Stanley trade at on 2026 PE? So kind of mid-high teens.

And then last question, what's the biggest kind of anchor on the valuation right now? So it's really around organic growth and trying to get that share gain going.

So with that, thanks so much, Chris. Thank you for being here.

Appreciate it.

Thank you.

Welcome to the Fourth Quarter Full Year 2025 Stanley Black & Decker Earnings Conference Call. My name is Shannon, and I will be your operator for today's call. [Operator Instructions] Please be advised this conference is being recorded.

I will now turn the call over to Vice President, 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 Chris Nelson, President and CEO; and Pat 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 11:00 a.m. 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-K 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, Chris 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 point 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 rigorously controlled costs throughout the organization while prioritizing targeted strategic growth investments to support our brand activation and innovation agendas.

Adjusted earnings per share grew 7% in 2025 to $4.67. We view this as a solid outcome considering the dynamic operating and macroeconomic environment this year including the substantial tariff headwinds incurred by our industry. Earnings growth and working capital efficiencies each contributed to strong free cash flow of almost $700 million in 2025. These funds not only supported our dividend and continued debt reduction, but they also provided capital for impactful initiatives that amplify the power of our brands and accelerate innovation.

Additionally, on December 22, we announced the definitive agreement to sell our Aerospace fasteners business. This portfolio change is consistent with our dedication to focusing on growing our biggest brands and businesses in enhancing shareholder value. We expect to use the net proceeds of over $1.5 billion to significantly reduce our debt, affording us flexibility to pursue a much more dynamic capital allocation strategy.

Now shifting to performance in the fourth quarter. We delivered strong results across many of our key metrics in the period. With continued gross margin expansion, robust free cash flow and a strengthened balance sheet, revenue was down 1% overall and 3% organically, which was below our expectations. We posted a 4% price increase and benefited from a 2% currency tailwind, which were offset by the 7% volume decline. We will unpack these drivers shortly.

The adjusted gross margin rate of 33.3% was strong and towards the high end of our planning range as we continue to deliver supply chain cost reductions, implement tailored pricing plans and execute tariff mitigation actions. Adjusted EBITDA margin of 13.5% was up by a robust 330 basis points year-over-year. Adjusted earnings per share were $1.41. Fourth quarter free cash flow was over $880 million, a very strong result as we effectively managed working capital while continuing to optimize our operations and supply chain.

Turning to our fourth quarter operating performance by segment. I'll start with Tools & Outdoor. Fourth quarter revenue was approximately $3.2 billion, down 2% year-over-year. Organic revenue was down 4% as a 5% benefit from targeted pricing actions was more than offset by 9% of volume pressure. Currency contributed a 2% benefit in the quarter. We successfully implemented our second price increase of the year in our U.S. tools business, a low single-digit increase this time with full implementation in the back half of Q4. The volume decrease was largely due to power tool demand dynamics in retail channels in North America and a soft market backdrop in North America and other developed markets.

Much of the U.S. Tools retail volume headwind was experienced with opening price point products and in select promotional areas as consumers have gravitated towards promotions during these uncertain economic times. As we have mentioned previously, we have expected consumer, competitor and channel response to the meaningful tariff pricing would take a while to shake out and that our top line could be volatile during this period. We see the fourth quarter result as an indication of this. We expect top line volatility through at least the first quarter as competitors continue to take price and as we tune our approach to promotions.

Tools & Outdoor fourth quarter adjusted segment margin was 13.6%, up 340 basis points year-over-year. Margin expansion was primarily driven by higher pricing, tariff mitigation and supply chain cost reductions.

Now for additional context on the top line performance by product line in 4Q. Power Tools organic revenue declined 8%, largely resulting from factors consistent with my previous comments and partially offset by professional strength in the commercial and industrial channel. Hand tools, accessories and storage organic revenue was flat as strong professional-grade power tool accessory performance was offset by hand tools due to conditions observed across the broader segment.

Outdoor revenue increased 2% organically driven by strong preseason ordering for 2026. The independent retail channel also exited the year with normalized inventory levels. These factors are both indications of a solid setup for growth in 2026.

Now, Tools & Outdoor performance by region. In North America, organic revenue declined 5% reflecting trends consistent with the overall segment performance. In Europe, organic revenue declined 3%. Growth in key investment markets, including Central Europe and Iberia was offset by softer market conditions in other parts of the region. The Rest of World organic revenue declined 4%, primarily due to market softness in Asia and South America.

On a full year basis, Tools & Outdoor organic revenue declined 2% due to the aforementioned factors impacting the fourth quarter, combined with the midyear tariff-related promotional reductions.

Full year POS demand was in the same zone as the organic change. DEWALT successfully overcame broader headwinds and posted low single-digit organic growth for the full year, including organic growth across all product lines and regions. Our success was underpinned by prioritized marketing activation and accelerated innovation initiatives, both of which I've highlighted as strategic imperatives at Stanley Black & Decker. A prime example of these imperatives in action is the launch of our ATOMIC 20V MAX cordless grinder suite designed for high performance and mobility in tight spaces. This new product lineup allows users executing demanding applications to transition from pneumatic to cordless. The fabrication trades, particularly fitters and welders perform some of the most demanding applications in the field.

Our dedicated team of trade specialists are actively in the market now, offering hands-on experiences to end users to convert this high-power sector of tools to enjoy the benefits of a cordless, compact tool without sacrificing performance. There are also several differentiating features, such as the DEWALT Perform & Protect anti rotation to maximize user control and the option to pair with Tool Connect for job site asset management, to name a few. Our platforming method enabled a swift launch of these tailored solutions, adding to our more than 300 product 20-volt MAX system for the toughest job sites. We intend to continue setting the industry benchmark in redefining the threshold of productivity for our end users.

Turning now to Engineered Fastening. Fourth quarter revenue grew 6% on a reported basis and 8% organically. Revenue growth was comprised of 7% volume increase, 1% higher pricing and a 1% currency tailwind. This was partially offset by a 3% headwind from the previously disclosed product line transfer to the Tools & Outdoor segment. This is the final quarter where this impact will be a factor. The Aerospace business continued its strong trajectory achieving 35% organic growth in the quarter. The Automotive business delivered mid-single-digit organic growth, reflecting strong sales of our systems for auto OEMs.

General industrial fasteners organic revenue declined low single digits. Adjusted segment margin for Engineered Fastening was 12.1% in the quarter. Year-over-year expansion was primarily driven by higher volumes, modest price increases and strong cost controls. On a full year basis, the Engineered Fastening segment delivered 3% organic revenue growth. This included high single-digit organic revenue growth in the second half, which more than offset the end market pressure experienced during the first half of the year.

Overall, both the Tools & Outdoor and Engineered Fastening segments delivered margin rates in line or better than expectations this quarter through disciplined execution, targeted pricing strategies and continuous improvements across our operations.

I would like to thank our team for their resilience and commitment to serving our customers and achieving these results.

I will now pass the call to Pat to discuss progress we achieved on key performance metrics and to outline our 2026 planning assumptions.

Thank you, Chris, and good morning to everyone joining us today. During the fourth quarter, we delivered significant progress on 2 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 objectives 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 3 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 the fourth quarter of 2026.

Now turning to our cash flow and year-end leverage results. We generated $883 million of free cash flow in the fourth quarter, bringing the 2025 total to $688 million. This performance surpassed our planning assumption of $600 million, driven by disciplined management of working capital, particularly in receivables and inventory. Our capital deployment in 2025 was consistent with the progress of recent years. As we reduced debt by $240 million, returned $500 million of cash to shareholders via our dividend and also invested greater than $100 million in growth initiatives to fuel brand building and innovation.

This approach underscores our ongoing commitment to deliver value to our shareholders while strengthening our financial position. In just the past 2 years, we have taken significant strides in reducing our net debt to adjusted EBITDA leverage ratio, bringing it down by 2.5 turns. We have reduced debt by $1.3 billion supported by working capital efficiencies and organic cash generation and increased adjusted EBITDA by $500 million or 44% over this 2-year period.

In December, we announced a definitive agreement to sell our CAM business for $1.8 billion in cash. We expect net proceeds after taxes and fees ranging between $1.525 billion to $1.6 billion. We will apply these proceeds to pay down debt supporting incremental leverage reduction of 1 to 1.25 turns in 2026 and positioning the company to meet our target leverage ratio of at or below 2.5x. Achieving this critical financial milestone will provide us with greater flexibility.

We will be well positioned to respond to market dynamics, invest in growth and enhance shareholder value creation. We are committed to maintaining a solid investment-grade credit rating to support our brands and our businesses, and we will continue to allocate capital thoughtfully with organic value creation, the priority.

Overall, our capital allocation priorities remain consistent with those communicated at our 2024 Capital Markets Day. Funding organic growth investments that drive long-term value continues to be our top priority. The company also remains committed over time to maintaining a strong and growing dividend and as a preference towards opportunistic share repurchases, which reflect our confidence in the company's future.

In recent periods, our excess capital has been deployed to reduce debt, but following the CAM transaction, we anticipate having additional options for capital deployment, always guided by our disciplined approach and focus on organic shareholder value creation.

Now let me walk you through our planning assumptions for 2026. We anticipate that 2026 will be another year of progress towards our key financial objectives. Though we do not expect progress to be linear as peak '25 tariff expense and second half 2025 volume deleverage rolls off our balance sheet into first quarter and first half expenses, and as macroeconomic and geopolitical uncertainties continue. Despite this backdrop, we expect to make meaningful progress towards our objectives as we did during 2025.

For 2026, we expect adjusted earnings per share to be in the range of $4.90 to $5.70, representing growth of 13% at the midpoint. This planning assumption includes a half year of CAM results. We are working to close the CAM transaction during the first half, though the actual closing date is subject to customary regulatory approval. We expect CAM to contribute quarterly sales of approximately $110 million to $120 million and quarterly segment profit of approximately $10 million to $20 million in each of the first 2 quarters, which includes expected corporate and segment allocations.

We are targeting free cash flow generation of $700 million to $900 million for the year, reflecting our expected continuation of strong cash flow conversion. This will be accomplished through a disciplined and efficient approach to working capital management, progressing inventory towards pre-pandemic norms, while remaining attentive to our ongoing tariff mitigation and footprint optimization initiatives. We are planning total company revenue to grow in the low single digits year-over-year, with organic revenue also expected to grow at a similar rate.

This outlook reflects our focus on pivoting to growth and our confidence in seizing share opportunities across our key markets. This revenue outlook includes an expectation of 50 to 100 basis points of benefit from foreign exchange, which would predominantly benefit the first half. There are 2 important revenue dynamics to appreciate for 2026. First, there is a second half year-over-year impact of the CAM divestiture. Second, we will be transitioning our gas-powered walk-behind outdoor product lines to a license model during 2026, which will enhance margin and returns but will result in a reduction of in-year revenue.

Let me provide more detail on this gas-powered product transition. Starting around the middle of the year, we will move away from manufacturing gas-powered walk-behind outdoor products ourselves and instead adopt a licensing model for these products. The impact of this change will not be reported in organic revenue performance and will be a separate factor. This product area represents a lower margin portion of our outdoor portfolio and a shrinking part of the outdoor market.

Importantly, this strategic shift does not alter our long-term view for Outdoor, particularly as we advance the electrification of our product lineup. We expect this change to result in a revenue reduction of approximately $120 million to $140 million in 2026 and another $150 million to $170 million reduction in 2027, with most of the impact to be realized in the second half of '26 and the first half of 2027. We expect this business model transition to enhance margins and returns. This business model change is already contemplated in our sales, margin and EPS guidance.

Moving to gross margin expectations. We anticipate adjusted gross margin will expand by approximately 150 basis points year-over-year, supported by top line expansion, price, ongoing tariff mitigation efforts and continuous operational improvement. We expect year-over-year gross margin improvement in both halves of the year, though as indicated in my earlier comments, first half margins will reflect headwinds from tariff expense and under absorption from 2025.

Our planning assumes that tariff levels remain at current levels, and we will continue to progress our tariff mitigation initiatives. Our planning reflects margin recovery from tariff mitigation efforts. We plan to continue growth investments in 2026 to further advance our robust innovation pipeline and fuel market activation with the goal of enhancing brand health and accelerating organic growth. We expect SG&A as a percentage of sales to remain around 22%. We will continue to manage SG&A thoughtfully preserving strategic investments that position the business for long-term growth.

Looking at our segments. We are planning for organic revenue growth and segment margin expansion across both segments. Tools & Outdoor is expected to deliver low single-digit organic growth in 2026 with an emphasis on market share gains and what we anticipate will be a roughly flat market characterized by continued uncertainty. Organic revenue in the first quarter is projected to be down in a low single-digit range, reflecting North American retail dynamics like those in the fourth quarter ahead of full implementation of promotional adjustments and changes to opening price points in nonstrategic brands and product categories.

We are confident in our plans to drive organic revenue growth beyond the first quarter as we start lapping the price increases and promotional disruptions that started in 2Q 2025. And as we refine some of our promotional strategies, we expect to see sales trends improve from our new product launches and commercial initiatives with a focus on outperforming the market. Adjusted segment margin is expected to improve year-over-year, driven primarily by price actions, tariff mitigation, operational excellence and thoughtful SG&A investment.

Engineered Fastening is planned to grow mid-single digits organically with comparatively strong performance in the first half, reflecting an anticipated half year contribution from CAM. Our other 2 businesses, excluding CAM, are expected to deliver low to mid-single-digit growth for the year. Adjusted segment margin is expected to improve year-over-year primarily due to continuous operating cost improvement and volume leverage.

Turning to other 2026 assumptions. Our GAAP earnings guidance of $3.15 to $4.35 includes pretax non-GAAP adjustments ranging from $270 million to $345 million, primarily from footprint optimization actions with approximately 20% of the total representing noncash charges.

Now for additional planning assumptions on the first quarter. We are planning for net sales to be around $3.7 billion, down roughly 1% year-over-year due to a solid [ '25 ] comparable. Adjusted earnings per share are expected to be approximately $0.55 to $0.60. In the first quarter, our earnings contribution will be impacted primarily by the timing of tariff cost realization as peak '25 tariff expense rolls off our balance sheet into the first quarter income statement.

We anticipate the first quarter will reflect the highest level of tariff expense on the P&L, which combined with the second half 2025 volume deleverage, offsets pricing and productivity initiatives. As a result, we expect adjusted gross margin rate to be roughly flat year-over-year. Additionally, our adjusted EPS for the quarter assumes a planned tax rate of approximately 30%.

In summary, 2026 is set to be another important year for our company with a strong foundation set, sharpened portfolio, disciplined cost and capital allocation and a relentless focus on customers, we are well positioned to deliver growth and create long-term value for our shareholders.

Thank you, and I will now turn the call back to Chris.

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 3 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 and 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.

[Operator Instructions] And our first question comes from Julian Mitchell of Barclays.

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 how quickly that gross margin improvement happens? Do we see it in the second quarter, for example, growing year-on-year?

Julian, good question. Certainly, a lot of moving pieces in gross margin as we head into 2026. I'd say the cadence throughout the year is we expect the first quarter to be around 30.5%, 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 as we do have affecting both the first and the second quarter peak tariff expense across the 2 years, our quarterly reported tariff expense in the first quarter and second quarter of '26 will be at their peak. And 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 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 the -- in those 2 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, whether you're looking kind of sequentially coming off Q4 or whether you're looking for what would typically be the 200 basis points of margin improvement year-over-year, it's kind of the same way you look at it. You're both getting affected by tariff expenditure rolling off the balance sheet and volume deleverage rolling off the balance sheet.

