Q1 2025 Stanley Black & Decker Inc Earnings Call
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Speaker Change: Welcome to the first quarter 2025, Stanley Black <unk> Decker earnings Conference call.
Shannon: My name is Shannon and I'll be your operator for today's call.
Speaker Change: At this time, all participants are in listen only mode.
Shannon: Later, we will conduct a question and answer session.
Speaker Change: Please note that this conference is being recorded I would now.
Speaker Change: I'll turn the call over to the Vice President of Investor Relations Dennis Lange, Mr. Lang you may begin.
Thank you Shannon good morning, everyone and thanks for joining us for Stanley Black <unk> Decker's 2025 first quarter webcast here today. In addition to myself is Don Allen, President and CEO, Chris Nelson C O O EVP, and president tools, and outdoor and Pat Hallinan, EVP and COO.
The F O our earnings release, which was issued earlier this morning, and a supplemental presentation, which we will refer to are available on the IR section of our website. A replay of this morning's webcast will also be available beginning at 11 a M. Today.
Speaker Change: This morning, Don Chris and Pat will review, our 2025 first quarter results and various other matters followed by a Q&A session consistent with prior webcast. We are going to be sticking with just one question per caller and as we normally do we will be making some forward looking statements during the call based on our current views such statements are based on.
Speaker Change: Assumptions of future events that may not prove to be accurate and as such they involve risk and uncertainty. It's therefore possible that the actual results may materially differ from any forward looking statements that we might make today, we direct you to the cautionary statements in the 8-K that we filed with our press release and our most recent 34 Act filings. Additionally.
Speaker Change: We may also reference 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 under the IR section I'll now turn the call over to our press.
Don Allen: And CEO Don Allen.
Don Allen: Thank you Dennis and good morning, everyone.
Don Allen: I'd like to start by recognizing that our transformation is working and we are focused on seeing it through to completion to drive sustainable market share gains with operations excellence at our core we believe the actions we are taking improve our ability to seize the longterm opportunities within the attractive markets that we serve.
Don Allen: As I've said many times.
Don Allen: The black <unk> Decker is incredibly talented people.
Don Allen: Powerful brands and an amazing innovation machine.
Don Allen: These foundational trades have made us an industry leader for many years.
Don Allen: Over the past three years, we have built strong capabilities in our supply chain, which we intend to draw upon as we continue to navigate this moment.
Don Allen: We also have been investing significantly in our end users and channel customers to provide the best innovation and service and experience we.
Don Allen: We intend to continue investing in growth and innovation even in this dynamic period, we've been planning for some time for the possibility that U S trade policy would change significantly and outlined a three pronged execution plan of supply chain mitigation price increases and partnering with the U S administration, while the <unk>.
Don Allen: <unk> and frequency of these changes has exceeded our expectations, we have been and remain prepared to address this dynamic trade environment and we are responding.
Don Allen: As you will hear from the team today, we have a plan for tariffs and have been executing on key elements that will help us mitigate the impact on our business.
Don Allen: Over the past several years, we have substantially reduced our China manufacturing footprint, which serves the U S market.
Don Allen: We believe we have the most flexible supply chain footprint in the industry as we now have significant hub in the U S, Mexico and southeast Asia that serve the U S market as we navigate these shifts in trade policy, we are starting from a strong position due to these existing hub.
Don Allen: We intend to build upon them to minimize the impact of higher input costs from tariffs over the next 12 to 24 months.
Don Allen: Price increases will be necessary in the U S market due to the current tariffs and we have implemented a substantial increase in April we have and plan to continue to invest time with the U S administration as they work to achieve the President's trade goal.
Don Allen: Now I want to focus on our performance this quarter.
Don Allen: Pleased to report that the company's first quarter represented another step forward against our transformation, we delivered a solid start to the year with organic revenue growth and year over year gross margin expansion. Both key measures of continued progress towards our strategic objectives.
