There were some bigger auditoriums, so. All right. All right, well, thanks for joining us. We're going to continue and actually conclude the day, the first day of our 17th annual J.P. Morgan Homebuilding and Building Products Conference, saving the best for last, of course, with Stanley Black & Decker. Really happy to have with us CFO Pat Hallinan as well as VP of IR Dennis Lange. Again, my name is Mike Rehaut. I cover the builders and building product names for J.P. Morgan. This presentation will be a fireside chat, but we will have time at the end for Q&A. So again, thanks, Pat, Dennis, and team for joining us today. I'm going to kick it off just with first question kind of around earnings power, kind of a little bigger picture. Your 2024 guidance EPS of $3.50-$4.50, it includes about a 30% average gross margin.
2025 expected maybe to get on average to perhaps 32, 33. Not putting words in your mouth, but just kind of doing the math on the way to 35. There could be potentially some increase in growth investments. Love to hear your thoughts on that. But how do you think about earnings power over the next two or three years? And maybe within that context, tools and storage margins as well.
Okay. I think when I got here a little more than a year ago, I was already up against 2024 guidance or 2023 guidance that Don had given, right? Oh, 2024. But I think it's a fair question. The macro and the deflation has been more of a headwind than we expected when we started on this transformation journey. But we have every confidence we're on the right path. And so as we think through the next two years, I certainly think assuming there's not a recession and assuming there's not some big inflationary shock that's outlandish, could our OM margins be double digits in 2025 and beyond the 10% or 11% in 2026 is something is very much within the realm of possibility and certainly something we're trying to achieve. I think what you're getting at is, are you going to invest away your margin expansion?
And I think the reality is we want to and will invest in innovation and brand building. But about the pace at which we can really make that productive on an annual basis is in that, call it $70 million-$100 million a year. So I think could we go a little bit beyond 100? Perhaps. But we're not going to be consuming all the margin expansion. So we're very confident in our gross margin path of finishing this year at 30%, which has the back half of this year at 31% average, of getting to 35% by the fourth quarter of next year, which that means we're going to be in the 32%-33% range for the average of next year.
Then having a measured amount of SG&A expansion, but therefore taking our current OM margin, which is barely high single digits, and getting it into that 10-11 range and then potentially 11-12 beyond that. We definitely believe that this business can and should be in the longer term beyond the 2026 horizon high teens or better EBITDA margin business. So in terms of tools and outdoor, I think that pre-tax operating margin can and should be mid-teens or better, most definitely. I think it would be the kind of business that's going to be 35%+, probably at least that range on gross margin and SG&A in the low 20s, if not 21-ish. So that's a framework I would give you.
I think if there was a macro, I'm kind of giving you that under the assumption that 2025 and 2026 are at best a low single-digit macro. That inflation or deflation is something moderate in either direction.
Okay. Thank you for that. Balance sheet leverage, I think, is another big area of concern. Maybe again, you could just kind of share with us your goals in terms of leverage and debt paydown over the next couple of years. And obviously, you've done a lot on the portfolio side to perhaps sell some assets, drive some additional cash, some additional debt paydown. So just how might that overlay as well when you think about the balance sheet?
Yeah. Again, I'd start with the end in mind. I think probably at a time beyond 2026, we're in that 2.5 net debt to EBITDA range. But I do think by the end of 2026, we could be in the 2.5x-3x. And probably by the end of this year, approaching 4x, I'd say that's mostly on the backs of we just closed our infrastructure sale the beginning of April, which was a little bit more than $700 million in net proceeds with debt paydown. And from there, that's mostly on the backs of organic cash generation. I think we will almost certainly do some very small and minor portfolio trimming within T&O when the M&A markets are appropriate for that and when we get a few businesses in a little bit better shape.
I'd put that in the $0.5 billion or less range, which might then in 2026 get you to the lower end of that range if the businesses are ready and the M&A markets are ready. I think there's been a lot of speculation on what we do with an industrial, which is a much bigger asset. And the ranges and reference points I just gave had nothing to do with industrial. I'd say we keep open-minded on that. That's a longer cycle business that is recovering. Especially, we were mostly wide-body commercial aerospace. We've done a really nice job of getting more narrow-body and more defense into that business. And that aerospace business is recovering very nicely. And then it's our challenge, is there enough synergies between these businesses? And are they similar enough that they should be together?