The good news is we've already got actions underway in the form of tariff mitigation and in the form of production cost reduction as we kind of recalibrate our plants for the volume realities. So we started those actions, as you can imagine, in the back part of last year. We accelerated them in the fourth quarter. We'll continue with tariff mitigation throughout the year, but that's pacing well, and we'll do a bit more capacity resizing in the early part of this first quarter. So by the time we get through with the first half, we'll kind of have neutralized those headwinds.

And therefore, that expansion in the back half becomes much more manageable because we've kind of rightsized plant capacity. We've accelerated tariff mitigation in the launching off point for the back half, means that those back half year-over-year margin improvements are much like our annual continuous improvement, and we have the plans in place to deliver those.

And our next question comes from Nigel Coe of Wolfe Research.

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 just like you to touch on the fact that you mentioned consumers are a bit more promotional sensitive. So maybe just address the price elasticity as part of this question. But I'm more interested really in the tariff mitigation and the measures you're taking around supply chain and other factors to USMCA to mitigate those tariffs.

Sure, Nigel. 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 started with the premise, as Pat said, that we're going to continue to emphasize the service levels for our customers, which we've done very well. We're actually at all-time highs right now from recent history, as well as making sure that through mitigation and pricing actions, we would be covering margin and cash going forward.

If we start with the specific operational mitigation plans, I think you're referencing, 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 U.S. 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-qualified SKUs and starting the production in North America versus exclusively in China. And 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.

I would just be remiss to say that in all of this, the amount of work that the team has done to get us ahead of the game is really admirable. And as we talked about, when Pat said a little bit of the capacity rolling off, a part of that is intentional because as you can imagine, as we're moving production around the world, we want to make sure that we have the appropriate amount of capacity to receive that in locations, and we'll start to be able to study that as we go.

Secondarily, on USMCA, I had previously said that we started at less than 1/3 of our products that were USMCA qualified. And we said that in the medium term, we saw no reason that we would not be able to be at or around industry averages for what that USMCA qualified percentage of imports would look like for a company, an industrial company such as ourselves. We actually are making great progress in that area, and we see absolutely no barrier to be at or maybe slightly above what that industry average would be and we're pacing once again, ahead of making that.

I think we had talked about that being in an 18-month to 2-year time frame. We're pacing nicely ahead of that right now. So the operational mitigation is going very strong, and we actually feel that, that is a big part of what we'll be able to continue to do to deliver -- continue to deliver the margin expansion that Pat referenced.

I think that you asked a little bit about the volume in 4Q, as well as what that means from a pricing perspective. So I would just say, if I think about 4Q and what we saw, I think there's a couple of things in there, Nigel. One would be that there was certainly in the market and I think specifically in North America and in retail, and this is, I think, a common thread that we've seen in a lot of different people's releases. It was just a softer market backdrop.

Secondarily, that in that environment in our industry in particular, as you think about the pricing actions that have been taken, we saw a particularly noted sensitivity -- pricing sensitivity in the opening price point products and brands. And an example of that, Nigel would be our cleaning and vacuum business and our Black & Decker branded portfolio, which are both reported in our power tool results. Those are on that line where people are looking at, should I be trading down and what is the right value that I should be taking a look at.

So that is where we have a look at making sure that we understand, are we appropriately making the price volume margin trade-offs in those OPP type of products, and we're working through those plans as we speak there. And then secondarily, yes, it was -- we saw more consumers and buyers looking for promotions. And I think that, that would be expected in an environment like this. And we will continue to kind of tweak and modify our promotional assortment and promotional plans as we go forward to adjust it.

These are minor types of issues that we understand what's going on, and we have the actions in place to address them. And they are around the edges to be sure. Because if I just bring back once again and reiterate where we started in saying, we wanted to make sure that we are pricing and mitigating for preserving our margin to make sure that we had the right margin structure for long-term investment and growth of our core brands, that's where we are, and we've accomplished that very nicely. And we also said that we expected a level of volatility as all of this plays out, and we're seeing that now.

And I would expect that volatility to continue to play out because candidly, there has been a large shock put into our industry and people are adjusting their promotional approaches as we go in a post-tariff pricing world. And even right now, as we continue, as we speak, more pricing is going into the market from different members of the competitive set. So I think that this will continue to monitor and adjust around the edges where necessary. But we're very happy with where we are, and we're very confident that we understand the issues from a pricing perspective and that we're right on where we wanted to be from executing the strategy that we laid out from the very beginning of this episode.

And our next question comes from Tim Wojs of Baird.

Chris, I had a follow-up on that question and then just my question. So the follow-up is the tweaks that you're making to some of the promotional cadences and price points and things. Is that really more of a reaction to what the consumer and how they're reacting to price? 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 some point in 2026. How much visibility, I guess, do you have to that? And any sort of kind of specific share gains that you could kind of talk about outside of just having some easier volume comps as you're going to work through the year?

Yes. Tim, thank you. It's great to hear from you. 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 looking at our core end users 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 I can't completely tease the two apart because as I said, 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 as it relates to the promotional question you asked, 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 there are normal modifications that we go through 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 absolute optimal trade-off between the volume and the margin, we're just working through those in certain highly sensitive SKUs, but there are minor adjustments for us to make going forward. And we're once again just reiterate we're confident that we're on the path to being to do so. And it will 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 professional channels and construction and industrial channel was a nice growth generator 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 the retail segment as well as our promotional line, that underlying momentum that we're seeing there, I think, is going to be a nice -- it's a nice indication that the overall strategy that we've laid out is actually paying dividends and will continue to grow. So yes, there would be nice indications underlying that we see the volume opportunity for 2026.

And our next question comes from Chris Snyder of Morgan Stanley.

If we -- you guys talked a couple of quarters ago about an expectation that the tariff-related price increases on the industry would maybe have like a one-for-one elasticity on volume. If we look over the last 3 quarters, 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 some of the soft consumer backdrop that we've talked about? Could it be a function of maybe something STANLEY-specific and maybe that could change as competitors push more price in '26 or some of the earlier conversation. But just any color on that? And what could maybe cause that to get better over the next 12 months?

Yes, Chris. That's certainly our expectation as we went into this pricing dynamic, which started in the second quarter. And for the first 2 quarters, 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 consistent with some of the points Chris made in the last couple of questions, I said, we see that heightened sensitivity 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'll be some choppiness along the way. And we think 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 1:1 zone is our expectation. We think that's very much within the manageable boundaries of all the things we're navigating during the tariff jolt that's impacted the industry.

And our next question comes from David McGregor of Longbow Research.

This is Joe Nolan on for David. You guys talk about being focused on paying down debt after selling the Aerospace Fastener business. But can you just talk about plans to invest in growth in the CRAFTSMAN and STANLEY brands? And just or 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?

Yes, I'll start and give you kind of 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. From a pure kind of financial framework, as we stated on the call, we'll get the proceeds from this transaction and pay down debt and get very much at or below the 2x net debt to EBITDA threshold.

We certainly plan to persist a growing dividend but that should still result in additional capital flexibility that we probably more likely been biased to pursue share repurchases as the next port 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 see our SG&A for the year will be up somewhere in that $90 million 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 kind of incremental $75 million to $100 million in 2026. But Chris can talk a little bit about what's going on with CRAFTSMAN and STANLEY. We've been making investments in those brands over a 24-month plus horizon, and we expect those investments to result in inflection this year.

Yes. So thanks a lot, Pat. And Joe, great question. What I'd say is that I just take us at the beginning. And if you remember the beginning 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 in the professional segment, greater scale, as well as the most. But we thought clear quick payback on those quickly following that, we started, as Pat said, in the last 24 months ago to then layer in incremental investments in both STANLEY as well as CRAFTSMAN as our other core brands.

And specifically, we're going to start to see the fruits of that what we've been putting in for the past 24 months and specifically a lot over the last 12 months as we come into this year, and we'll continue to invest. So 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 kind of quantity perspective, in certainly recent history as we're launching out a large suite of CRAFTSMAN V20 products in 2026, as well as we've talked about before, we've 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 of being launched into our channel -- with our channel partners. And we're very excited about the opportunities and what we see there. And I think that's going to be a nice inflection point that we can see coming.

Secondarily, with those brands, and I'll talk about STANLEY specifically, for example, which the majority of STANLEY sales are outside the U.S. and we have been putting in dedicated sales and feet on the street for that STANLEY brand, specifically in the European hand tools market that we are seeing pay dividends and as we continue to build demand in shelf space, in what is a very professional market in Europe for those products. And we see that being something that will continue to pay off. And we've started to see certainly the inflection already.

And then from an activation standpoint, I would say that we are going to be this year really amping up our efforts in social spend, we're going to be spending at or above what I think is the highest level we've done in the history of this company and those brands. So we're very excited about the progress, obviously, that we've been talking about, and we've seen the results on in DEWALT and I would anticipate seeing that this year, probably STANLEY, it'll be a little sooner than CRAFTSMAN. We'll see CRAFTSMAN inflect in the back half of the year as well. But we're really excited about what we have. And there are tangible things that are -- have been in progress for a couple of years that are now being launched in the marketplace.

And our next question comes from Rob Wertheimer of Melius Research.

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 price led? Is the idea that the 3% productivity will give you tailwinds versus your cost structure? I'll stop there.

Yes, 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, call it, $300-ish million in that ZIP code. Those are gross savings. And every year, you get a manner of wage and benefit inflation inside of our COGS cost structure, plus you get materials inflation and deflation that tends to be kind of net inflationary predominantly driven by metals.

I'd say that, that leaves you with usually a net savings after inflation in the $100-ish million range, which allows you to make choices on incremental margin expansion and/or investment in the brands. And I'd say that's kind of our structure going forward. And we'll manage SG&A relative to overall volumes. So we'll manage SG&A up and down with the volumes in the business. And I'd say our pricing in the business will be -- will be driven by innovation and brand building that can be in place, should material inflation get outside of any kind of normal band.

But I'd say that's our margin algorithm going forward that you should expect 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 kind of manage SG&A to deal with volume versus SG&A inflation.

And our next question comes from Eric Bosshard of Cleveland Research Company.

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 1Q, 2Q and 2 half.

Yes, 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 -- kind of modest changes to promotions and OPP that are baked within that 2% pricing.

Obviously, most of that's going to come in the first half of the year. I don't know it precisely by first quarter versus second quarter, but mostly that's going to 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.

Right. Hello, everybody. So for our next presenters, we're excited to have Stanley Black & Decker here with us. We've got Pat Hallinan, CFO. Pat, you wanted to kind of start off with some initial remarks. So why don't I turn it over to you?

Yes. I'll say a few things and then turn it over to you, Joe, for some questions. Obviously, for manufacturers, especially manufacturers with long supply chains especially those that extend to Asia. It's been quite an interesting year. And I would just start off saying that while this has been a year of dealing with a number of challenges and headwinds, as a team, we're quite confident that we stay on our long-term trajectory about a year ago this time we had a Capital Markets Day, laid out a number of markers of getting to mid-single-digit top line growth, 35-plus percent gross margin and EBITDA margin in the high teens or better.

And we still think those are the right targets for the business. Tariffs probably put us 12 or so months behind that pace. But we've taken enough price to offset the tariffs. And then we're going to be pursuing mitigation that is well underway and throughout next year, that kind of gets the margin back on the volume impacted by tariffs, and we feel very confident with the path we're on. We would certainly welcome a calmer environment or a more construction products friendly environment, but we are confident in the things that we control.

Makes a ton of sense, Pat. And so I know Chris isn't here, but still, it's early days for him as the CEO. Just any thoughts on just changes in strategic priorities or playbook is in place and expect to kind of...

Yes, I would say for those of you who aren't familiar with us, we hired Chris Nelson, about 2.5 years ago, he sat in the Chief Operating Officer chair for the better part of those 2.5 years and took over the CEO reins in October. And I would say his approach will be evolutionary, not revolutionary. We are going to stay very focused on the financial metrics we laid out a year ago and very focused on the strategy that he really helped design over the last year, 1.5 years of being a branded products-oriented company where we're really for the near to medium term, myopically and aggressively focused on organic growth and margin expansion as opposed to M&A. And the same brands, DEWALT, STANLEY and CRAFTSMAN will remain the same priority brands. I'd say we'll do some very modest portfolio tightening. So again, I'd say it's -- it's more evolutionary than revolutionary. And the thing that I'd emphasis at this stage of our journey and it's unfortunate the tariff disruption of get to the 35% gross margin so that the focus is disproportionately on growth, right? Because that's kind of the next big -- I think, the next big chapter of the same story.

Got it. So let's talk about the long-term targets, and you referenced the fact that the same target still exist, but maybe because of the tariffs, they've been pushed out about 12 months. But let's talk about gross margin specifically. So the 35-plus percent gross margin target you now see it being achieved in the fourth quarter of 2026. Just talk about some of the levers that you need to pull in 2026 to achieve it. And then also, I know we'll get to growth, but what kind of level of like market stability do you need in order to get.

To growth? I can talk about both. I'd say gross margin. So I'd say the good news this year in a crazy year of a point in time when Liberation Day tariffs were 100% of our EBITDA. And obviously, and thankfully, those tariffs came down to maybe more like 35% of our EBITDA, but still a significant headwind. We really only had tariffs kind of knock us off forward margin trajectory for 1 quarter, the second quarter of this year, right? We took price quickly. And by the third quarter, we were back to margin progress. We finished this year, probably the fourth quarter of this year, around 31% gross margin for the full year and 33% for the quarter. Obviously, there's a little seasonality with our gross margin because we have outdoor products in the front half of the year that put some weight on it. But we expect to get to 35% next year. And I'd say Joe, the levers are -- we've been pursuing, as you know, about $500 million a year of gross COGS improvement each year.

Next year is probably more like $350 million, $375 million of what I'll call like type gross margin improvement, whether that's strategic sourcing, platforming, continuous improvement in the plants and a few more plant activities. We probably get a few more footprint nodes out of the system next year. But then complementing that is $200-plus million of tariff mitigation, which is by the planned movement of SKUs out of China, whether that's to Mexico or elsewhere in Asia and then the SKUs that go to Mexico, getting USMCA compliant, that effectively lowers the tariff bill by $200 million to $300 million. So it's a combination. It's a modestly lower amount of gross traditional COGS savings complemented by about $200-plus million of tariff mitigation.

Okay. Great. And then just on the growth aspect, as you look into next year, getting to that, call it, 35% plus gross margin by the end of next year, does it contemplate a certain amount of growth.

I mean obviously, we would welcome growth and growth can provide leverage on the margin, and it can provide some leverage headwinds if it doesn't materialize. But when you think of our cost structure, our PP&E is about 2% to 4% of net sales. So there's not a big fixed asset issue around growth. It's really how we're leveraging the people in our plants issue. And so when the growth doesn't come, we have to rightsize the head count in the plants and when the growth does come, we can leverage it up to a point until we need to add a shift or something like that. So next year, I don't -- I'm not here today to kind of call next year's macro, but we probably aren't going to prepare for a robust macro. We will prepare for kind of a like noisy flattish or thereabouts kind of macro. And we're going to make that 35% margin progress kind of irrespective of that.

It will force us -- if that is kind of closer to flat than to up, that forces us just to be tighter on our headcount, and we would certainly welcome the macro should it improve. I mean I think -- and I think there's a chance of that in the sense that this has been a year where because of tariffs, people have been very lean on inventories, hasn't been -- with all the immigration enforcement, it hasn't been a terribly friendly year for construction labor. And so if next year, just those things stabilize or don't get any worse, and there's any kind of midterm pressure on rates, then I think there's some chance for upside. But that's the kind of stuff that it would take to get, I think, macro upside.

Makes sense. Do you want to just spend a minute or so talking about the -- what you're seeing in the Pro versus DIY channel?