Don Allen: Organic growth was up 1% led by solid outdoor performance, our powerhouse and professionally focused dwaal brand extended its streak of year over year revenue growth with power tools hand tools accessories and storage and outdoor all contributing these.
Don Allen: These organic growth drivers were more than offset by two points of pressure from the final quarter of lapping the infrastructure business divestiture and two points of currency pressure.
Don Allen: Taken together this resulted in total revenue of $3 7 billion.
Don Allen: Consistent with our plan.
Don Allen: North American end market demand as measured by our retail Pos in the first quarter was generally consistent with the stable trends, we observed exiting 2020 for the year started slow but March improved in April look solid as well.
Don Allen: Adjusted gross margin continued to improve on a year over year basis. The first quarter adjusted rate of 34% was up 140 basis points versus last year.
Don Allen: Supply chain efficiencies and positive mix benefits from new innovation launches were partially offset by freight inflation and the initial impact from China and Mexico tariffs initiated in February.
Don Allen: We are firmly executing against our strategic objectives and are on track with our transformation plan.
Don Allen: We intend to successfully complete our transformation in 2025 and meet our $2 billion savings target.
Don Allen: Organic growth, we delivered in the first quarter, along with a year over year gross margin expansion translated into solid adjusted EBITDA performance net of growth investments adjusted EBITDA margin approached 10% an increase of approximately 80 basis points versus the prior year adjust.
Don Allen: Adjusted earnings per share was <unk> 75.
Don Allen: Up 34% versus last year.
Don Allen: First quarter free cash outflow was $485 million relatively consistent with both the prior year and typical historical seasonality an impressive result, considering we pursued targeted inventory investments to navigate the current trade situation overall, a solid quarter as we continue to make meaningful progress on what is within our control.
Don Allen: I.
Don Allen: I want to thank the organization for staying focused on execution and making forward progress once again.
Don Allen: We clearly are entering a dynamic period with reduced visibility, albeit with relatively stable demand based on what we're seeing in the market and across the business.
Don Allen: While we don't know the full picture of how tariffs will impact the U S economy or demand in our categories. We are preparing ourselves for multiple demand scenarios. This year.
Don Allen: And even though it's too early to predict all of the different direct and indirect impacts as I mentioned earlier, we do believe the current trade policies will prompt significant price increases for companies in our industry and many others.
Don Allen: We will continue to monitor these evolving policies as well as project the potential effects on the operating and demand environment to remain agile and responsive to evolving market conditions.
Don Allen: Over the past few years, we have strengthened our execution capability and have consistently delivered results in an overall weak market backdrop.
Don Allen: Our strategic decisions are aimed at navigating the immediate challenges while positioning the company for sustained long term success.
Don Allen: Our top priorities remain clear and intact, we are accelerating our growth culture, and placing a priority on serving our end users and customers, we expect to control costs, while prioritizing growth investments as we continue our journey to sustainable share gain.
Don Allen: We also expect commercial opportunities to emerge for our businesses, particularly as we further leverage our north American footprint to serve local markets.
Don Allen: We remain focused on generating cash and strengthening our balance sheet long term, we intend to mitigate the cost burden of tariffs through supply chain adjustments and other cost control some of which are already in flight.
Don Allen: Some will take time to fully implement.
Don Allen: As such pricing as a necessary initial response to protect our cash flow. So that we have time for the full effect of our supply chain strategies to hit our P&L and we can continue to fuel innovation.
Don Allen: In this context as I mentioned earlier, we implemented an initial U S tools and outdoor price increase in April and notified our customers that further price action is likely required if existing tariff stay at current levels.
Don Allen: To summarize even in the current circumstances. We believe we are decisively advancing towards the successful completion of our strategic transformation building, a sustainable productivity engine to fund growth investments and support our long term margin journey.
Speaker Change: The capabilities. We've built during this process will aid in accelerating adjustments to adapt to the new economic backdrop, Chris will share more about the near term opportunities that we're pursuing in just a moment passed then we'll share more detail on financial planning given the fluid environment. Today, we are providing our latest thoughts on 2002.