But we'll always do what's right to generate the most value creation for our shareholders. But we're not in a recession in industrial. And we feel like the overall balance sheet risk, while we fully acknowledge we have more work to do as we sit here today, and we're not really going to feel as comfortable as we'd like to feel until we're at 3 or below, we feel like we're on a good track with or without doing something with industrial. That should be more of a strategic move.
Right. And just to make sure that was clear too, sub-3 is kind of exiting 25.
Yeah.
So, 2024 end around 4x. Ending 2025, you hope to get to below 3.
Around 3, yep.
Around 3. Okay. One of the things mentioned on the recent earnings call was the outdoor business having some encouraging US retail POS data, maybe showing a little bit of an early start to the selling season versus last year. If that type of trend continues, what type of impact could that have on the tools and storage business in terms of revenues for the year?
Yeah. I don't know if we're at a point where one would want to predict that and then therefore change guidance. But I'd give an order of magnitude. Our legacy handheld outdoors business, around $800 million in revenue. The kind of current status, if you want to call it, the year-end 2023 status of the acquired business is around $2.2 billion of revenue. So you got about a $3 billion business. And if this season kind of kept the shape of a seasonal curve that was traditional, could that be a couple points of growth on that? That's not in our forecast. I think that's somewhere in the 1-3 points of that. That's very possible.
On the $3 billion portfolio.
On the $3 billion.
Right. Okay.
That's why I wanted to give you that. I don't know if that'll be the case or not the case. But I certainly think that's possible. And I think if that were to occur, most of it would probably fall down. I mean, I think at any given point in time, you can make some incremental investments. But we want to make incremental investments thoughtfully. And Chris Nelson has his team with a very specific game plan for this year. And while there's room to do a bit more, we don't just want to invest to invest. So I think there's a good chance that a good chunk of that would flow down.
Right. Okay. Competitive environment, another big area of investor focus. On the last call, you talked about the competitive environment being stable, although and with the promotional environment kind of returning to historical levels. So how do you expect the backdrop to continue this year, given that consumer DIY is still a little bit muted? How do you think things can progress in that type of scenario as it might continue?
Yeah. I would echo what we said on the call. I'd say even though I would say the consumer demand became particularly soft. And this is obviously, most of last year was soft on the outdoor front. But kind of I'd say in broader tools, it kind of became soft in the middle of last year that I'd say retailers and manufacturers alike have been pretty disciplined. In large part, I think it's because it wasn't like they had a lot of traffic that was coming in and leaving with nothing. They had an absence of traffic. And so that steered them away from over-amplifying promotions. And that's still, I would say, the general experience. And I'm sure many people in this room took some time today to peek at Depot's earnings. And they're broadly in line with their guidance.
I would say, like much of the sector, a little bit softer on the top line, marginally than anybody would have liked. That's where I would say we were hoping that our demand would have been better in the first quarter, but making it up on margin and expense management. I think if the rest of the retailers and pro channels play out that way, I think they're going to end up staying disciplined this year. I think the competitive dynamics stay healthy. They stay focused on innovation, focused on brand building, focused on smart working capital reduction. Those are the things we're focused on. We haven't seen any dynamic that suggests that's changing.
Right. Okay. On the growth side, I mean, you did highlight in the first quarter that DEWALT did grow a little bit. And maybe highlighting some of the drivers of that growth, I believe volume was down maybe 1% for tools and storage, if I remember right. So I'm assuming, correct me if I'm wrong, if there was some growth in DEWALT, it wasn't that I would think probably in the low single digit range.
You're in the zip code. You're in the zip code. And I would say that's even controlling for we had some placement gains where we had ship-ins. And that would be even controlling for that.
Okay. So you talked about growth being driven by a combination of factors: higher fill rates, new products, customer engagement, highlighting the brand. How do you kind of segment out those factors in terms of contributing to growth? And how might those different factors drive growth going forward?