Yes. I would say this year, like the last few, the Pro has stayed stronger. I'd say, both have kind of been fits and starts. I'd say, obviously, the Pro has been more robust throughout all of this. And the takeaway from this year is you have some SKUs because we took quite a bit of price this year. And while the elasticity across the total portfolio is roughly 1 point of price up, 1 point of volume down. Obviously, that's not true everywhere at the SKU level. There's some that are more favorable and less favorable than that. When you really see truly, truly, truly only Pro SKUs, things for like hammer drills or saws for cutting concrete, you're seeing much less elasticity than you are in DIY SKUs. So the Pro has stayed stronger. I do think, though, that all have felt a lot of pressure from price and from immigration this year. And so the backdrop has been more challenging in '25 in total than in '24, still with the Pro ahead of the DIY, but both with some pressure. But the Pro is still willing to pay for performance, safety and durability, and the DIY is still on the margin spending only when they need to.

Makes sense. So we typically talk a lot about the gross margin line when it relates to your company, but the reality is that you're also doing things on the SG&A side as well. I guess talk a little bit about some of the investments that you're making in SG&A, but then -- and then balancing that with trying to structurally have lower SG&A over time?

Yes. And I would -- what I would say structurally, we've kind of had SG&A on a global basis as a percentage of net sales in the 21%, 22% range. As you know, Joe, sometimes it's kind of been 22-plus slight amount. Sometimes it's been lower. I would say, if you're thinking of next year, I'd say somewhere very much in between those 2. But inside of SG&A in a year like '25 here where sales is roughly going to be flat, we're pulling about $100 million plus out of the back office in order to put $100 million into the front office. And for '25, much like '24, the preponderance of that investment has been in product and in field resources, be it field sales or field support. I'd call it pretty modest changes in '24 and '25 around digital capabilities or just pure brand advertising because we were over these last couple of years, we've been a little bit refreshing our brand strategies and dialing in which targets we're going after most. I think as we go into '26, you're going to see a year that's somewhat similar where we're creating the capacity to invest by being lean in the back office.

The investment will be similar kind of in that $70 million to $100 million range. And it will be similar, but I think we feel we're at a stage digital infrastructure-wise and brand strategy wise with DEWALT, CRAFTSMAN and STANLEY where you'll start to see maybe a different balance of what I'll call just pull marketing, be it digital marketing or more traditional media for brand advertising in addition to more feet on the street, but it won't be kind of all that. And I think it will be -- and that's just a reflection of the evolution of the brand turnaround.

Got it. You referenced earlier the $350 million to $375 million in platforming manufacturing footprint, sourcing kind of being like the primary levers. You're also on the cusp of concluding a very large program, a $2 billion cost reduction program. One of the questions we get frequently is how is there still room for them to cut costs? Like so how -- so how does the $350 million to $375 million that you referenced, how is that different from the actions that you've already taken over the last couple of years to drive out a pretty significant cost out?

Yes, I'd say on the margin, platforming and in-plant improvement, which platforming was barely at all in the last 3 years. and in-plant, which is -- which was a smaller part of it are growing, but I'd still say the preponderance is in strategic sourcing. But what I would tell you is like any company where you kind of have a living, breathing marketplace you're dealing with and performance execution, the pipeline we have right now of ideas to chase the $350 million, $375 million next year and the fruit that they're bearing in the early days is on a proportional basis like the pipeline we've had. So the way we govern it is we have -- at any given time, we have a set of 4 big work streams going, whether it's in-plant improvement, sourcing, platforming or taking nodes out of the network. And there's a game plan and there's kind of a high side, low side and what's the monthly and quarterly estimates of those and how much fruit are we getting along the way.

And we're on a trajectory right now that would tell us proportionately, we could deliver the $350 million, $375 million next year. And then on the tariff mitigation, we have -- every Friday morning, we're together with a by-SKU where is it moving from country A to country B and how much USMCA. So it's -- you can imagine it's an intense project management process, but it's the requirement for us to get to 35%, you -- you've been part of this journey even before I came on board. And when Don laid out this game plan in the middle of '22, it was predicated on volume growth being mid-single digits. And so what we've had to do is get to the same endpoint with higher tariffs and with basically a volume decline. And so we've had to gin up more ideas and pursue them more aggressively.

So it's interesting. In a hypothetical scenario where tariffs maybe not go away, but they're a lot lower than they are today. You've done a lot to your supply chain to change the supply chain. How does that ultimately affect your P&L if we were in a much lower tariff environment than what you're experiencing today?

Yes. I mean I think you're getting to the -- is some of this regrettable -- or is it [indiscernible] some complexity or all these kinds of things. And I think like any manufacturer, we haven't, as a country, provided a very stable backdrop of policy to the good or the bad, right? I mean it's been a lot of whipsawing and I think what we've concluded, we're a global player is at least our U.S. COGS have to be minimized in China because whether we went under Democratic regimes or Republican, there's enough friction there. Sometimes it's just pure geopolitical friction, sometimes it's very trade-centric geopolitical friction. But I think that's something we must do and as long as we execute places like Mexico, Vietnam, Thailand efficiently, we -- first of all, over time, we can definitely get them to China levels efficiently. It will take some time to get that.

But we feel like we're going to end up -- where we were a company that probably had 3 big centers of gravity manufacturing-wise, we're probably going to be more like 4 or 5. China doesn't go away. I mean we still have a European business and Asian business and a Latin American business that gets serviced from China but that node shrinks a bit and probably 2 other nodes grow a bit. Would you rather have 3 than 5 from an inventory perspective? For sure. But I think that's just the world we're going to be living in. And we feel like it gives us the flexibility that as different forces play out over time, we can kind of adapt over time.

Yes. And just for those that are not familiar, your expectation is still to have less than 5% of your COGS that you're sourcing into the U.S. from China?

Correct. Yes. We started this year around 15%, and we probably finished '26 below 5%.

Yes. Pretty incredible change there. Also for the folks that don't understand or don't know much about your platforming strategy. Do you want to explain the strategy and then ultimately, why now is the time for you to embark on it?

Yes. I mean -- there was a very big part of Stanley Black & Decker for a long time, where there was a highly decentralized engineering and product development process. And that's only changed in the last 2 or so years where Chris Nelson brought in a Chief Technology Officer. We centralized all engineering and new product development off of 1 central group. And in the old world, I think to the benefit of the company and 1 thing we've tried to hold on to is we were very close to end users and what they valued. And so our product developers knew intimately what they needed to do to drive value to end buyers. But they also had full license and really no good infrastructure to share.

So they went off and they did everything in a very bespoke manner. I mean if they were innovating the next impact ranch, they specified their own engine. They specified their own transmission. And there was nobody overseeing it to harness it, that's a miss on our part. We now have the org structure and the incentives in place that and just the governance in place that people have to use set libraries for key components. And also that we have the expertise to make sure we're offering up the quality library to do things. And so I think now is the time, it's a huge. I came from a business where we use platforming to a great extent. So did Chris. I came from Fortune Brands, Chris from Carrier. And it's super powerful. It is a very big cultural change because people have to give up a degree of freedom and they have to see enough value in speed and cost to give up the degree of freedom because they are making trade-offs. But I think it's going to be a very powerful lever for us. I don't -- I think it's a modest piece of what gets us to 35%. I think it is an unlock beyond 35%.

And the measurable impact is going to be the cost efficiency and cost savings and the productivity associated with it.

And inventory longer term. I mean I think it's -- right, you can imagine a world where if sales were flat, we would like to get another $800 million to $1 billion of inventory out of the system. I think that becomes -- we'll make about $200 million of progress next year. That will become easier once we get through some tariff mitigation because you can imagine there's a lot of inventory builds and drawdowns as we go through tariff mitigation. But if we're going from a world with 3 big manufacturing centers as we just talked about to 5, that's a work against inventory. So if we're going to get inventory net down over time, we're going to need efficiency and efficiency is going to be better sales and ops planning, but also from things like platforming.

So we've talked about some of the pieces for 2026. Do you want to elaborate on maybe -- you mentioned inventory, that's a piece that people will be paying close attention to. We talked about the gross margins as well. Do you want to provide like any other thoughts around an initial framework for next year?

Yes, I certainly want to stray from strong form guidance because I think we're still trying to figure out exactly where the consumer and the market will be. So I kind of leave it to the wise people in the audience to kind of make your own kind of market predictions. I think and this is consistent with both the third quarter and some of the Q&A that is filed, right? We'll be aiming to hit 35% gross margins by the end of next year. We'll be there or very close. Certainly, our goal as a team to aim for 35%. We're probably going to finish this year with an average of 31%. It will be 33% in the fourth quarter. That's a pretty seasonally strong gross margin quarter for us. I think next year is probably going to be an average of somewhere in the 32%, 33% range with 35% being the endpoint. I think SG&A will be somewhere in that 21%, 22% range. Tax, about 20%. And we'll probably try beyond the cash that would flow out of that normal operating income chase about $200 million of inventory reduction. And I think until we talk to you about our market expectation at the end of January, beginning of February, that's a framework to put up against your own market expectations.

That's helpful. And your comment on seasonally strong in the fourth quarter. That is something that we've witnessed and experienced before. So gross margins stepping down sequentially but still up year-over-year, probably starting at the low 30s, to start is probably the right way to think about it.

Yes. I'd say that's the case. I mean I'm still waiting to see. We do have -- we talked about it on the third quarter call that as we went through tariffs this year and some of the pricing we decided as a leadership team, hey, let's not be too dollar on the elasticity, let's keep some capacity in our plants in case it's better than 1:1. So we're kind of working now to get that capacity out of our plants that will have a little bit of a headwind into next year because, as you know, those under absorption gets capitalized and rolls off the balance sheet in the first half. But I think you're right in that we'll make some progress sequentially, but you'll drive that average of 32% to 33% off the back half of the year.

Makes sense. So you referred to pricing just now. I mean, pricing has been strong, partly driven by the tariff environment that we've been in. How -- what's the kind of right way to think about pricing into next year?

Next year? We're not -- I mean our industrial business, which is 15% of our revenue is always doing some pricing on the margin, but that's very targeted and very unique to that business because they're engineered products for customers. And we're always doing a little bit internationally for FX in our tools business, but we don't have any big tools and outdoor pricing for next year. We did a second wave as we talked about doing, and we've executed it and finished that all up with our customers. And so unless there's some significant shift in the tariffs, we don't anticipate a big pricing event next year. Now you will have carry-in pricing that's pretty material, right? Because we -- this year, we took $800 million of annualized pricing but really, we got half a year of it roughly. And so you do have the front half of next year, that pricing coming in.

So in your reconciliation, you'll see pricing, but we don't have a big new price increase coming next year. And right now, as you look at the things that tend to affect our business, metal pricing, resins and transportation, there's maybe a little bit of upward pressure in some metal categories that you're familiar with, but I'd say logistics are net favorable. And so you kind of look at, I don't want to say 0 inflation for next year, but pretty benign inflation, and we'll be leaning on cost of goods sold improvements to kind of offset that.

Okay. Great. I know we haven't touched on it yet, but we should. The fact that you're kind of changing your strategy within tools and outdoors to be much more brand focused versus sales-oriented. Talk about what that actually means for the 3 brands that you're really honing in on? And then also what it means to the brands that are not part of DEWALT, STANLEY and CRAFTSMAN?

Like anything, I mean, it's -- I'll get in more detail to that last part, but more it's -- our biggest brands between DEWALT, STANLEY and CRAFTSMAN, that's over $9 billion of our $13 billion of revenue. So it was a little bit of we need to get that right. Otherwise, what are we doing kind of thing. But what it really means to be brand-led. I mean a lot of what we were doing before was we were innovating product and then after the fact really figuring out which brand is most effective for the -- or most applicable to the product. And we weren't being disciplined enough of the trade segments we were chasing or which types of DIY customers we were chasing. And so it was a lot of product push and a lot of focus on channel exclusivities or at least some differentiators across channel and probably not enough focus and discipline on end buyers back. And so shifting to brand-led is really which end users did each brand target with what level of priority.

And then what does that mean for the product road map? And then what does that mean for which channel partners and geographies and then where do we place our dollars from there. And so over the last 2 years, under Chris' leadership, we've really gone through as we've done our annual strategic planning, working end user back and focusing much more discipline on specific trades or specific segments of the DIY market. much more disciplined on what that means for our product road map and the product road map being uniquely brand-driven. And then where are the geographies where that's going to give us the most amount of growth. And it's been a big change for the company because it was kind of a product push instead of an end-user pull type company, and that's been the change we've been going through as we've navigated this.

So the second part of that question was, what does it mean for the other -- the other parts.

The other brands, we have had general managers where -- and I've been part of turnarounds prior, you don't say, "Hey, we don't care about these other brands, which for those of you who don't know, would be things like Black & Decker and Lennox and Irwin and Proto and there's a whole host of brands, Mac Tools, it's more with very limited resources and very limited senior leadership attention. How do you kind of hold water because we needed just to kind of hold in there. And so they have to get very focused on -- there's very few things they can do because they have very few degrees of freedom. And then also a little bit is then and if you really would have paid attention to third quarter disclosure, there were some brands we bought and we stretched too wide, probably just to the liking of our channel partners, but it wasn't sustainable for either of us like Lennox, which has long been a cutting tools brand. We started making Lennox screw drivers and tape measures, and we did the same with Irwin, which used to be a woodworking brand, not very sustainable for us or our channel partners. We've gone back and we've refocused those brands on where their core strengths are greatest, and that's been a part of what they've done.

So it begs the question whether there's potential addition by subtraction in some of the brands that you're talking about, but then there's also been discussion that we've had historically about within the Engineered Fastening business, potentially pieces of that portfolio.

Yes. I mean I think we still have a leverage issue out there. And we've been reasonably explicit if there's a part of the industrial fastener business, most likely our aerospace business, where if you followed the aerospace M&A sector, it's been a pretty hot sector. And that's a business where we have a good business, but it's a relatively small part of our business. It's about $400 million of revenue out of $15.25 billion. And as you know, we're not going to be on an M&A path in aerospace. That's the most likely asset we sell, and I think that gets to our leverage issue. I think other portfolio changes will be small things on the margin. I think it's -- there will be some other small things that happen just because they probably don't have the growth and margin potential we're looking for in the total portfolio. I think more to if we had a clean sheet of paper, would we have as many of these brands as we have now, maybe we wouldn't design it that way with a clean sheet of paper. But I think on a tools brand wise, we're more likely to focus those other brands than we are to jettison them just because we probably couldn't get paid enough relative to the value of focusing them.

Makes sense. One last question. So you're targeting about $600 million or so in free cash flow for this year. That assumes -- I know that fourth quarter tends to be seasonally stronger, but it does assume a pretty significant step up. So maybe just kind of walk through how you're thinking about that and what that's...

I mean again, those of you who don't know, seasonally, we do about the last quarter or 1/3 of the year is a bulk of our net cash flow. This year is probably even more so, again, because of some of the inventory builds and other expenses we faced in the middle of the year tariff-wise. The fourth quarter route to full year $600 million is about like $150 million, $160 million of net income, probably like $130 million, $140 million of D&A and then over $500 million of working capital improvement, predominantly from receivables and inventory and it will be a mix of all 3, but those are typically the heavy ones in the fourth quarter.

And still on track.

We're still on track.

Okay. Great. Pat, thanks so much for being here with us today. Great. Great to see you.

Yes. Thank you.

All right. Great. Good afternoon. Thanks for joining us. I'm Tim Wojs. I cover building products here at Bairds. We're delighted to have Stanley Black & Decker join us again at our Global Industrial Conference. Stanley is one of the world's largest tool companies, and they own several leading brands that include DEWALT, Stanley Craftsman, among others.

From the company, we have President and CEO, Chris Nelson, up here with me on stage. We have Michael Wherley, who recently joined as VP of IR; and then Christina Francis, who also is Director of IR.