Speaker Change: Ninety-five with sensitivities to help model different scenarios.
Speaker Change: We have our sights set on share gains and long term value creation and are committed to making the necessary decisions along the way to achieve our long term financial objectives.
Speaker Change: I will now pass it to Chris Nelson, who will review the business segment performance and provide more context on how we successfully execute our strategy and a volatile trade environment.
Chris Nelson: Thank you Don and good morning, everyone I.
Chris Nelson: I will start with the tools and outdoor first quarter operating performance.
Chris Nelson: Revenue was approximately $3 $3 billion flat versus the first quarter 2024.
Chris Nelson: Organic revenue grew 1% driven by volume.
Chris Nelson: So Walt was a key contributor to this performance in the quarter with revenue up mid single digits, driven by professional demand the brand achieved its eighth consecutive quarter of revenue growth in.
Chris Nelson: In addition, we had strong outdoor product shipments ahead of the season.
Chris Nelson: These positive factors were partially offset by a cautious consumer and continued softness in the DIY market. Adjusted segment margin was nine 6%, a 110 basis point improvement as compared to the first quarter of last year. This was largely attributable to supply chain efficiencies and new.
Chris Nelson: Innovation benefits, partially offsetting this was freight inflation the initial impacts from incremental tariffs announced during the first quarter and targeted investments in growth initiatives.
Chris Nelson: Turning to performance by product line.
Chris Nelson: Power tools experienced a 2% organic revenue decline as the consumer DIY category remains pressured and tools achieved 1% organic revenue growth supported by strong reception from customers of new products designed with an end user centric mindset to improve their productivity.
Chris Nelson: A couple of examples include the Walt construction Jack.
Chris Nelson: Which offers hands free lift assistance.
Chris Nelson: And the dual wall tough system 2.0, Dx L modular workstation system.
Chris Nelson: Outdoor posted 6% organic growth led by a return to normal seasonal load ins with our channel partners as well as new listings and expanded spring promotional placements at our retail partners.
Chris Nelson: Focusing on tools and outdoor performance by region.
Speaker Change: North America recorded a 2% organic revenue increase reflecting the overall segment's growth factors as Dan stated total quarter U S. Pos demand was stable and that continued into April we are tracking demand closely and looking for signs of change in consumer behaviors.
Chris Nelson: <unk> is our first round of price increases begin to hit the shelf youre.
Chris Nelson: Europe organic growth was flat as our investments in eastern Europe are yielding results, which counter acted a generally weak market backdrop due to macro factors.
Chris Nelson: Rest of World organic revenue was down 3% as Latin America was comping robust growth last year based on current underlying market demand, we expect to return to growth in the coming quarters in summary, the growth and margin performance was a solid start to 2025 and was in line with our plan.
Chris Nelson: And for the segment.
Chris Nelson: Now, let's transition to engineered fastening.
Chris Nelson: Which was our former industrial segment. We've made this name change to reflect the segments more focused portfolio.
Chris Nelson: On a reported basis first quarter revenue for engineered fastening was down 21% versus prior year 16 points of the decline was attributable to the final quarter of lapping the infrastructure business divestiture. Other factors impacting revenue included a one point increase in price.
Chris Nelson: Two points of volume pressure two points of currency pressure and a two point decline due to a product line transfer to the tools and outdoor segment.
Chris Nelson: All told there was a slight organic revenue decline of 1%.
Chris Nelson: The automotive business faced a high single digit organic decline, primarily due to Oems, reducing light vehicle production schedules and tightening capital expenditures.
Chris Nelson: The aerospace business generated robust mid teens organic growth driven by strong performance in fasteners and fittings. This business has a multiyear backlog and growth outlook reinforced by new content wins and a high booking rate general industrial fasteners achieved low single digit organic.
Chris Nelson: Growth, reflecting steady demand.
Chris Nelson: The engineered fastening adjusted segment margin rate was 10, 1% for the quarter.