Yeah. I would say those were things that were all helpful. They were all taking effect in the back half of last year. And while there was innovation shipment in there, we still had growth without innovation shipments in the mix. DEWALT's been a brand I think our whole portfolio has been so challenged that the strength of DEWALT hasn't gotten an opportunity to shine. And it's been a brand it's maybe not in perfect health, but it's certainly in good health. And it's certainly been performing better than the market. Last year was a market where the whole market was probably down mid-single digits. And DEWALT was just barely below zero last year. And so what we want to keep doing as we pursue increasing organic growth is get DEWALT's performance amplified. It's been positive. It can be a lot more positive.
And then in some of our more challenged brands, in particular CRAFTSMAN and STANLEY, get them back to the brand health they should have. And I think that's why you don't see the strength of DEWALT when you have some other brands that are performing as well as they can and should. And Chris Nelson's team is focused equally on both. He has a new chief growth officer who's working on taking DEWALT to higher highs and making some big turnarounds in CRAFTSMAN and STANLEY.
Okay. No, that's helpful. I mean, it kind of leads into my next question because certainly and the question I have down kind of refers to that 2023 highlight where you said that DEWALT did kind of outpace the industry. But at the same time, maybe kind of take a step back and think about maybe holistically, your tools share where it is today versus three or five years ago. And to the extent that there have been shared changes in the industry, maybe some of the other shifts with the other participants, how things might have played out. And how does that kind of then impact what you want to see or what you want to accomplish over the next two or three years?
Yeah. And I'll touch on some of it. Dennis might be able to add a little bit more to the arc of 3-5 years that I underappreciate. Certainly, as you think of and I'm assuming because you're focused on this topic mostly, kind of the power tools chunk of the world, DEWALT hasn't been the top grower but has been better than average in a category that's been pretty challenged from the early days of 2022, probably the second quarter of 2022 or thereabouts. And I think what has been helping DEWALT and one other brand you're probably thinking of in your head is, one, the pro has been disproportionately the share of wallet of power tool purchases, which has helped any pro-centric brands at the expense of some non-pro-centric brands, some that we own like CRAFTSMAN and some that maybe somebody else owns.
And then what we've seen is some of the European and Asian brands really kind of retrench and go back to their home grounds because they've been having a hard time holding and gaining share in the U.S., especially post-COVID, as they retrenched on the expense side of things. And so I think the share gains that have been happening have been happening at the price points below the pro price points and at the expense of some European and Asian manufacturers. Can we and should we be getting more of that? Yes, and we will. But I think those have been the recent dynamics. And the leadership team is focused on getting all of our brands to be growing anywhere from 100-200+ basis points higher than the market. But I don't know if you would add anything to that on kind of the longer arc of history.
No, I think you have it characterized right. One thing to keep in mind too is where some of the brands that you referenced earlier I mean, we didn't have a CRAFTSMAN power tool business 10 years ago as an example. So there are headways that we've made over this time period. There was obviously a big disruption period where it was noisy, it was harder to parse out share, market, etc. But we've come out kind of where Pat's describing it. And we have priorities right. And we feel like it's a big opportunity to be able to have more consistent and larger share gains in the business, which is what we're investing behind.
Right. So I mean, on that, obviously, you continue to put out there an organic growth goal of 2-3x the market. And I don't know. I think you just kind of mentioned 100-200 basis points. But I don't know if that's part or.
Yeah. I would say.
Of what you would think, but.
We kind of think of the market, our market, as kind of real GDP. But if you're talking 2-3 times that, you're talking in the 4%-6% range, is kind of where you're talking. And I would tell you that in the very near term, given the macro is still a little bit soft, we're probably on the lower end of that range the next couple of years.
Okay. Yeah. That's helpful. That's kind of what I was hitting on. We talked about margins a little earlier during this conversation. But one of the questions to be a little more explicit again, you kind of talked about the tools and storage margins. I mean, just to give some context, pre-pandemic, the prior 15 years, the tools and storage segment averaged a 15% operating margin. It actually, from 2016 to 2021, averaged 17%. So obviously, today, it's a different story. But how do you see the business over time? Can it get back to those types of mid-teen levels? And certainly, it would seem like there'd be a lot of heavy lifting. But what type of drivers would be needed to be put in place to get to that type of a range?