So I thought maybe we'd start with just a quick state of the union, Chris, and then we'll kind of hop into Q&A.

Yes. So I think we talked a little bit about it in our latest earnings release, but we are on pace to hit a pretty significant milestone by the end of the year with achieving our $2 billion cost out target that we set out as a target at the beginning of our transformation. And we feel good about the progress we're making towards our margin goals at 35% plus, and we're able to see margin expansion in the quarter as well after a one quarter step back due to tariffs.

So I thought that, that execution and getting back on the margin trajectory was encouraging. And then we still have on our radar screen. Obviously, the strengthening the balance sheet, and we'll -- we have a stated objective of 2.5x debt to EBITDA, and we've been pretty public about the fact that we likely to pursue a pruning action most likely with our aerospace fastening business to achieve that. And we're on pace to be able to complete that by the most likely the middle of next year, if not sooner. And that will put our balance sheet in great shape. We are looking forward to the continued margin expansion. And then I think everybody is excited to turn the page on the transformation and get towards running a business and growing organically.

And really, as I've stepped into the new role a little over a month ago, it's really just focusing the organization on the 3 things we need to pay attention to. And that is we need to absolutely continue to activate our core brands with purpose.

We need to drive operational excellence to provide the fuel to continue to invest in the business, and we need to continue to accelerate our innovation engine to be able to continue to build out our pull through with our end users.

So I think that we've made a lot of progress, but I think what I'm most excited about is the opportunities that lay ahead as we get towards turning the page on transformation and really competing and winning and growing the business organically.

Yes. I guess, I mean, on that, I mean, those are very logical things that I think you should be concentrating on. I mean, just it's hard for me, from my seat to judge just how big of a change that is internally. So could you just maybe talk a little bit about what you're kind of structurally changing in the organization and kind of what the buy-in is?

Yes. So I guess I've been with the company about 2.5 years. And I'd say that coming in, it was obvious that we have great people, a great set of brands and an organization really poised in wanting to win. But I just felt that there were some things on the focus of the business that had detracted from our ability to really drive organic growth and perform and execute at a high level.

First and foremost, and people have heard me talk about this before is that we were a very product-centric business, meaning that it was individual product line by individual product line and then we thought about what brands to put on those products and that was really based on a view of how we could continue to grow our shelf space with channel partners. What we are missing is that doing so really took us a step away from our end users and going and talking to our end users and our customers, they think about us as brands. And what they want to know is what are you going to do with DEWALT that will help me grow my business and drive productivity in the future?

And why do I want to -- why do I want to partner with you, whether I'm a large contractor in a certain trade or whether I'm a channel partner. So really wanting to get closer to that end user and think about end-to-end solutions versus point product solutions was a big change for the organization. And we changed it. So we now have -- we have a GM of DEWALT, we have a GM of Craftsman, we have a GM of Stanley Black & Decker outdoor, et cetera. And that has really helped us engaging it closer to our customers and think about what we need to solve for them, and that drives our innovation as opposed to driving innovation and then trying to figure out what we can solve with that.

And that's probably the first big thing. And the second thing is taking the opportunity to leverage our scale and change from what was a very fragmented and product-based engineering organization over to one that was centralized. I brought in a new Chief Engineering and Technology Officer, who previously held the position in Otis Elevator and I had worked together with a carrier a number of years ago. And think about a centralized approach where we could understand the specifications we needed for the specific end user, design the products in a platform manner to really drive our scale using common componentry.

Whereas before, when we were a product line business, we were -- we had kind of individualized pockets, so a team who worried about drills and a team who worried about impact branches and the team who are worried about [indiscernible] .

And it just while you can produce great products, it was difficult to leverage scale and the speed that we needed to be successful. So those are pretty large changes. We're kind of 2-plus years into it. And the buy-in is strong, and they're strong for one reason because it's all based on wanting to do the things that our end users think that we need to do. And that's kind of -- that's in the ethos of the company. And I think as we had spent more time and resources and capital on acquisition and diversification, I think we strayed from what we needed to do, which was to be able to solve problems for our customers and be connected to our customers. And that resonates with the organization and everything that we can do to help us to be more clear in that objective, there's a lot of support behind.

So there are a lot of different kind of silos in the business that -- so you would go out from a cost perspective and you take cost out and you take cost out in drills and miter saws and all those things, but you still wouldn't leverage the total kind of buying power of what Stanley. What have...

I mean pretty simply is that if you had as an engineer, you had the autonomy if you're working on a new drill to create your bottoms-up ground-up motor and module controller and transmission for that drill. And someone next door might be doing the same thing for an impact wrench. And we weren't thinking about how we could leverage that. And that drives increased development time, increased qualification time. And then certainly, it makes it more difficult to leverage your scale as you go out to market and source these components.

As importantly or maybe even more importantly, when we think about supporting our end users, that complexity of componentry and sourcing also is -- runs counter to better service for your customers. So the more common componentry, the easier it is to plan the fewer variables you're having to source and actually, it helps you bring down your working capital and increase your -- in the form of inventory and increase our service levels, which we're now running at as high as they've been -- as I've been able to look across the history as far back as I can take a look.

Yes. I guess with platforming, just -- it's kind of a broad concept for investors to just kind of think about like what it sounds like you're almost giving people like almost prequalified kind of here's a parts list for a lot of the commonality between these types of tools. And that obviously gives you some buying power, but then also they're prequalified. It should speed up the development time too. So can you just talk about the platforming concept? And then how we should start to see the financial benefits of that kind of roll through the P&L over the next couple of years?

Yes. I mean it really -- it hits the mark around all, whether it's working capital speed and productivity. It helps along the way. And I would simply describe it as saying a platform product in our definition is one that in excess of 70% of the content is made out of the library of common components.

So when we look at a drawing or when an engineer is thinking about creating a new tool, they have a drawing and part of it's in red, part of it is in yellow and part of it's in green. And the red is you can only choose from these 3 motors choices. Yellow means you can take a look at these library and maybe you can change a shaft length by a millimeter or two.

So you have a very moderate amount of change the specification available. And then green is knock yourself out, differentiate a way. And what it does is it allows us to have our engineers and our designers worrying about 100% of their time worrying about the 20% of the product that actually makes a difference to differentiate. So counterintuitively, somewhat, we're actually improving our focus on how we can differentiate performance and brand identity with common componentry. So I would say that when will you start seeing benefits.

We're seeing them now as when we were as a part of the transformation program to take cost out. What we did out of the gate was we spent a lot of time and effort just on negotiating savings with vendors for sourcing. That gets to a law of diminishing returns. You can only take the same bundle of commodity out to bid so many times. But now what we're seeing is we bring scale together and we're doing more engineered cost savings and kind of aligning on optimally cost of components is that our proportion of material productivity has gone up from round about 5% or 10% engineered cost savings to 30-ish percent, and it will continue to climb from there, which offsets some of the diminishing returns from what we've seen on sourcing.

Secondarily, we've seen -- quantitatively, we can take a look and say, this year, as we think about from inception of a program to launch of a product, we're 20% faster than we were. And we know that we have plans in place to take that another 20% down by 2027, end of 2027 and that in an industry that rewards innovation and new product with accretive margins is an important speed mechanism for us to continue to drive margin expansion.

And how does that work kind of across the brands? Because obviously, DEWALT is a pro and there's a very different performance level that's being driven at DEWALT and maybe like Craftsman. So how do you make sure that it doesn't become like too common that the brands kind of bleed together.

That's a great question. What -- the key is that we -- as we've gone to more of a centralized approach to design, what we have asked our product managers to do is to be able to -- and I'll get back to how we're doing this a little bit different. Quantify what we need from an output of the product, not the product we need. So it says, if I'm designing x product for this pro I need to have quantitative performance on power, speed, torque, et cetera, that meets these requirements.

So that's really what a customer cares about. They care about how it performs, how it feels and how it how it measures up to that brand promise. Now what's inside of it driving that? You could pick a common motor that's a lower power motor for a Craftsman product that accomplishes what it means to at a lower cost. Whereas maybe you're going with a high power motor on DEWALT. But at the end of the day, what matters is the performance out of it all. And when I talk about the quantitative requirements that we're having people be able to specify out in product development, we've also launched this is more than a year ago.

We have no -- let's just say we have no shortage of feedback as to what people think about our products. It's a high-involvement category, and we get pieces of feedback all the time, star reviews, all that and we've actually now developed an AI tool that allows us to take a look at all of that data coming and parse it out, understand what -- how we stack up kind of specification for specification versus competitors, where people like us, where we're over designed, what people aren't valuing what they aren't paying for, and then we can decide how to spec that new product based on that analysis that we're getting out of the AI tool.

So I think it's -- whereas before, there was a lot more of a feel of going out to a job site, working with an end user and saying, "What do you think you want out of this and trying to then say, how you wanted that to work? We've taken a much more scientific approach and saying, this is what it actually quantitatively is saying that we have to be able to do and driving the specs that way. That gets you to less of a conversation about kind of emotional trade-offs and more about, one, how you can think about choosing the right component for right performance.

Yes. I mean we've been asking a lot of people about AI. I mean, that's 1 example. I mean, what other things are you kind of doing internally to kind of leverage AI and...

So we've spent a lot of time and effort making sure we first and foremost, set up our own AI infrastructure. And making sure that we have our own environment that it's safe, that it's trusted and it gives the right answers because there are implications in our line of business of telling a person to use the wrong nail and the wrong nailer.

We need to make sure that we're -- we have that logic being checked. And we have -- so we have that infrastructure that we've invested in -- and we have had looked at third party, et cetera, and it's, I'd say, above the mean for what people are doing in industrial world. Now we're starting to then roll out our different agents. There's the one I talked about for voice of the customer. We call that one. We've got 1 that's a customer service agent that is that basically is able to bring in all the different data points to our customer service agents and make them much more effective, cutting down their time to answer significantly in order to serve our customers better.

We have an agent that we've built that allows us to have our -- a big part of our push is to have our people or end user specialists out with customers more, spending more time understanding what they need, how we can meet their needs. It's actually very labor intensive for someone to then go in and say, "Let me take a look at your array and come with a proposal for what you should buy from us. As simple as that sounds, that can take -- you're talking about thousands of SKUs. What does it match up, what price point, how do you need to have the right accessories, et cetera.

We now have an AI agent that we can just feed in the information and we get out the array, the marketing materials, the proposal with the pricing out the other end in a matter of minutes versus days. Now what does that mean? Is it means that I've got people spending more time selling than doing the administrative stuff in the back office.

Where we need to take it now is making sure that we continue to deploy at scale and get from pilot to more scale implementation of the things that are going to drive the business. But it's a big focus. I think we're all learning as a management team. It's -- and the -- I would say that the people who excel in the AI world and deploy it at scale, it's not differentiated by technical capabilities. Is differentiated by a management team's commitment and understanding of what it means, what it could do in learning and leaning on that as a necessity of how we do business.

That's where we are.

We talked a lot about the kind of platforming and some of the internal changes you had to make on the back end. What about the front end? How are you thinking about kind of field resources, kind of maybe where we're at today, maybe where you ultimately see that going?

Because I think just if you're able to kind of fix and become more brand led on the back end, it just seems like there's a big opportunity for you to get more people in the field and just promote and kind of talk about...

Yes, that's been an emphasis for us. It was as we started this journey, I'd say that when I came in on and said, we got to get closer to the end user, we have to become simpler and then that was the concept. It was like, okay, how are we going to put some meat on this bone. And the -- one of the first things out of the gate was just understanding and recognizing, as I talked to customers that we did not have the level of representation that we needed to support our folks in being able to understand what we had to offer. How it worked with the new innovations were and how they could grow with us.

So we took -- we have made big investments more than 600 field resources over the past couple of years in areas that we think geographically, we're underpenetrated or where we knew there was going to be construction hotspots or internationally, where we knew we had high-growth countries that we thought we like the market structure. So we see an ROI on those investments in kind of like a 12-month time frame. And this year, if we look at our conversion pipeline versus where it was this time last year, it's 2x the velocity coming through. And I think that, that is the momentum you're seeing with our continued growth in DEWALT. And we will continue to grow that out in a -- over a series of years as we continue to see the opportunities of where we want to very, very kind of tactically invest in the markets where we think we can drive the outsized growth.

And in terms of pace, the -- would your point be we can't just throw Brazilian people at the market because there's just not going to be a return on them. So we're going to kind of meter this out or measure it out and kind of kind of be returns focused as opposed to just kind of blanketing everything with just more field people.

Yes, actually, that was probably one of the biggest challenges for me is that I'm not a patient person at all. And I -- if there's 1 thing that's been my mantra as I've gotten the seat, we're going to move at pace, we're going to make decisions, and we're going to grow and we're going to execute. That's what we do. We are not a holding company. We are successful based on how we win or lose with the customer, and we don't have time to doll, we've got to make decisions and move. I would say that the we knew what needed to be done, but in order to build the infrastructure, the technology support and the training to make sure that we took. It's a big investment to make with 600 people and continuing on top of it. We needed to make sure that they are going to ramp up and be as effective as possible as quickly as possible.

So we've metered it out. And I think we've got a machine that's working well right now, and we're seeing the ramp-up periods decrease as we go along. And as we see opportunities for outside is growth, I feel confident that we can continue to invest in that area and see the returns that we want.

Okay. Any questions from the audience?

I guess maybe just kind of on that point, kind of tactical with SG&A. I think Pat talked about SG&A being down in kind of the fourth quarter. Is there any specific action kind of driving that? Or is that just kind of a timing consideration just given the environment?

It's more kind of programmatic than that is that we've been very public about talking about how much incrementally we're going to invest in SG&A. And a lot of that has gone to the front end of the business. What we haven't talked a lot about is that while we've been doing that, we have been equally aggressively taking the G&A out of the back office.

So what we say is a $75 million to $100 million investment in the front end is actually much more than that because we're actually taking out resources that are noncustomer facing. I would say that One of the byproducts of the fact that the company over the years became more of a multi-industrial type of play that had different legs in more of a holding company is that there was a lot more back office and bureaucracy and support than we needed, and we've been very -- I've been -- all SG&A isn't created equal, and I'd rather have less G&A and more S. So we're constantly moving to have fewer people counting things and more people selling things.

How do you kind of think about battery systems? Because I think what's interesting is like the evolution of this industry has kind of gone from you plug the best product into a wall and it could be whoever to now contractors have 30, 40, 50 of these batteries line around. And there's a real kind of barrier and to the systems and the 20-volt DEWALT system is still one of the leading systems in the world really in terms of batteries.

So I guess how do you kind of leverage that and kind of what's your approach there? Because it does seem like if you have those top 2 or 3 systems like you could start to really create a moat around a business where there really wasn't kind of won before.

I'd say it's a great way to think about it, and that's exactly how we do think about it internally. And I'll share is part of the beauty of the way that this industry is structured is that in excess of 80% of the time when a person goes into the purchase cycle with a battery platform, they're going to purchase a tool that's in the battery platform. And that's a staggering number.

More than 50% of the time when someone goes into the purchase cycle, it is not because they've lost or lost a tool or stopped working. It's a discretionary purchase because they want to drive more productivity, they like the features or they have a new regulatory safety requirement they have. So it's a discretionary high moat purchase. And if you look at in the professional world, the buying criteria, and this is something that I haven't really seen in my career before, is that price comes way down the list for that customer. Because if you think about it, we actually -- our solutions produce labor arbitrage. We want to be producing power tools that take labor out of a job site, labor is very expensive on a job site. And by the way, it's a bottleneck.