Chris Nelson: This is a decline from the previous year, largely due to softness in high margin automotive products.
Chris Nelson: Successfully complete our transformation in 2025 remains a top priority and is core to improving our cost structure advancing customer focused innovation and driving our growth initiatives with the underlying objective of generating profitable and sustainable market share gains.
Chris Nelson: As it relates to costs, we continue actively implementing our series of initiatives, which are projected to yield approximately 2 billion of pretax run rate cost savings of which 1.5 billion is coming from the supply chain.
Chris Nelson: We have identified the key sources of savings this year and are progressing down the path towards our 2025 full year target of $500 million of savings in the first quarter, we achieved approximately $130 million in pretax run rate cost savings, bringing our total savings to approximately 1.7 billion.
Chris Nelson: Since the program's inception.
Chris Nelson: We continue to enhance our strong culture of operational excellence and build a sustainable productivity engine both of which we believe are critical to funding growth investments and achieving our long term, 35% plus adjusted gross margin goal accelerating our growth culture is also key our teams are focused on further enhance.
Chris Nelson: <unk> service for our end users and customers as we continuously improve our supply chain. The right side of the page highlights two examples of how we are seizing opportunities with priority end users in attractive markets and concentrating investments behind our core brands.
Chris Nelson: One key initiative is increasing to Walt penetration in Saudi Arabia, a market in which we've historically been underweight, we are taking a local and focused market activation approach to serve our customers and gain market share in a region that is experiencing robust construction growth.
Chris Nelson: One strategy, we are pursuing to drive growth is portable job site containers that operate as mobile service stations. These containers offer a range of efficiency driving solutions, including training tool repair and loan and purchase options to reduce downtime on the job site.
Chris Nelson: This quarter, we also launched to Walt tough wire, a versatile cable hanger system revolutionizing H V AC sheet metal electrical and plumbing trade applications with customizable suspension solutions informed and inspired by our professional end users. This system is designed to improve.
Chris Nelson: C and simplify installations these.
Chris Nelson: These are just two examples of many across our portfolio to illustrate how we are innovating with purpose and addressing unique challenges of tradespeople with safe productivity enhancing and durable solutions. We believe we are taking the right actions to thoughtfully and aggressively prioritize resources to deliver consistent profitable share gains.
Chris Nelson: Sure.
Chris Nelson: Like many companies with global supply chains, we are currently navigating a frequently changing and complex operating environment.
Chris Nelson: As we take decisive actions our goal is to position the business for success with focus on achieving our long term financial objectives. It is crucial that we balanced meeting the near term needs of the business with preserving and maximizing long term value all while maintaining our customer first mindset.
Chris Nelson: Our business teams are continuously assessing the evolving trade policies and diligently evaluating their impacts on our global supply chain and our business in.
Chris Nelson: In October of last year, we outlined how we are enhancing our preparations to mitigate the potential impact of higher tariffs and we've continued to stay true to our plans and the four guiding principles behind them.
Chris Nelson: First and foremost we are committed to serving our customers and end users during this dynamic period.
Chris Nelson: Our end users core needs don't change with changes in the macroeconomic environment. They still demand solutions that deliver high performance safety and productivity, we intend to be here for them and to continue to invest responsibly in growth and innovation even in this dynamic period.
Chris Nelson: Second we are working to minimize the impact of higher input costs from tariffs by accelerating the repositioning of our supply chain. We estimate this to be a 12 to 24 month process and we believe there are adjustments that could begin to contribute to reducing the impact this year.
Chris Nelson: Approximately 15% of our supply chain for the U S comes from China through our mitigation efforts were focused on effectively be out of China supply for the U S business in the 12 to 24 month time period.
Chris Nelson: This is a high priority and will remain a key focus even if China tariffs go to lower levels.
Chris Nelson: We also have plans to increase our U S MCA compliance from where it stands today at just below one third of Mexico supply for the U S.
Chris Nelson: Third we are moving with speed on price increases, we're taking a judicious approach maintaining a long term perspective, as we make the adjustments necessary to protect our cash flow EBITDA and margin structure.