Yeah. Yeah. No, I think mid-teens for that segment. I don't think that would be their 2025 or 2026 per se, maybe 2026. I think we're solidly on that track. Getting above the mid-teens, I think, is some of the period you referenced was particularly low metals deflation, kind of the late 2017 through or 2016 through early 2018 where we're low metals deflation. And we did acquire an outdoors business that isn't as high margin. I don't think that prevents us from getting to the mid-teens. But I think we'd have to work the COGS there to a different place to get back to the high teens. But I would tell you that mid-teens pre-tax operating margin for that T&O business, again, not next year, maybe not even in 2026. But that is definitely the pathway we are working towards.
So that kind of leads me to my last question that I have for this session, which is really around the outdoors business. And you kind of talked about just now maybe adjusting the cost structure. I know that's something that on the past earnings call, it was alluded to that you're actually potentially looking even right now at perhaps making some adjustments to the cost structure based on the current environment and even longer term, maybe parts of the business being pruned. And from a sales perspective, it was noted on the call that 2024 is expected to be down potentially substantially versus 2019, even 2025 could be a little bit below. So the question really here is, what's changed in this business relative to when you acquired it?
Because you would think that at the time of acquisition and you had been working with MTD for several years before that. Certainly, it appears again that there are some real fundamental changes that occurred post-acquisition. So maybe kind of walk through what those changes have been, maybe what you didn't expect or foresee at the time of acquisition in terms of the challenges that it currently faces.
Yeah. First of all, I put a few things in broader context because we did talk about those points on the call. We did talk about them around outdoors, I'd say broadly because the macro has been softer 2023, 2024, 2025 and because we haven't really seen meaningful deflation outside of ocean freight deflation. We've had to do more self-help to get the margin progression. So we still have a $2 billion target. We talk about it's still $1.5 billion COGS, $0.5 billion SG&A. But it's likely if the macro stays where it is, which is our most likely assumption, we're probably going to be having to push beyond $2 billion to get to the same margin percentage. We're tracking towards that. We're not out with a new goal. I don't mean to be announcing a new goal.
That's the basic math of the lack of macro forces. And so part of that is fixed cost reduction, some incremental footprint rationalization beyond what we would have anticipated 6 or 12 months ago, certainly even before the acquisition. And I think that will take place in outdoor. It will also take place in the broader tools business that will be pursuing much more footprint rationalization throughout this year and next year to drive the margins. And that's why we have confidence in the margins we're pursuing. I think specific to outdoors, I can't speak to all of the assumptions that went in the acquisition. I wasn't here then. But what I can tell you most definitely is the acquisition was predominantly predicated on taking our advanced battery technology and electrifying outdoor power equipment.
I'd say the progress we're making in handheld, which is our legacy business, is even greater than the progress we thought. And in walk behind, I'd say it's probably at par to slightly below. I think where the big gap to the acquisition case is anything that's ride-on, whether it's entry point ride-on all the way up to higher price point commercial, is probably going to convert slower than automobiles are converting for consumers, right? And that's the big delta. So then you're in a world where you're focused on competing with what I'll call a more legacy set of competitive dynamics, a bunch of gas-powered companies, of which, first of all, there's probably some excess capacity. And you got to fight with kind of global steel prices and a whole host of other dynamics. And so I think that's the reality.
That conversion is going a lot slower than we would have thought at the time. And therefore, that forces us both in our cost structure, whether it's material or fixed cost structure or whether it's the segments of the market we're going to focus on and chase because we think we have products that are particularly strong like zero-turn versus entry price point ride-on. And so these are all the dynamics we're going to be managing to get that business to a better spot than it's in today and probably to even a better spot than it was when we acquired it but probably not the spot we thought it was going to be when you were thinking electrification.
Right. That's helpful.
We're going to manage in our portfolio. Everything in our portfolio is going to have to be able to grow mid-market or above. It's going to have to be trending towards an attractive organic ROIC. I mean, we want to get it's going to take us some time to get our portfolio towards a 20-ish% ROIC. But all the assets are going to have to be heading in that direction.
Right. Perfect. That's all I have for me. I'll open it up to the audience. Yes.