So when people see that innovation they can do so, they're willing to pay. So it's that structure is incredible. So what does that mean is that we -- and this is a part of the brand, the kind of market-backed brand ladders. We needed to be more and are more purposeful about saying, okay, around that battery platform, whether it's our 20-volt or our FLEXVOLT or our new power shift higher-capacity batteries. What are the things by trade? What are the tools by trade we need to wrap around that.

So a Carpenter can go through their entire workflow and use all the wall tools. So a plumber can. So a concrete worker can -- and that's how you build that moat around the business around -- and you have that annuity from the battery sale, but then you also -- you can build a moat and keep on it. It's a relatively lower threshold to purchase around that platform. And that's kind of in a nutshell, that's how we've centered our professional strategy is saying we want to continue to round out that workflow and continue to define that workflow by high priority trade to put a high moat around that.

Okay. Okay. I mean with the wall, I mean, that's gotten back to growth over the last couple of years. What's been the driver of that? Is it just kind of the pro mix has been better than kind of DIY? Or is it really things like the investments in field resources and new tools and things like that?

Well, we -- listen, DEWALT 7 billion of our -- it's a $7 billion franchise. So it didn't take a rocket scientist to say, "Hey, that would be a good place to start. And if you looked at it plays in a pro market, it's relatively stronger. It has great brand positioning and had great opportunities.

So the market has been relatively strong, but then really our focus on making sure that we went with the key priority trades and that we were driving the field resources to drive growth. I think that we have been seeing above-market growth from the actions that we've been taking in what's already a relatively stronger market than the DIY market.

And then you've kind of outlined kind of 3 core brands. I mean, like you said, DEWALT probably makes the most sense. Stanley probably makes the most sense. Craftsman make the most sense. Just -- maybe talk about kind of where you are on kind of reinvigorating both kind of Stanley and kind of what you need to do on the Craftsman side?

Yes. So I'll start with Stanley, for those of you who aren't familiar with it, is it's largely an international brand. 70% of the revenue comes from overseas. And it was a brand that had not really been touched for a number of years. And when I say touched, it wasn't just from a product lineup, but from the brand language, the design language and the packaging and how we can merchandise it.

So we -- more than a year ago, we set out and are doing a Stanley product revitalization program that's going to start launching early next year and go throughout the next 1.5 years or so. So it's getting the product right, getting it updated establishing the right target end user and the right target end user for Stanley is the small res construction or handyman as opposed to the DEWALT enterprise and making sure that specifically in a very hand tool intensive business, the European hand tool business is much different than North America.

It's a fragmented wholesaler it goes through. And you basically -- it's you have branded walls in those wholesalers, and that's where those small residential contractors buy. You need to be with those wholesalers not only to help them drive demand, but so that you own that wall and you turn it into a vending machine.

We had throughout the years, either removed or attrited all of our Stanley brand-specific resources that had the responsibility to call on that wholesaler and make sure that they continue to win and defend that wall to keep that vending machine going.

So we've put Stanley-specific resources in Europe that are actually -- they're having a lot of progress getting that up and running. And then as a third element of the strategy, there is a big opportunity in that kind of advanced DIY power tool brand in Europe and rest of the world for a brand, and that's -- we're going to have Stanley we do have and we'll continue to grow Stanley power tools and we'll do that off of the Craftsman platform in the V20. So we'll be able to basically take a red Craftsman DIY product in North America, turn it yellow for Europe and use the same technology to further penetrate that.

I would say that we're in a stabilized form right now. And then next year, I would expect to go to growth in the back half. Craftsman was a little bit more of a reclamation project, and we're running out of time, so we'll make this quick.

We bought a brand without product. We took a bunch of Pro product and made it red to fit the marketplace, and it was trying to sell a Pro product at a DIY price. Not a great margin solution. We've taken a lot of time to get that properly specified take the cost out of the product and then make sure that we continue to round out that product line for what the DIYer needs.

And that is, I'd say, probably late '26, early '27, I would expect to see that kick in to growth.

Welcome to the Third 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 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 third quarter call. With us today are Chris Nelson, President and CEO; 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 today's webcast will also be available beginning around 11:00 a.m. Eastern time. This morning, Chris and Pat will review our third quarter results and various other matters followed by a Q&A session.

During today's call, we will be making some forward-looking statements 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 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 measure and additional information, please refer to the appendix of the supplemental presentation and the corresponding press release, which are available on our website under the IR section.

I'll now turn the call over to our President and CEO, Chris Nelson.

Thank you, Michael, and good morning, everyone. I am honored and energized to be leading Stanley Black & Decker as we embark on our next chapter of growth.

Since joining the team over 2 years ago, we have focused our businesses on where we want to compete, the end users we want to serve and the markets where we can be a leader. This work has been about being more selective so that we invest our resources in the places where we see the most significant opportunities and greatest ROI for our businesses. We show up every day for our customers and end users to deliver what they need when they need it. Through everything we do, this will continue to be our North Star.

Over the last few years of transformation, Stanley Black & Decker has solidified our foundation and sharpened our focus. I am proud of the dedication and collective effort that our team of approximately 48,000 employees strong has contributed to get us here. Our ambition is to build a world-class branded industrial company by solving our end users' most pressing and complex challenges.

We go to market with a portfolio of iconic brands, and innovation is in our DNA. We have strong connections with customers and end users, and our brands open doors and afford access to opportunities in geographies around the world. These foundational attributes, combined with the renewed focus achieved through our transformation, have positioned us to win across industries poised for long-term growth.

Stanley Black & Decker has made tremendous progress towards the objectives we established at the outset of our strategic transformation. We achieved these results despite a rapidly shifting operating environment, evolving consumer demand dynamics and trade policy fluctuations. With the operational proficiency and agility we have developed through our strategic transformation, we can now serve our customers and end users more effectively and efficiently.

With a strong foundation firmly 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. This presents us with the compelling opportunity to deliver attractive returns for our investors while benefiting all stakeholders.

As we look forward, we are on track to successfully deliver the $2 billion cost reduction targeted when we began our transformation over 3 years ago by year-end 2025. Our next priority is to achieve 35% adjusted gross margin while further strengthening our balance sheet. We will build on our capabilities and strong financial foundation as we execute our 3 strategic imperatives: activating our brands with purpose, driving operational excellence and accelerating innovation. I want to spend a few minutes going into each of these focus areas to give you a better sense of what will drive our profitable organic growth going forward.

The first imperative is activating our brands with purpose. We have pivoted from a product-led marketing approach to a brand-led market-back approach to reinvigorate our organic growth. This included creating a closer feedback loop between our brands and end users and prioritizing innovations that will address end users most pressing needs. Our core brands, DEWALT, STANLEY and CRAFTSMAN, each have a distinct identity, and we maintain this differentiation along with clearly defined target end users. This strategic segmentation informs how we prioritize resources and investment in key brands and focused trades. In addition, it enables broad coverage of the total addressable market, with specific and productive solutions that uniquely address the needs of end users, ranging from commercial and industrial professionals, to residential construction contractors and ambitious DIY enthusiasts.

Our organic growth strategy is anchored on accelerating DEWALT's performance, while maintaining a strong focus on delivering consistent above-market results in STANLEY and Craftsman. DEWALT's mission is to serve the world's most demanding professionals. Supported by a more data-driven, targeted approach, our commercial teams are executing locally and focusing on the most attractive growth opportunities with trade-specific initiatives.

To amplify our presence with professional end users on and off the job site, we have added nearly 600 trade specialists and field resources to our team over the last 2 years. And these investments typically show a payback within 12 months of each hire. Our trade specialists visit job sites with DEWALT solutions, demonstrating and promoting our newest innovations. They also gather valuable end user insights to drive future product development priorities.

In addition, as part of our Grow the Trades program, we are investing to support the training of new tradespeople and upskilling of established professionals. These initiatives are driving continued organic growth for DEWALT. Our results are informing and guiding future investments in real time and ensure our resources are deployed to the best prospects for accelerated growth.

In addition, these initiatives are building DEWALT brand ambassadorship along the way. We rigorously track metrics, from commercial activation to operational execution, with all efforts laddering up to our strategic vision. As a result of these efforts, positive momentum is also beginning to emerge from the international STANLEY brand vitalization effort. In parallel, the CRAFTSMAN brand campaign and portfolio expansion is progressing with an improved margin profile and strategy to drive success with the ambitious DIY enthusiasts.

Our next imperative is driving operational excellence. While it all starts with activating our brands with purpose, equally vital to our success is our commitment to operational excellence and continuous improvement. As we move beyond the transformation, we are executing with a lean-based operating system to deliver annual productivity gains, which we expect will contribute to both margin expansion and firepower for accelerated growth investments.

Operational excellence also extends to our distribution network. Business process improvements, along with our redesigned distribution network, have helped our team to deliver the best global customer service levels in our company's recent history. As we build strategic partnerships and multiyear growth plans with our channel partners, this will continue to be a top priority.

And finally is innovation, the lifeblood of Stanley Black & Decker's value proposition to our end users. We are accelerating innovation to advance and expand our end-to-end workflow solutions across DEWALT, STANLEY and CRAFTSMAN. By innovating faster, we will strengthen our position to provide preferred solutions for our end users and drive growth for our channel partners and for our brands.

We know that our end users, particularly the professional trades, are seeking holistic solutions that make them more productive and safer in every task that they perform on the job site. Providing this comprehensive set of solutions tailored for the specific needs of each trade, all powered by our robust and well-established battery platforms is our opportunity. To enable this, we've centralized our engineering organization under one leader to unify our global strategy with investments in core capabilities, design processes and systems.

Within this operating model, we are accelerating how we deploy the product platforming method, which is a comprehensive approach to modular design and governance. It empowers our engineers to dedicate more of their time and expertise towards addressing our end users most pressing and complex challenges. It also enables us to deliver highly specialized solutions to the market at greater speed. Year-to-date, our team has achieved 20% faster product development, and we believe there is runway for an additional 20% improvement by 2027.

In addition, this approach is streamlining product development and production processes. This allows us to take full advantage of our scale to achieve cost leadership and drive further working capital efficiencies. Our aim is to implement platforming across roughly 2/3 of our product portfolio by 2027, enabling our 35% plus margin objective. Our entire organization is contributing to an organic growth-oriented culture, underpinned by operational excellence. We believe that by executing this strategy, we can deliver a compelling value creation opportunity.

A year ago, we outlined long-term financial targets. And those levels of market-beating growth, earnings power, profitability and cash generation remain the appropriate long-term financial targets for our business. We expect our capital deployment priorities to focus on funding investment in the business, improving our balance sheet and supporting our long-standing dividend. Once these priorities have been satisfied and our leverage is sustained below 2.5x, our preference for excess capital will be opportunistic share repurchases.

We are executing with purpose, leveraging our core strengths and deploying capital with discipline. While we continue to navigate a dynamic macro today, we believe we are taking the actions required to serve our end users and customers, protect the profitability of the business and make progress toward our long-term financial goals. By fully executing against the strategic imperatives that I outlined, we are confident in achieving strong long-term shareholder returns.

Now turning to our third quarter 2025 performance. Our operational agility helped us deliver sales and adjusted EBITDA in line with our expectations. Furthermore, gross margin increased year-over-year, restoring progress towards our expansion trajectory and overcoming the tariff-driven interruption experienced during the second quarter. We accomplished these results despite the persistently challenging macroeconomic environment.

Total revenue was $3.8 billion, flat with the prior year period and down 1 point organically, driven by pricing up 5% and volume down 6%. We continue to generate growth in our DEWALT brand in the third quarter, supported by relatively resilient professional demand. Consistent with prior quarters, the overall consumer backdrop remains soft.

Our third quarter adjusted gross margin rate was 31.6%, up 110 basis points versus last year, predominantly driven by the benefits of our pricing strategies and the supply chain transformation efficiencies. This result is a testament to the dedication and collective focus of our teams around the company. It is even more noteworthy given it was achieved in a dynamic macroeconomic environment and with the ongoing production transitions. We expect to continue our trajectory of year-over-year adjusted gross margin improvement with expansion projected on a full year basis for 2025 and 2026.

Third quarter adjusted EBITDA margin was 12.3%, reflecting a 150 basis point improvement year-over-year, mainly attributed to the gross margin expansion. Adjusted earnings per share was $1.43, which includes a $0.25 tax benefit that we had previously expected to land in the fourth quarter. Third quarter free cash flow was $155 million, a solid result as we effectively manage working capital while shifting an increasing percentage of our U.S. supply chain to North America.

Turning to our operating performance by segment. I'll start with Tools & Outdoor. Third quarter revenue was approximately $3.3 billion, which was flat year-over-year. As with the total company revenue drivers, the drivers for Tools & Outdoor were in line with our expectations. Organic revenue declined by 2%, as a 5% benefit from targeted pricing actions was more than offset by a 7% decrease in volume.

Currency tailwinds and a small product line transfer from Engineered Fastening each contributed a 1% benefit in the quarter. The volume decrease was partially due to expected price elasticities and partially impacted by tariff-related promotional reductions within the retail channel.

As we had indicated during our second quarter earnings call, price realization in the third quarter was consistent with our expectations based on the April price increase. Consistent with prior disclosure, we are implementing a second price increase during the fourth quarter to maintain our innovation and brand investments, given the pressures resulting from tariff-related cost increases.

DEWALT, our powerhouse professional brand, maintained strong momentum and continued to demonstrate top line growth. The brand delivered revenue expansion across all product lines and regions. This result reflects the positive impact of our ongoing targeted investments in innovation and market activation.

Tools & Outdoor adjusted segment margin was 12%, up 90 basis points year-over-year. Margin expansion was driven by price realization and supply chain transformation efficiencies, partially offset by the impact of tariffs, lower volume and inflation.

Shifting to performance by product line. Power tools organic revenue declined 2%, largely resulting from tariff-related promotional cancellations in North America and continued softness in consumer demand. Hand tools organic revenue was flat. Strength within the commercial and industrial channels was offset by softer retail channel performance. Outdoor organic revenue decreased 3% as we ended a subdued outdoor season, where the independent dealer channel partners focused on selling through their remaining inventory. We anticipate inventory will be rightsized heading into preseason ordering for 2026.

Now Tools & Outdoor performance by region. In North America, organic revenue declined 2%, reflecting trends consistent with the overall segment performance. End user demand, as measured by U.S. retail tools and outdoor POS, started the quarter strong, but moderated later in the quarter, with aggregate third quarter performance at a level that was relatively flat on a dollar basis. In Europe, organic revenue was flat. Growth in the U.K. and key investment markets, including Central and Eastern Europe, was offset by softer market conditions in France and Germany. The Rest of World organic revenue declined 1%, primarily due to pockets of market softness in Asia.

Turning to Engineered Fastening. Third quarter revenue grew 3% on a reported basis and 5% organically as compared to the prior year. Revenue growth was comprised of a 4% volume increase, a 1% price benefit and a 1% contribution from currency. This was partially offset by a 3% headwind from the previously disclosed product line transfer to the Tools & Outdoor segment.

The aerospace business continued its strong trajectory, achieving over 25% organic growth, propelled by robust demand for fasteners and fittings. This business maintained its exceptional year-over-year and sequential top line growth supported by a solid backlog. The automotive business delivered low single-digit organic growth, reflecting a stronger-than-anticipated automotive market during the quarter. General industrial fasteners organic revenue declined by mid-single digits.

Adjusted segment margin for Engineered Fastening was 12.8%, which reflects elevated production costs in relation to a tough prior year comparable. On a sequential basis, adjusted segment margin expanded by 200 basis points versus the second quarter, reflecting improvements in the automotive market.

Overall, our teams delivered results in line with expectations through disciplined execution, targeted pricing strategies and a continued optimization of our supply chain, a solid quarter in a trying environment with significant credit to the global Stanley Black & Decker team. Together, we all continue to make meaningful progress on what is within our control. Thank you to our team around the world for all your hard work and the dedication you display every day to our customers and end users.

