All right, great. Good afternoon. Thanks for joining us. I'm Tim Weiss. I cover building products here at Baird. We are 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, and 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. 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
Yeah, so I think we talked a little bit about it in our latest earnings release, but we're 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. We feel good about the progress we're making towards our margin goals at 35% +, and we're able to see margin expansion in the quarter as well after a one-quarter step back due to tariffs. I thought that execution and getting back on the margin trajectory was encouraging. We still have on our radar screen, obviously, the strengthening of the balance sheet. We have a stated objective of 2.5 x debt to EBITDA.
We have been pretty public about the fact that we are likely to pursue a pruning action, most likely with our aerospace fastening business, to achieve that. We are on pace to be able to complete that by most likely the middle of next year, if not sooner. That will put our balance sheet in great shape. We are looking forward to the continued margin expansion. I think everybody is excited to turn the page on the transformation and get towards running a business and growing organically. Really, as I have stepped into the new role a little over a month ago, it is really just focusing the organization on the three things we need to pay attention to. 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.
We need to continue to accelerate our innovation energy and to be able to continue to build out our pull-through with our end users. 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.
OK. Yeah, I guess, I mean, on that, 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. 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?
Yeah, so I guess I've been with the company about two and a half years. I'd say that coming in, it was obvious that we had great people, a great set of brands, and an organization really poised and wanting to win. 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. Then we thought about what brands to put on those products. That was really based on a view of how we could continue to grow our shelf space with channel partners.
What we were missing is that doing so really took us a step away from our end users. Going and talking to our end users and our customers, they think about us as brands. 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? 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? 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. We changed it. We now have a GM of DEWALT. We have a GM of CRAFTSMAN. We have a GM of STANLEY, BLACK+DECKER Outdoor, et cetera.
That has really helped us engage and get closer to our customers and think about what we need to solve for them. That drives our innovation as opposed to driving innovation and then trying to figure out what we can solve with that. That is probably the first big thing. 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 at Otis Elevator. I had worked together with a carrier a number of years ago. 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 had kind of individualized pockets. We had a team who worried about drills and a team who worried about impact wrenches and a team who worried about miter saws. While you could produce great products, it was difficult to leverage scale and the speed that we needed to be successful. Those are pretty large changes. We are kind of two-plus years into it. The buy-in is strong. It is strong for one reason, because it is all based on wanting to do the things that our end users think that we need to do. That is kind of in the ethos of the company.
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. That resonates with the organization. Everything that we can do to help us to be more clear in that objective, there is a lot of support behind.
OK. There are a lot of different kind of silos in the business that you would go out from a cost perspective, and you'd take cost out, and you'd 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 would have.
Yeah, so I mean, put pretty simply is that if you had, as an engineer, you had the autonomy, if you were working on a new drill, to create your bottoms-up, ground-up motor and module controller and transmission for that drill. Someone next door might be doing the same thing for an impact wrench. We were not thinking about how we could leverage that. That drives increased development time, increased qualification time. 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 runs counter to better service for your customer. The more common componentry, the easier it is to plan, the fewer variables you are having to source.
It actually 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.
Yeah. I guess with platforming, just it's kind of a broad concept for investors to just kind of think about. It sounds like you're almost giving people almost pre-qualified kind of here's a parts list for a lot of the commonality between these types of tools. That obviously gives you some buying power, but then also they're pre-qualified. It should speed up the development time too. 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?
Yeah, I mean, it really hits the mark around all, whether it's working capital speed and productivity. It helps along the way. 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. When we look at a drawing or when an engineer is thinking about creating a new tool, they have a drawing. Part of it's in red, part of it's in yellow, and part of it's in green. The red is you can only choose from these three motor choices. Yellow means you can take a look at these libraries, and maybe you can change a shaft length by a millimeter or two. You have a very moderate amount of change to the specification available.
Green is knock yourself out, differentiate away. 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. Counterintuitively somewhat, we're actually improving our focus on how we can differentiate performance and brand identity with common componentry. I would say that when will you start seeing benefits? We're seeing them now. 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.
What we're seeing as we bring scale together and we're doing more engineered cost savings and kind of aligning on optimally costed components is that our proportion of material productivity has gone up from around 5% or 10% engineered cost savings to 30%-ish. 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. We know that we have plans in place to take that another 20% down by 2027, end of 2027. 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.
How does that work kind of across the brands? Because obviously, DEWALT is a pro. There is a very different performance level that is being driven at DEWALT than maybe CRAFTSMAN. How do you make sure that it does not become too common that the brands kind of bleed together?
That's a great question. The key is that 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. 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. That's really what a customer cares about. They care about how it performs, how it feels, and 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 needs to at a lower cost, whereas maybe you're going with a high power motor on a DEWALT. At the end of the day, what matters is the performance out of it all. When I talk about the quantitative requirements that we're having people be able to specify out in the product development, we've also launched this, this is more than a year ago. Let's just say we have no shortage of feedback as to what people think about our products. It's a high involvement category. We get pieces of feedback all the time, star reviews, all that.
We have actually now developed an AI tool that allows us to take a look at all of that data coming in, parse it out, understand how we stack up kind of specification for specification versus competitors, where people like us, where we are over-designed, what people are not valuing, what they are not paying for. We can then decide how to spec that new product based on that analysis that we are getting out of the AI tool.
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 drive the specs that way. That gets you to less of a conversation about kind of emotional trade-offs and more about how you can think about choosing the right component for the right performance.
Yeah. I mean, we've been asking a lot of people about AI. I mean, that's one example. I mean, what other things are you kind of doing internally to kind of leverage AI and kind of see the outcomes?