Is it first the?
Can you use the mic, actually, since we're webcasting? Thank you.
Yeah. Two questions. First one, just on the slower conversion on the outdoor piece, on the electric side, is that macro? It's a higher-priced product. And people are slower to convert. Or is there something else creating a lag in the conversion versus the previous expectations?
No. It's a macro dynamic. I'd say handheld, especially handheld for consumer, has been a very rapid and very successful and very high gross margin conversion proposition, I'd say, for professionals broadly, whether it's handheld or ride-on. And then just for the consumer, the ride-on price point proposition is just not as powerful as it probably needs to be to get them to make a different choice.
The second is just on power tools. How would you say your battery technology lines up from a competitive standpoint right now?
I'd say we're very comfortable. I mean, we've been quite innovative in our battery technology, especially as it applies to higher power tools for the pro. And so we're very comfortable with our current position and where we're going with it.
Yeah.
Just one quick question on R&D. I know in the past, there was sort of an emphasis on larger platforms and maybe I don't know how else to put it than bigger innovation versus sort of individual tools and sort of targeting markets. I know there was one peer who maybe did pretty good in MX. I'm wondering, over the last couple of years, has there been a focus toward building out those product suites and maybe some of the pain points?
Yeah. I think you're probably referring to kind of core versus breakthrough innovation and the mix of those.
Yeah. Yeah. Exactly.
Yeah. Yeah. And so I think we've had a lot of successes in both areas. And if you think about the legacy of DEWALT and also where its power is, it has technological leadership as you think about power, runtime, performance, protect, safety attributes, and things along those lines. And it's got a long history of leading the industry up in these areas. Core innovation is also critically important because it helps you reset price, change price in the market. It helps drive brand health and news around your brands. And you need to have a mix of both. And I think if you think about the strategy here around what we're trying to accomplish, it's not that we want to shift one or the other. We need both. And we need to be successful at both.
And what you're hearing from us is more purpose, more prioritization, and driving bigger impacts with what we do. And so as Chris Nelson has come on organizationally as well as prioritization, it's been helping the innovation do that. And a good example of something that we want to do more broadly is what we launched earlier this year at the World of Concrete with PowerShift. It's a suite of tools surrounding concrete application. It's going to power levels that have never been really hit before with the runtime that we're delivering with those products. And it beats the incumbent technology. And so whenever you have those things come together in a way that works for the pro, you do see adoption in a quick manner because it is a technology that you usually trade up for in price.
But if you get the performance along with it, we see people gravitate towards those types of solutions.
Yeah. Yeah. Your dividend policy is pretty remarkable over the years. If you had to keep your investment grade and you got to do a crunch like a recession came up, how do you think about the trade-off between the two? What levers might you pull to try to maintain both? You used to have a convert in the market a while ago. Would you perhaps accelerate disposition of a division? Or how would you deal with a crunch between those two?
From pure capital, how would you allocate capital to deal with that?
Yeah. How do you maintain investment grade and still pay a dividend policy? That's remarkable. How do you not, say, jeopardize the dividend policy over prolonged periods?
Yeah. Our bias is to preserve the dividend where it is, right? And so what we've been trying to do is position assets for sale at a pace that kind of gets ahead of the organic leverage threshold that we have there. I would tell you that our first priority would be trying to use the portfolio focus mechanism before we would go to the dividend. But we wouldn't want to lose investment grade. We would be putting all the cards on the table to interrogate that before we would give away investment grade. That's for sure.
Anything else? I think we've more or less reached the end of the time anyway. So thanks so much. Appreciate it, Pat and Dennis and the whole Stanley team. And it's great to see the DEWALT stands in front of the building this morning. So that was extra fun. We're going to conclude the first day of our conference. Tomorrow, day two, we have Masco, TopBuild, followed by Taylor Morrison and LGI Homes. And rounding out the day, Smith Douglas and Forestar. So thanks again. Appreciate it. And we'll see you tomorrow.
Well, thank you.
Thanks, Mike.
Thank you for having us on. We're celebrating DEWALT's 100th anniversary today.
Yes.
It was a very fitting way to cap the day.
Of course. Thank you.
Thanks.