I will now pass the call to Pat to discuss progress we achieved on key performance metrics and to outline our latest 2025 planning assumptions.

Thank you, Chris, and good morning to everyone joining us today. I'm going to start by diving deeper into our gross margin performance.

In the third quarter, the company achieved adjusted gross margin of 31.6%, representing a 110 basis point increase over the same period last year. Our entire organization has prioritized margin expansion. And through the implementation of targeted initiatives, we have achieved tangible year-over-year margin improvement. The improvements have been primarily driven by our disciplined pricing strategies and enhanced supply chain efficiencies. Our targeted initiatives contributed meaningfully to our performance this quarter, though the benefits were partially offset by tariffs, reduced volume and inflation.

Our gross margin trajectory remains firmly positive, reflecting the organization's steadfast dedication to operational excellence. The team's commitment and capability to deliver is exemplified by the fact that even with the significant tariff expenses hitting our P&L starting in April, we only had a single quarter of gross margin setback. Despite broader market volatility, our teams have demonstrated remarkable agility and focus, ensuring we sustain profitable growth even in uncertain environments.

And looking forward to 2026, we foresee a strong opportunity for significant year-over-year adjusted gross margin expansion versus 2025, even if the macro conditions do not improve materially. We continue to target 35-plus percent adjusted gross margin. As a team, we continue to strive to achieve or be very close to this target by the fourth quarter of 2026.

Turning now to our global cost reduction transformation program. In the third quarter, we continued to make substantial progress, delivering approximately $120 million in incremental pretax run rate cost savings. These actions are instrumental in supporting our ongoing margin improvement trajectory, which ultimately enables sustained investment in growth.

Since its inception in mid-2022, the program has generated about $1.9 billion in pretax run rate cost savings, underscoring the scale and effectiveness of our transformation agenda. We are on track to meet our targets, with consistent progress across all work streams. We expect the transformation program to yield cost savings of $500 million in 2025 and $2 billion overall by the end of this year, marking the successful achievement of this initiative's original cost reduction goals.

A key element of our tariff mitigation and gross margin improvement strategy centers on minimizing the amount of U.S. supply that comes from China. We are making substantial advancements in this area and systematically progressing along a clearly defined path. We have been rapidly moving cordless production from China to Mexico, while also rapidly increasing the levels of USMCA compliant production in Mexico. We expect to continue to meet targeted reductions in U.S. goods from China. We plan to reduce from 2024 levels when approximately 15% of our U.S. supply was sourced from China, to less than 10% by the middle of 2026, and to less than 5% by the end of 2026. These milestones are essential for achieving targeted gross margin objectives and for improving supply chain resiliency. By diversifying our supply chain, we are better positioning our business to navigate evolving trade dynamics, respond to regulatory changes and deliver operational excellence.

Operational excellence via platforming, lean manufacturing and further fixed cost reductions will remain a top priority beyond 2025. We remain confident in our ability to sustain positive momentum as we move into 2026, and that our focus on disciplined execution will deliver sustainable productivity gains and cost leadership. Annual productivity improvements will serve as the engine to fund investments that drive top line growth and further our competitive position. The actions we are taking today are foundational to supporting ongoing margin improvement and achieving our long-term adjusted gross margin target of 35-plus percent.

Now let's take a look at our planning assumption for 2025. Adjusted earnings per share is expected to be approximately $4.55, a reduction of $0.10 compared to the estimate from last quarter. This revision reflects higher-than-anticipated production costs resulting from tariff-related volume softness and supply chain changes. We will correct for these items during the fourth quarter to facilitate achievement of targeted 2026 gross margin improvement, making these headwinds temporary elements of our tariff mitigation response plan. Our earnings outlook for the year reflects an updated GAAP earnings per share range of $2.55 to $2.70. This revision from the previous planning assumption is primarily attributable to $169 million pretax noncash asset impairment charge recorded in the third quarter.

Let me provide clarity on these impairment charges. First, updates to our brand prioritization strategy to focus more company resources and investment on DEWALT, CRAFTSMAN and STANLEY, which we have discussed many times over the past year, impacted 3 trade names specifically LENOX, Troy-Bilt and IRWIN. This was the vast majority of the impairment charges. Going forward, we intend to focus on marketing of these specialty brands to specific product categories and regions where they hold their most meaningful market positions and value to end users.

Second, we've made a strategic decision to exit most of our noncore legacy corporate venture investments, which resulted in the write-down of certain minority investments in the quarter. Total pretax non-GAAP adjustments for the year are estimated to range between $370 million to $400 million, primarily related to the supply chain transformation, noncash asset impairment charges and other cost actions that will benefit SG&A. We expect approximately 45% of these adjustments to be noncash as they pertain to the aforementioned trade name impairment charges and write-down of certain minority investments associated with legacy corporate ventures.

Now in regards to the revenue outlook. For the full year, we anticipate total company sales to be flat to down 1% as compared to 2024, most likely at the lower end of this range. Organic revenue is projected to decline in the same zone as a total company, and price realization is expected to be offset by anticipated volume declines. Currency is expected to contribute a positive 1 percentage point, which will be offset by the first quarter comparable impact from the infrastructure divestiture. We expect adjusted gross margins to remain resilient. And based on our current trajectory, we expect to be approaching 31% adjusted gross margin for the full year 2025. To deliver profit and cash in a dynamic environment, we will continue to advance our tariff mitigation and gross margin expansion journeys, and we will manage SG&A thoughtfully relative to expected volumes while preserving growth investments.

Looking forward to the fourth quarter, we expect continued year-over-year expansion of adjusted gross margin to around 33%, plus or minus 50 basis points. This outlook is supported by our second round of price increases, ongoing benefits from our supply chain transformation and additional tariff mitigation measures, partially pressured by tariff-related production costs.

SG&A as a percentage of sales for both the year and the fourth quarter is planned to be 21% in a fraction, characterized by judicious cost management while protecting strategic growth investments. We remain committed to investing in high-growth, high-return opportunities, with over $100 million being reinvested in 2025 to drive market activation, strengthen our brands and support commercial expansion, while managing SG&A costs down elsewhere in the business.

For the full year and fourth quarter, adjusted EBITDA margins are also expected to expand year-over-year, supported by gross margin improvements and the cost actions we are implementing.

Shifting to our segments. For the Tools & Outdoor segment, the full year organic revenue outlook is projected to decline approximately 1 percentage point. The Engineered Fastening segment is expected to achieve low single-digit organic revenue growth led by aerospace.

Now turning to cash generation. We generated $155 million in free cash flow during the third quarter, making progress toward our full year 2025 free cash flow objective of $600 million, which remains unchanged from a quarter ago. As we advance through the last quarter of 2025 and into 2026, we remain committed to diligent inventory management, ensuring customer order fulfillment remains a top priority, even as we proactively navigate evolving supply chain dynamics and potential shifts in the external market environment. Our capital expenditure outlook for 2025 remains approximately $300 million, in line with previous planning assumptions.

On capital allocation, we intend to allocate free cash flow in excess of our dividend toward debt reduction in the near term. Maintaining a strong and resilient balance sheet is a top priority, and we are committed to achieving a net debt to adjusted EBITDA ratio of less than or equal to 2.5x. Our strategy to reach this leverage objective is to be supported by the proceeds from an asset sale we are targeting within the next 12 months. We continue to anticipate our adjusted tax rate will be approximately 15% for the year.

Other modeling assumptions for 2025, as shown here, are generally consistent with the assumption shared with you in July. For the fourth quarter, we anticipate organic revenue to be flat as price increases are offset by volume pressures, stemming from a subdued consumer DIY market. In the fourth quarter, we expect continued pretax earnings growth and working capital efficiencies driven by the seasonal drawdown of receivables and a modest decrease in inventory to deliver our free cash flow target. Adjusted earnings per share for the fourth quarter is expected to be approximately $1.29.

We remain optimistic about the long-term growth prospects for our industry and our business. The targets we laid out for you a year ago at our Capital Markets Day remain appropriate for the business and our focus, albeit delayed by roughly a year due to the impact of increased tariffs. Near term, we expect market conditions to remain dynamic and challenging. We will continue to respond decisively through targeted supply chain and SG&A adjustments, underscoring our commitment to meet the needs of our end users and customers while delivering financial result improvement. We continue to focus on enhancing the company's long-term earnings power and strengthening the balance sheet.

Thank you. And I will now turn the call back to Chris.

Thank you, Pat. We are strengthening our operational resilience on a daily basis. Our disciplined data-driven approach empowers us to navigate evolving market conditions, seize emerging opportunities and consistently deliver value to our stakeholders.

As Pat outlined, we are continuing to proactively manage factors within our control to facilitate the achievement and advancement of our goals. We believe our outlook for 2025 is balanced given the elevated levels of global uncertainty. We recognize the operating environment is challenging. And we are focused on creating significant value from our powerful brands and businesses to generate long-term revenue growth, margin expansion, cash generation and shareholder return.

We remain committed to driving towards the goals outlined during our November 2024 Capital Markets Day. I am confident that with the collective dedication of our talented team, and an unwavering commitment to supporting our customers and end users, Stanley Black & Decker will continue to set new standards for excellence in the years to come.

We are now ready for Q&A, Michael.

Thank you, Chris. Shannon, you can begin the Q&A now.

[Operator Instructions] Our first question comes from Tim Wojs with Baird.

Just maybe on the volumes, I'm just curious how those performed relative to your expectations? And I guess if you could break down the volume between kind of what was impacted by tariffs and kind of what the, I guess, elasticity you saw in the quarter. And as you think about the next few quarters with price and volume, do you expect that kind of one-for-one trade-off to kind of continue with price and volume? Or do you think there could be some underlying improvement in that dynamic?

Tim, this is Chris. Thanks for joining us. Yes, I would say that our volumes were relatively in line with expectations. We started the quarter fairly strong, and there was a little bit of tapering towards the end of 3Q. But that really was more due, we believe, to -- as we had referenced in earlier conversations, a non-standard promotional window. And we're -- as we go into Q4, we actually will get back on a more normal promotional calendar. And we're actually very excited about the promotions we have for the holiday season, which, as you know, is important to our business.

I'd say that we expect the environment to remain similar into Q4, and then we will continue to monitor and adjust as we go into the new year in 2026. But I'd say that while we see the environment, as Pat certainly mentioned, as challenging, it is relatively stable, and we're excited about the promotional calendar we have to close out the year and it's going to be important for us to monitor.

Our next question comes from the line of Julian Mitchell with Barclays.

Maybe just my question would be around dialing into some of the profit levers in a bit more detail. So I think for the fourth quarter, you're assuming operating profit up a few tens of millions of dollars sequentially with flattish sales. And is that all really coming from this extra price increase? And then as you're thinking about 2026, it's only 8 weeks away now, it seems like you won't get much help from volume based off the exit rate from this year. So maybe help us understand what are some of the main gross margin drivers you're most enthused about for 2026?

Thanks, Julian. Yes. So operating profit for the fourth quarter is going to expand really 2 levers. We certainly expect to continue making progress on the gross margin front. We expect a fourth quarter gross margin around 33% could bounce around plus or minus 50 basis points, but that's certainly what we're targeting and tracking towards.

And then one of the things we've been talking about all year is judiciously managing SG&A expense relative to the volume environment while still protecting growth investments. So while we're still targeting around $100 million of growth investments, and elsewhere in the business, we're really reducing SG&A expense quite considerably, almost to an equal amount this year in our '25 full year income statement. And we'll probably, on a year-over-year basis, be down in SG&A, $40-or-so million versus the same quarter last year. So the profit expansion in the fourth quarter is a mix of gross margin expansion and SG&A reduction. Those are the primary drivers in a quarter where, overall, our net sales line is roughly flat. So that's where you're getting this year.

I'd say as we work into next year on gross margin, we're still, as an organization, very focused on our long-term objective of 35-plus percent. And every day, we get up trying to solve the riddle of how to get there by the fourth quarter of next year, and that's still our objective. We'll be there thereabouts working on that, assuming the macro environment is kind of in line with where we are or better. Obviously, if there was a big recession, we might need to revisit that.

And the levers we're going to be pulling for next year, we're still going to be working strategic sourcing, in plant, continuous improvement, platforming is going to be starting to play a bigger role, and we still have some facility decisions ahead of us. So all of those levers are still in play for '26 and beyond. And they'll all be playing very significant roles. And as we mentioned, as we adjusted the outlook for the fourth quarter of this year, we went into the back half of this year with a bias to having some excess capacity in our plants to deal with the circumstances elasticity ended up being more favorable and to accommodate some of the global transitions of supply and we'll be having to kind of adjust for those types of costs, too, as we go into the early parts of '26.

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

Chris, congratulations on actually sitting on the phone right now, I guess, but congratulations. Maybe -- I think you mentioned going out with another price increase in the quarter. So can you just maybe mark-to-market somewhere you expect price to maybe come into the fourth quarter? And maybe just give us a quick mark-to-market on -- I know it changes a lot, but on the tariff inflation, how you see it right now? And are you down in this 10% [ sentinel ] term production? And does that have an impact on 4Q?

Thanks a lot, Nigel. Nice hearing from you. I'll start, and I'll let Pat wrap up. But I would say that the price increase -- the second price increase, as I mentioned in my remarks, we're in process right now, and it's going to be in that low single-digit realm that we talked about in previous conversations, and we're on track to that.

And we're working with all our channel partners constructively to get that in place because our goal collectively is to make sure that we do everything and anything we can to minimize what the stress would be on our end users. And therefore, where our real emphasis is, is driving our production moves and mitigation to reduce our reliance on China imports for U.S. consumption. We've been making significant progress there. We remain on pace to be below 10% by the end of the year and below -- at or below 5% by the end of 2026. We're making great progress there. And that's really the emphasis.

So as it relates to the second part of your question, which would be the tariff exposure based on latest information. It really has no material impact. It's still right about the same area based on the changes that have come in 232s, combined with the reduction in China, it's kind of netted out. So we're right in that same ballpark. And as it relates to what that means for our mitigation efforts, we were basically, as I mentioned earlier, we were planning in the not-too-distant future to be largely absent from China as a source of supply for the U.S. So it really has minimal impact on our medium- to long-term strategies there.

So I don't know, Pat, if you had anything else to add there?

Yes. No, I think you covered most of it, Chris, I'd say -- just to reiterate a few things Chris said, is our end game plan kind of end of '26 forward is to be below 5% U.S. COGS from China. That's what drove our total mitigation strategy, both supply chain changes and pricing. And so given that this reduction in 10% of -- 10 percentage points to the China tariffs doesn't meaningfully change that outcome.

You asked a little bit of is there a fourth quarter benefit? It's probably in the ballpark of very low single-digit millions given that it affects one quarter and then you pretty much only get the LIFO portion of that. So for the fourth quarter, it's a very small amount. It's a slight help probably in the 5 to 10 range of each of the first 2 quarters of next year or thereabouts. But it's not a game changer long term. Certainly, any relief is welcome, but it's not a big magnitude item.

Our next question comes from the line of Christopher Snyder with Morgan Stanley. Christopher Snyder, your line is open. Please check your mute button.

Sorry about that. I wanted to ask about Tools & Outdoor top line. So price this quarter, I think you guys said 5%, but I thought the conversation on the Q2 conference call was for high single-digit price. Maybe that was more of a back half comment than a Q3 comment. So any color there would be appreciated. And then also, Tools & Outdoor is calling for a better Q4 mark. It seems like maybe flat organic. Q3 was negative [ 2 ]. And now we have a more difficult comp into Q4. So can you just maybe talk about why that 2-year stock will get better? I know price comes through, but we would think with the one-for-one offset that, that would be accounted for on lower volumes.