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 have that logic being checked. We have that infrastructure that we've invested in. We have had it looked at third party, et cetera. It's, I'd say, above the mean for what people are doing in the 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 one that's a customer service agent 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, our 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. 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? 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. It is a big focus. I think we are all learning as a management team. I would say that the people who excel in the AI world and deploy it at scale, it is not differentiated by technical capabilities.
It's differentiated by a management team's commitment and understanding of what it means, what it could do, and learning and leaning on that as a necessity of how we do business and where we are.
OK. 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.
Yeah, that's been an emphasis for us. As we started this journey, I'd say that when I came in, Don said, we got to get closer to the end user. We have to become simpler. That was the concept. It was like, OK, how are we going to put some meat on this bone? 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, what the new innovations were, and how they could grow with us.
We have made big investments, more than 600 field resources over the past couple of years in areas that we think geographically we were 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 liked the market structure. We see an ROI on those investments in kind of like a 12-month time frame. This year, if we look at our conversion pipeline versus where it was this time last year, it's two times the velocity coming through. I think that that is the momentum you're seeing with our continued growth in DEWALT.
We will continue to grow that out 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.
In terms of pace, would your point be we can't just throw a bazillion people at the market because there's just not going to be a return on that? We're going to kind of meter this out or measure it out and kind of be returns focused as opposed to just kind of blanketing everything with just more field people?
Yeah, actually, that was probably one of the biggest challenges for me is that I'm not a patient person at all. If there's one thing that's been my mantra as I've gotten the seat, it's we're going to move at pace. We're going to make decisions. We're going to grow. 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. We don't have time to dawdle. We got to make decisions and move. I would say that we knew what needed to be done. In order to build the infrastructure, the technology support, and the training to make sure that we took, that's a big investment to make with 600 people and continuing on top of it.
We needed to make sure that they were going to ramp up and be as effective as possible as quickly as possible. We have metered it out. I think we have got a machine that is working well right now. We are seeing the ramp-up periods decrease as we go along. As we see opportunities for outsized growth, I feel confident that we can continue to invest in that area and see the returns that we want.
OK. Any questions from the audience?
I guess maybe just kind of on that point, kind of tactically 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. 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. What we say is a $75 million-$100 million investment in the front end is actually much more than that because we're actually taking out resources that are non-customer 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 and more of a holding company is that there was a lot more back office and bureaucracy and support than we needed.
I've been all SG&A isn't created equal. I'd rather have less G&A and more S. We're constantly moving to have fewer people counting things and more people selling things.
OK. How do you kind of think about battery systems? Because I think what's interesting is 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 lying around. There's a real kind of barrier and moat to these systems. The 20 V DEWALT system is still one of the leading systems in the world, really, in terms of batteries. I guess how do you kind of leverage that and what's your approach there? It does seem like if you have those top two or three systems, you could start to really create a moat around a business where there really wasn't one before.
It's a great way to think about it. That is exactly how we do think about it internally. I'll share it is part of the beauty of the way that this industry is structured, that in excess of 80% of the time when a person goes into the purchase cycle with a battery platform, they are going to purchase a tool that is in that battery platform. That is a staggering number. More than 50% of the time when someone goes into the purchase cycle, it is not because they have lost a tool or it stopped working. It is a discretionary purchase because they want to drive more productivity, they like the features, or they have a new regulatory safety requirement they have. It is a discretionary high moat purchase.
If you look at in the professional world, the buying criteria, and this is something that I have not really seen in my career before, is that price comes way down the list for that customer. Because if you think about it, 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. By the way, it is a bottleneck. When people see that innovation that can do so, they are willing to pay. That structure is incredible. What does that mean?
Is that we, and this is a part of the brand kind of market back brand let, is we need to be more and are more purposeful about saying, OK, around that battery platform, whether it's our 20 V, our Flex Volt, or our new POWERSHIFT 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 DEWALT tools? A plumber can. A concrete worker can. That is how you build that moat around the business. You have that annuity from the battery sale. You also can build a moat and keep on it. It's a relatively lower threshold to purchase around that platform.
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.
OK. OK. I mean, with DEWALT, 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 ProMix 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?
DEWALT's $7 billion of our, it's a $7 billion franchise. It did not take a rocket scientist to say, hey, that would be a good place to start. If you looked at it, it plays in a pro market, it's relatively stronger. It has great brand positioning. It had great opportunity. The market's been relatively strong. 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.
OK. OK. You've kind of outlined three core brands. I mean, like you said, DEWALT probably makes the most sense. STANLEY probably makes the most sense. CRAFTSMAN makes the most sense. Just maybe talk about where you are on reinvigorating both STANLEY and what you need to do on the CRAFTSMAN side. Yeah.
I'll start with STANLEY. For those of you who aren't as familiar with it, it's largely an international brand. 70% of the revenue comes from overseas. It was a brand that had not really been touched for a number of years. When I say touched, it wasn't just from a product lineup, but from the brand language, the design language, the packaging, and how we can merchandise it. 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 year and a half or so. It's getting the product right, getting it updated, establishing the right target end user.
The right target end user for STANLEY is the small residential 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 is a fragmented wholesaler that goes through. Basically, you have branded walls in those wholesalers, and that is 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 retreated 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.
We have put STANLEY-specific resources in Europe that are actually having a lot of progress getting that up and running. 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. We are going to have STANLEY, we do have, and we will continue to grow STANLEY power tools. We will do that off of the CRAFTSMAN platform and the V20. We will 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 are in stabilized form right now. Next year, I would expect to go to growth in the back half. CRAFTSMAN was a little bit more of a reclamation project.
We're running out of time. 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. 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. That is, I'd say, probably late 2026, early 2027, I would expect to see that kick into growth as well as those new products come out.
OK. Great. Yeah, we're about out of time. Please join me in thanking STANLEY for being here.