Yes. So Chris, pricing can get confusing because obviously, it's a portion of all the work we're doing to mitigate tariffs. Obviously, there's a lot of supply changes in addition to that. But it's largely United States, Tools & Outdoor phenomena. So you're talking about taking considerable price on 60% of our business, not on 100% of our business.

So you're accurate in understanding that our pricing, ultimately, when we get through the second round of price increases, but even the pricing we've already taken is in the high single-digit range. It's probably going to across our U.S. product lines be in that high single to maybe even in the low double digit depending on the SKU you're looking at. But again, when you take basically 60% of that, you're getting into a mid-single-digit global viewpoint on pricing, both global for T&O and global for total Stanley Black & Decker.

So we -- if you look at our outlook and planning assumption information, we've been referencing on an enterprise-wide basis, expecting mid-single digits U.S. T&O high single digits or above. And that's exactly what we're seeing. So it's a lot of hard work by our team and a lot of hard work with our channel partners to do it thoughtfully, but we're getting the price we expected. And you saw in the pricing reconciliation for the third quarter, it was 5 percentage points, and that's right in the ZIP code we expected.

Obviously, we're taking a second round of pricing in the fourth quarter, but we're also going to be running back to kind of a more normal promotional cadence. So I would expect the reconciliation for the fourth quarter to be in a similar ZIP code. It can kind of move up or down from that 5 based on promotional mix to relative sales.

In terms of the growth cadence for the quarter and the year, for the full year, enterprise-wide, we're expecting net sales for the full year, enterprise-wide on an organic basis to be flat to down 1%, probably more likely towards the lower end of that range. And for T&O for the quarter, we're also kind of expecting flat to down at 1-ish percent. And again, probably towards the lower end of that range. So that's going to have an enterprise where T&O for the quarter and the year is down somewhere between 0 -- flat to down 1%, closer to that down 1%, and you're going to have SCF up about 2 percentage points on the year, and that's what's going to drive the overall enterprise to the enterprise expectation.

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

I wanted to focus on -- without really getting into guidance for next year, focus on some of the actions you've taken this past year and how they might impact '26? And in particular, just thinking of, number one, the carryover impact kind of like from an annualized perspective on what the cost reduction that you're on track to do the $2 billion by the end of this year. What impact, on a fully annualized basis, would that have to benefit 2026 as well as the movement of supply chain with the China footprint reduction that would ostensibly -- as that comes down throughout the year, I would figure have some type of -- also some type of benefit to cost.

Yes, Mike, it's a fair question. We certainly are going to be looking at how this quarter plays out from consumer confidence, consumer engagement and volume perspective before we're going to feel like talking about '26 guidance is appropriate.

But anchor stones to '26, kind of no matter the macro are going to be making gross margin progression and managing SG&A thoughtfully. So we're working game plans for '26 that have us around 35-ish percent in the fourth quarter. We're going to be finishing this full year on like a 31-ish percent basis. So the full year '26, we're going to obviously be targeting something very much in between those 2 points of 31 and 35.

And as I mentioned to the questions Julian was asking, all the levers are still in play. We're going to need to be generating in terms of gross productivity next year, somewhere in the $350 million, $400 million range. That's going to be our rough focus point, again, irrespective of the macro, to continue marching on that gross margin path. And then we're going to be working on mitigation path of getting $200 million to $300 million of tariff expense out of the system via, whether that's shifting product out of China and/or increasing USMCA compliance. So those are our focus areas. Those are levers that we're pulling, and we'll continue to kind of manage SG&A in that 21-ish in a fraction range, again, working to generate growth investments while tightening up the cost structure elsewhere.

Our next question comes from the line of Adam Baumgarten with Vertical Research Partners.

Just curious how you think your North America power and hand tools volumes compared to the market in the third quarter?

Adam, so I think we're relatively in line with market. I'd say a couple of things. We know DEWALT continues to grow year-over-year in the absolute terms, and I think that, that would be pacing the market. We've been seeing more signs of progress staying in line with market levels, with our other 2 core brands.

And I think the important thing to understand is that in the short term, with the amount of change that has happened with various responses to tariff policy, pricing as well as promotional calendars, there's just -- there's been a lot of volatility in the market. We're going to keep on monitoring and see how things progress, not only as we wrap this year, but go into the next year into 2026. But I'd say we have been relatively in line with what we think the market would be and I'd say, exceeding what we think the market is with our DEWALT brand.

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

There's a lot of moving pieces with housing policy for the current administration. I was hoping you could talk to how you see Stanley Black & Decker as a potential beneficiary of some of these proposals to catalyze and unlock dormant housing supply in the future?

Thanks a lot, Jonathan. Nice hearing from you. Let me start by just saying that we understand that -- and we would say that we don't see any real near-term catalyst right now for that market. So we're focused on making sure we control what we control. We're excited about what we're doing. We're excited the progress we're making in our margin expansion and our product line expansions. And we'll continue driving towards that. And for lack of a better term, we're going to continue to improve based on the actions that we take, on the things that we control, and that's what we're concentrating on. And I think that excited about the progress we've been making, and we expect to continue to make along those lines as we go into 2026.

As it relates to any release of momentum in the housing market, whether it be new construction or repair and remodel, we certainly believe that we are very well positioned to be a beneficiary of that. We certainly serve those markets and serve those trades with very high share positions, and we have been using this time of, what I would say is a little bit more of a retrenchment of that market, to invest heavily to make sure that we are there with those end users, with those contractors and with that industry to be building the relationships and building the innovation so that as that does unlock, that we will be there to certainly be a beneficiary of it and probably more than our fair share.

Our next question comes from the line of Joe O'Dea with Wells Fargo.

You gave some helpful color on China and U.S. supply exposure there and what you expect on that trajectory. Any perspective on USMCA compliance and the path that you're on there? And then along with that, just on the 4Q pricing that you talked about being kind of in process, for how much of the quarter would you expect that price to be flowing through the P&L, the incremental price that you're in process on now?

I'll start with USMCA, and then I'll turn it over to Pat for the pricing question. So USMCA, and I think I stated this on our last call that we -- we are making significant progress. It's a big part of our mitigation efforts. And as we -- as we've talked about our strategy from the very outset on managing the tariffs, we're going to support our customers, we are going to mitigate our operations, we're going to price where necessary, and we're going to maintain our communications with the administration. We certainly priced for what we believe our end state mitigation was going to look like as we went out of 2026. So it's all hands on deck to get us towards that end because that's a big part of what our mitigation and margin journey is all a part of.

As it relates specifically to USMCA, we're making progress, and we see no structural roadblocks to us being at or around, what I would say is the average for industrials that look like us, and we'll be there over the medium term. So we're making great progress, and we see a good opportunity there to make sure that we can continue to have the products that our end users need at the prices that they can afford.

Yes. And Joe, relative to fourth quarter pricing, a fair number of those discussions with channel partners have been completed, and those pricing actions are starting to go underway. We would expect the balance of them to be completed here in the early part of November. And so I kind of think of it as, for the most part, 2 of the 3 months of the quarter, and we feel like we're tracking on that. And with all the variables we're managing in this quarter within our planning assumption, we're comfortable with where we are on that front.

Our last question comes from the line of Joe Ritchie with Goldman Sachs.

Just -- the only question I have right now is really around inventory levels. It looks like you've reduced your inventories over the past year and also sequentially, how far above do you still think you are from an inventory perspective? And what's your expectation for reduction in 2026??

Yes. Good questions, Joe. I mean I think I'd raise it to the topic of cash and then come back to inventory because we still are in a delevering mode and very focused on generating cash. And obviously, we have work to do this quarter. And so we expect the gross margin improvement and the SG&A management I referenced earlier in the Q&A to drive profit expansion in the fourth quarter, and then we'll be pushing for over $500 million of working capital reduction in the quarter. That's both receivables and inventory.

I'd say this whole year, at least to this point in the year, we're a little bit heavier on inventory than we'd like to be, but that is understandable relative to all the supply chain moves we're doing. I mean, obviously, we're taking 15 percentage points of our U.S. COGS and moving them out of China, that ends up requiring some inventory slack in the system, and that's part of our challenge.

I'd say for next year, we're probably targeting at least $200 million. We'd like to be better than that because I think our longer-term opportunity in a level at this revenue stage probably approaches $1 billion of working capital reduction. That's not just kind of on the margin thing, that's leveraging, platforming and improving the way we do planning and a whole host of other things that drive inventory. But I still think that, that's the opportunity that's out in front of us. But with some of the tariff mitigation that's going to consume the first half to 2/3 of next year, I think a target in the $200 million to $300 million range closer to [ $200 million ] for next year is probably more appropriate.

I would now like to turn the call back over to Michael Wherley for closing remarks.

Thank you, Shannon. We'd like to thank everyone again for their 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. You may now disconnect.

All right. Thank you, everybody. Chris Snyder, a U.S. multi-industry analyst. Super excited to have Stanley Black & Decker up here with me. We have CFO, Pat Hallinan; [ Chris Cappella ], Director of IR; and then Michael Worley, Vice President of IR, who just joined the company, and will be replacing Dennis Lange, who many of you know, who is moving now into a strategy role with Stanley Black & Decker.

Before we get into the Q&A, Pat is going to start off with some remarks.

Yes. Thanks, Chris. Good to be here, and thank you for attending this afternoon. I just -- as we have Chris Nelson, who's been our Chief Operation Officer for the last 2.5 years, stepping into the CEO role in October and Don Allan, our current CEO, going into Executive Chair. I just want to reinforce the fact that we think we still have a great organic self-help and growth story in front of us. And that's where our focus is for value creation is finishing the transformation, mitigating tariffs to get our margins to 35-plus percent and really pivoting to growth and doing so by heavy emphasis on accelerating very targeted innovation and activating our brands with greater precision and greater purpose in the marketplace.

And obviously, the macro environment and the political environment has given us some new fun things to work on. But we still feel despite all of that noise and tumult that the targets we laid out a year ago at the Capital Markets Day we had last fall are very much still the appropriate targets for the business and very much still within reach. The tariffs probably put a 12-ish month lag to achieving those targets, but they're still the right targets for the business. And we're looking forward to having Chris in the CEO role and are very confident in the road ahead. So with that, Chris?

Thank you. Kind of maybe starting with that Investor Day from last year, you guys talked about that you're really focusing spend on 3 brands. DEWALT seems like first and foremost, but then also STANLEY and CRAFTSMAN. Can you talk about that decision, why it was made and ultimately, what benefit that brings to the company?

Yes, yes. I think a few things. One is -- we went through a period as did many durables products that go to market through construction channels, whether they're retail big boxes or trade-centric channels where a proliferation of brands maybe helped a channel exclusivity exercise. And so we obviously, if you followed our story for a long time, we acquired many brands, many you didn't list, and I'm not going to spend the time here listing them. But the road from here forward in accessing growth is really about resonating with end users as your channels partners and not promising lots of exclusivity. And so therefore, having these brand boundaries is a less valuable route forward. And now we need to be able to invest to demonstrate to end users that we're giving them productivity or safety improvements or supporting them in the field better. And so by prioritizing brands, it enabled us to allocate capital in a much more concentrated scalable manner.

And when you look at DEWALT, STANLEY and CRAFTSMAN, those brands are 75-plus percent of our dollar revenue to begin with. And they allow us to access the 3 big market segments that we're targeting most specifically. DEWALT, very much targeted at pros across a number of trade channels. STANLEY, a brand that is targeted very much at the kind of sole proprietor pro. And if you follow STANLEY outside the U.S., it's a very powerful brand in power tools as well as hand tools, whereas the U.S. is still a hand tools brand. And then CRAFTSMAN gives us the entree to DIY. So there are places where we had good scale, we had good route to market, and we had good attachment to the end markets we're chasing most specifically.

I appreciate that. DEWALT has had really good growth. You guys kind of have talked about that. Are you seeing improvements at STANLEY or CRAFTSMAN from the focus on the investments you're making?

We are. I mean, obviously, they're not quite at the pace and magnitude of DEWALT yet. The ex U.S. parts of our STANLEY brand were on that game, probably in kind of second order relative to DEWALT, and we are in Europe and Latin America, seeing much greater performance from that brand. And we're going to be bringing that more to the hand tools marketplace in the U.S. Some of its industrial design and packaging and some of its merchandising. But yes, we are starting to see that in the European market.

And then I think CRAFTSMAN is a brand where we're retooling its positioning with DIYers. It probably got a bit too broad in terms of category and product offering, and we need to focus that a little bit more. We're -- we have 2 big retail partners there. One, we're humming on all cylinders. And one, I think we need to do some work to retool the actual product offering in the marketing and then align strategy. But I do think in '26, you're going to see progress in both of those brands that starts to read through to the top line in both of those brands.

I appreciate that. You guys talked about with the growth investment, obviously, product innovation. So I guess, are there any specific innovations that you want to call out that are really having -- or having or could have a material impact on demand? And the second piece you guys called out was you added more than 400 customer-facing employees. So can you just kind of talk about what they're doing to help support growth?

Yes. So on innovation, I would say we have some areas of historic strength like carpentry and concrete, and we've had products in both of those categories over the next -- over this year and into next year. And we've always had good presence in mechanical, plumbing and electrical, but not where it needed to be. And I think as you see things roll out next year, you're going to see a lot in the plumbing, mechanical and electrical spaces. And I think that's where you're going to see the growth in DEWALT in those categories.

In terms of resources, they're kind of equally, if not biased a bit towards sales and then some infield service. And as we've gotten back to historic strength, which is field support of the brand. And as you go to market with trade customers, whether it's a Grainger or a White Cap or whomever is a channel partner of you, they expect you to have your own salespeople in the field with their salespeople, driving relationships with big contractors and driving sales initiatives. I'd say that's where about 2/3 or more of that headcount has gone. And then the rest is supporting product, customer service support and field support of product on big job sites or with channel partners where we -- whether we run a repair facility that's co-located with a channel partner or some of our own.

I appreciate that. You mentioned that these 3 priority brands account for about 75% of the portfolio. The other 25%, is the investment into those 3 brands coming at the expense of the other 25%? Or is the investment there just being kind of held steady. It's just not increasing like the others?

It's the latter. And we have general managers in charge of those brands, and we expect them to be much more kind of bootstrappy entrepreneurial. But we're not -- for example, we're not starving LENOX to feed DEWALT. It's just as we've talked about our transformation journey since '22, while we were saving $2 billion, $500 million from SG&A and $1.5 billion from COGS, we were also saying, hey, we're going to be deploying about $100 million incremental a year to growth. And those incremental dollars are going towards those 3 big brands.

I appreciate that. Obviously, there's a lot of cyclical pressure in the market. The consumer is weak, interest rates have been high, tariffs aren't helpful. But I think the investors that have a more structural negative view of STANLEY would say, you guys want to outgrow the market by 2x to 3x, but there are competitors in the market who are just willing to run at lower margins versus what you're targeting.

I know there's more than one competitor. I know we always focus on the one. So I guess -- I guess what would you say to that? And then like who is the company taking share from? Or who do you think you could take share from?

Yes. Well, I'd say there's 3 things in there, right? One is, I think -- and we sometimes talk about 2x to 3x the market, and I think people get either excited or very anxious. But the market we're talking about real GDP. So if you're thinking real GDP is 2-ish percent plus or minus 50 basis points, we're talking about 4% to 6%. And I think if you look at a brand like DEWALT that's had a CAGR over 6% for the last 10 years. So we're kind of talking about performance that's within the bounds of our long-term trajectory. It's not easy, but we're not out there chasing 12% or 18% and trying to incite price competition. That is certainly not our objective.

I feel that we can compete and grow this business mid-single digits in a market that's probably a 3% to 5% market. If we're growing 4% to 6%, that's probably the framework we're talking about. And if we compete on the basis of innovation and the way we support our products in the field, we can do so constructively without creating pricing -- lack of pricing discipline in the market. I think in terms of share, the 2 of us that you're mentioning together globally are each about 12%, 12.5% market share. So we -- the 2 of us together have 25% market share. There's still 75% of the market to go chase. So it's not just 2 people tearing stake off of each other's plate. We have 75% of the market to go after.

And if you look at other durables markets, it's not atypical that you have 2 to 5 players that are of reasonable equal size and capability. So I think players like ourselves and the TTI brands, we can go to the market and we can compete for the other 75%, and we can compete against one another on the basis of innovation without killing one another.

I do think on the -- where else is share coming from? I mean, I do think there are a number of other players. Some of them are global, some of them are local. And they've been retrenching a bit for various reasons, whether they have other lines of business that are more important than power tools or whether they're going back to some of their more traditional geographic markets. And I think that's kind of where the share has more than not been coming from.

I also think the innovators like ourselves and certainly have to give TDI some credit, we're innovating for the Pro, and we're growing the market by growing dollar share in terms of higher-priced tools that drive higher productivity.

Yes, absolutely. The company has had a strong gross margin recovery. I think the trough was about 20%. And I think you guys are kind of targeting low 30s in the back half. The target is 35%. It sounds like you said earlier, maybe that's kind of out 12 months from the original year-end 25%. And I think it's very reasonable that we have had a very challenged market down volumes the whole time. Obviously, tariffs are unhelpful to that. But you're also going to end the year roughly all the way through the $2 billion restructuring program. So like what drives that next? What gets you from low 30s to mid-30s plus? Is it just volumes? Is there more cost savings?

A lot. If we get to the end of this year, we'll be -- and this is consistent with the dialogue we had at the end of the second quarter, we'll be roughly around 31% for the full year in '25. Obviously, we wanted to be farther along than that. Tariffs have brought in about $800 million in annualized new cost. What gets us through that by the end of next year is we'll have a second price increase this fourth quarter. We'll have tariff mitigation next quarter. And then we have some additional activity in supply chain opportunities. So we have every confidence we get there. But the biggest -- in the simplest terms, the biggest is mitigating the tariffs out of the system is the biggest.

Because when we look at tariffs by this fourth quarter, we'll kind of dollar for dollar price neutralize them on a run rate, meaning like if we have an $800-ish million tariff bill, we're kind of at that level of pricing, but that doesn't recover margin. So the supply chain actions that we're attacking to get product out of China to elsewhere, whether that be Mexico or other Asia, and a little bit North America or U.S. rather, that will be the margin expansion of next year.

I appreciate that. Maybe turning to the market. It feels like the story here has been the same for the last 3 years. The pro is resilient and healthy. The consumer is not -- is feeling pressure. I guess, are you seeing any rate of change as you look across either side of the market?

No. I mean there's been -- and some of these were dialogues, there's been ebbs and flows across the months and quarters of this year in that there has been months where the POS has actually been surprisingly strong, and then there's months when the POS has been weak. It does seem like the consumer and especially the DIY consumer or anybody buying higher price point items, they kind of ebb and flow with the political move. But we set out this year, we thought we'd be flat to maybe up 1 point. And then across the first quarter close and the second quarter close, we revised that to kind of flat to down 0.5 point. And we still feel like we're roughly in that ZIP code.

And I do think if there could be some certainty on the tariff/pricing front, and I do think there's meaningful movement when the 10-year is getting to 4% or low versus 4.5% and up. And we'll see if the current dynamic holds, right? I mean there's a lot of noise in interest rates right now. But construction broadly, not just U.S. housing will benefit from a 10-year that's 4% or lower.

Yes. I mean that was kind of going to be my next follow-up. If we look at Tools & Outdoor volumes, have been down for 3 years, below pre-COVID levels from my sense. I guess, is that it? Do you think it's -- we need rates to get it? Is it just maybe consumers need to see certainty, feel better? What could kick start this?

Yes, I do think -- I think rates are a part of it and are a big part of it. I also think -- and I'm not naive. I don't think that these things click over quickly because obviously, rates ultimately will rise and fall with deficits. I also think immigration and employment policy because that drives construction activity for sure, not just housing construction. And then finally, how is the government, both local governments and federal governments going to deal with infrastructure because we care, obviously, about residential construction, but commercial and infrastructure construction is as valuable to us.

Yes. absolutely. I think you guys said on the last conference call that you're seeing about one-for-one price elasticity. Price goes up one, volumes go down one. Is that still what you're seeing?

That's still what we're seeing as we went into this tariff pricing environment, the reality is the industry hadn't taken a lot of price recently. And so most of what we had to observe data-wise was our promotional elasticity, which was really if we take price down 1%, what do we get? And it was about a one-for-one lift. And so we went into a price increase environment, which was mostly a list price increase environment, not exclusively so. And that's about what we've seen. Now obviously, it doesn't hold across every SKU equally, and we didn't take price equally across every SKU. There are certain categories that are more elastic and some that are less elastic, but that is a good rule of thumb on average for [indiscernible].

Appreciate that. You guys very successfully, it seems like, went out to the market and got price in the spring. And I know that's not an easy thing to do with the channel partners you guys have. But I guess my question is, -- is that getting harder as time goes on? And do you feel like there's any pricing fatigue in the market because maybe not due to the absolute level of price, but just due to the consistent every other month having to come back and ask for more?

Yes. So both very fair questions. So I think on the first price increase, which we launched in the spring, middle of the second quarter, we had the good fortune of kind of starting those dialogues early, meaning the fourth quarter of '24, less with the -- we know precisely what we're going to do, and we know precisely when we're going to do it, more of we're anticipating tariffs, we're anticipating them to be significant, and we're anticipating them to stick and we need to have 35% gross margins to give you, Mr. or Mrs. retailer or the end consumer innovation that you want.

And so we had for almost 9 months before they were activated been in constant discussion and healthy give and take of how are we going to do this? How much is list price, how much is change in promotion, that kind of stuff. We got the first one in, as you mentioned, and we were probably on the early side on both tools and outdoor equipment there. I think it's a fair question on the second. We're only doing 2. I mean we might be talking about it all the time, but the way the world is experiencing it is at least this year, there'll be 2 of them and the second one will be in October.

We still have the ground to stand on if we're not -- one, we're not where we need to be from the margin journey. And two, I think now the retailers themselves are realizing that this tariff regime is for real. A lot of the prior regime, they were exempted from either in total or by category, and they're now living it. And so it doesn't make the discussion easy or quick, but it makes it fact-based, and I have every confidence we get the next one in. I do think in our industry, power tools, in particular, because we haven't been taking a lot of price, I don't want to say that means it's easy for retailers or end buyers to digest our price increases. But some other industries in pretty close adjacent spaces have been pushing that envelope even way before tariffs pretty hard. And I do think some other places are seeing some price fatigue, whether it's because copper is also a force there or whether it's an industry like HVAC where they've been really pushing the outer boundaries for a long time. I don't know those industries all that well, but I don't sense those same dynamics in our space.

When we look at the tools market, really the power tools market, there's a lot of imports from Asia. And some of them could be even from yourself if we look back historically. But I guess kind of the question is, do you think that you guys are in a net competitively advantaged by the tariffs given also the North America production base?

We certainly believe that, that's a potential, and we're trying to make that the reality. I think it hinges on our ability to maximize USMCA achievement by product line because then you're going to 0. And we had the good fortune, which didn't seem like good fortune a couple of years or months ago when in 2018, the last tariff regime, we probably overexpanded in Mexico. And until this tariff regime, we're wondering, do we hold on to all that capacity or not.

Now we're basically moving volumes from China into that capacity. One, there's a speed because we already had the 4 walls. And then two, it doesn't instantly become USMCA compliant. You have to do some other things to the product content-wise to get it there. But we do believe if we optimize that part of our value chain that net-net, we're advantaged from a tariff perspective. And then the more you develop the local supply chain in Mexico over multiple years, the more you can take inventory out of the system as well because you're a bit more closer to market.

I appreciate that. We saw in August, the expanded list of derivative products on the 232 metal tariffs. Does that have any impact? And I think you guys last sized the gross tariff impact of $800 million. Is that impacted by this? And is that going to maybe be rolled up into the October price increase you talked about?

It doesn't change our total number. And the only reason is that we did not anticipate the further 232 increases. But what we had done on the second quarter outlook is anticipated that the rest of world tariffs would be higher than they turned out to be. If you recall, around that July time frame, Vietnam had gone from 10 to 20. And so we kind of just assume, well, everybody in the rest of the world is going to be up 5 to 10 percentage points.

On average, those things haven't happened. And so we kind of overcooked our estimate on rest of world tariffs. And then 232 went up, they roughly offset each other. And so our run rate is still kind of unmitigated run rate is about $800 million annualized. And it's just because we overestimated one and underestimated the other, but they roughly offset.

I appreciate that. And then kind of tying that to gross margin. You guys -- obviously, there's productivity tailwinds that is boosting gross margin. But there's also kind of a lot of price coming through kind of to your point, that's going to be margin dilutive because it's dollar neutral. Can you just kind of talk about that and ultimately, that gross margin bridge that you guys are forecasting into the back half of the year?

Yes. I mean, so we're -- we obviously had some serious headwinds in the second quarter because the second quarter had relatively low amounts of price and for a period had deliberation date tariff rates of 145%. So you kind of had the extremes of little price and maximum tariff, we were at about, I think, 27.5% gross margin. And we'll be in the low 30s the back half of the year. I mean a big chunk of that is price, including by the fourth quarter, some incremental price. We are going to get some mitigation into this year. We're not speaking about that publicly, but there are our ability to take SKUs we were already making in both China and Mexico, get more of those to Mexico. And also some ability to change some of the things we're doing with our Mexican SKUs to get them more USMCA compliant, so we can get an acceleration of tariff mitigation.

And then third, we still have the transformation work that if you've been following our story, for the most part, we generate those efficiencies. They go on our balance sheet for 6 months and they come off in the fourth quarter. And I'd say all 3 of those are contributing significantly to that fourth quarter, if you're inferring, you're going to get into the low 30% in the fourth quarter, right.

Yes. I want to kind of follow up on USMCA. Can you kind of update us on Stanley's USMCA compliance? What is that process or time line for getting compliance on a product? And then the USMCA is under review in 2026. Is that part of your thought process at all yet that perhaps things there could change?

Yes. 2 different questions. I mean, I think prior to tariffs and specifically tariffs on whether it was finished goods or components from China and whether they were coming from our own facilities or a supplier, the efficiency of untariffed goods from somewhere in Asia could sometimes in a prior life, trump the ability to get to USMCA, where you might have to develop more local capability to achieve that. And so in the past, we weren't -- it wasn't we were ignoring it. Anywhere we weren't doing it, it was because it was optimal to not do it.

Obviously, 55% tariffs on China changed that equation quite a bit. And each of them in the simplistic of terms, country of origin, which drives the tariff demarcation and USMCA have, in essence, their own rules on percentage of content because it's not just any dollar of content, it tends to be the content that drives the actual productivity of the tool. And so there are 2 different criteria. But in the end of end, they tend to be close enough to percentage of content. And so our mitigation path is how do we optimize both. I think you're not going to hear us speaking very loudly about the level of USMCA compliance because we feel like that's going to be a strategic advantage.

We'll be guiding people by gross margin expectations, but you can be assured we're trying to push for maximum USMCA compliance. Some of that can be quick because the supply base already exists, whether it's ours or somebody else's, some of that will take some supply chain development. I think on the notion of, hey, what happens with USMCA. I mean, I think if the last 5 or 10 years have taught us anything, it's going to change.

So we're going to have nodes around the world. We won't be only Mexico dependent. We had a capability in multiple Asian -- other Asian countries, not just Vietnam, but you can imagine we're expanding those capabilities, and we also have capabilities in India, we're expanding. So I think you're going to see us be -- and I'm going to assume scaled, smart, durable manufacturers are going to have to be multinodal manufacturing.

And our Asia -- our China hub still services Europe, right? So it's not like that capability goes away either. I mean you can imagine that one of the knock-on effects of taking U.S. content out of China is the rest of world can go into China and then come out. So we'll be -- we'll be, as best we can, a voice to preserving the current USMCA regime or something highly similar to it, but we'll have to be prepared to adapt if it changes.

I appreciate that. Can you maybe talk about some of the moving parts into 2026? Obviously, the macro and volumes are difficult to call, but it feels like the company has pretty material price wrap into next year, particularly following the October action. It sounds like you expect to get -- you may exit at closer to that mid-30s gross margin, so you get nice margin expansion there. Anything else to call out or think about?

No, I'd say we're -- obviously, it's dangerous to come here and start getting too over your skis on '26. But our mindset is how we're tackling the year is we're still expecting a volatile macro and political environment, which is creating at least uncertainty. What it does to GDP, I'm not here to kind of give a '26 GDP forecast. But I think it creates uncertainty. I think that uncertainty puts weight on end market buyers. So as a company, we're just planning on -- we better be able to make gross margin and cash progress if it's a low-volume year, and that's our mindset.

And so we're going to be maniacal about holding on to the price, maniacal about driving the mitigation that gives us the gross margin expansion. And we're going to continue to challenge ourselves to be more efficient with SG&A in the back office so that even in a low-growth environment, we could pump $75 million to $100 million towards sales and marketing. And that's the way we're going to position ourselves. And I think as you see gross margin improve, you're going to see EBITDA and cash improve. And that's the mindset going into next year. I think if somehow the world is better than that, I think if there is growth, then it's a powerful force on next year.

Thank you. I appreciate that. Maybe only a couple of minutes left, maybe finishing up with some strategy ones. At the late '24 Investor Day, you guys talked about about $500 million, if I remember correctly, of divestiture. I think you gave around 18 months as a potential time line for that. Kind of any update on that part of it?

Yes, we're still tracking. I mean I think we've been in various forms, reasonably direct. It's mostly likely an asset in our fastener business, aero-centric, where you can get the multiples -- and the time to get there has been less about waiting for the M&A market and more about us getting the profit consistency out of that business that enables us to monetize it in the best possible manner. And I would tell you, I think we're out with that asset sometime in the fourth quarter or the first quarter.

I appreciate that. Just kind of you guys beyond Aero, also there's auto fasteners, general industrial fasteners. Can you just maybe talk about what the scale of that business would be without Aero and why it makes sense to keep some and not all?

Yes. That business, we're about $15.25 billion, and that business is about $2.1 billion with Aero in it. Aero is probably about $400 million, right? So it's still a sizable business. You're talking a 17-ish, 18-ish business. And to your point, it's about auto-centric, -- the remainder -- the remaining 1/3 is general industrial. From our perspective, our job is always to create maximum shareholder value. So we'll always challenge ourselves about the composition of the portfolio, what makes sense, what doesn't make sense.

We do believe that business grows very similarly to tools, maybe more like 3% to 4% instead of 5% to 6%, but it's still a decent grower. It has the ability to innovate and grow beyond real GDP. And at an EBITDA margin, it's every bit as good, if not even slightly better by a point or so than our tools business. It might have a slightly different composition of gross margin, SG&A. Maybe it's a point or two below in gross margin, but also a point or two below an SG&A kind of thing.

And right now, I don't think if we monetize it, we'd somehow get paid more than 12x for it. So that's not a way to create value for shareholders. And we feel like we can compete to win in those businesses. And that business, just like our tools business, we're just being much more intentional about the end markets we're chasing and how we're allocating organic growth dollars to chase those end markets.

Well, we are up on time, but thank you so much. Really enjoyed the conversation.

Likewise. Thank you.

Thank you.