Chris Nelson: Finally, we continue to engage with the U S administration as they work to achieve their trade related goals.
Chris Nelson: Turning to the current situation you can see our production mix from the U S, Mexico, and China that we've previously disclosed to help size the potential impact of changes in policy.
Chris Nelson: It is important to note that we have developed a flexible footprint to leverage as trade policy evolves.
Chris Nelson: Of the 1.5 to $1 $6 billion in supply from the rest of the world 75% of that is comprised of four countries, Taiwan, Vietnam, Malaysia and Thailand.
Chris Nelson: Additionally, our long held local for local manufacturing and distribution strategy strongly resonates today with greater than 60% of our costs located in North America.
Chris Nelson: We believe we have created a flexible and industry, leading footprint for global tools and outdoor companies that can be a competitive advantage in this environment.
Chris Nelson: A few updates on the mitigation actions.
Chris Nelson: First on price in April we successfully implemented a high single digit average price increase across our United States retail partners.
Chris Nelson: Given the magnitude of the current tariff rates, we are actively engaged with our channel partners about a second price increase targeting implementation at the beginning of the third quarter as it relates to our supply chain moves. The teams are actively prioritizing projects that we believe deliver the highest value at the quickest pay.
Chris Nelson: Just for example, we have opportunities in our supply chain to move dual sourced S skus out of China and into Mexico.
Chris Nelson: Additionally, we are pursuing relatively straightforward supply adjustments to increase the amount of U S. MCA qualified product coming from Mexico.
Chris Nelson: With all that in mind based on our understanding of trade policy as it stands today. Our current estimated 2025 headwind net of mitigation is approximately 75 on an adjusted EPS basis. In addition to pursuing mitigation actions. We are also evaluating new commercial opportunities.
Speaker Change: Leverage our U S plants, we manufacture a significant amount of outdoor hand tools storage and engineered fasteners in America, we will remain agile as the policy landscape evolves and in a moment Pat will outline more details for scenario planning purposes.
Speaker Change: When presented with an environment like this current one it requires strong coordination across our enterprise to ensure our responses well orchestrated and timely and I'm proud of how our teams are coming together to find creative impactful solutions.
We are thoughtfully and aggressively navigating the path forward as we focus on serving our customers optimizing our cost structure and protecting cash flow as we position the business to achieve its long term potential these environments present as many opportunities as there are challenges and we are squarely focused on both.
Speaker Change: Thank you and I'll now pass the call over to Pat Hallinan.
Pat Hallinan: Thank you, Chris and greetings to everyone on the call today.
Speaker Change: I'm going to devote the majority of my prepared remarks to discussing how we are approaching the current environment.
Speaker Change: Before I do I just want to reiterate that we are encouraged by the progress we achieved in the first quarter marked by organic revenue growth gross margin expansion and continued advancement towards our strategic financial objectives.
Speaker Change: Now turning to the balance of the year.
Speaker Change: As is well covered at this point in the earnings cycle. Many companies are navigating the uncertainty stemming from rapidly evolving trade policies.
In response Stanley Black <unk> Decker intends to remain nimble and strive to counter the effect of tariffs with measures within our control such as supply chain adjustments and price.
Speaker Change: We will leverage the internal team we assembled during 'twenty 'twenty four to enable our organization to address tariffs, while keeping our strategic objectives and focus.
Speaker Change: Our teams have conducted extensive internal planning to prepare for a range of scenarios during 'twenty 'twenty five and beyond and.
Speaker Change: And to facilitate our response today, we will present the scenario against which we are executing.
Speaker Change: To note, we are not macro forecasters and we have not endeavored to formulate a holistic macro forecast or call a U S recession.
Though our scenario planning does contemplate a continuation of the persistently soft DIY landscape and considered tactical adjustments retailers may make as they navigate tariffs we.
Speaker Change: We believe we are prepared to adapt to changes in the economy and in our end markets, if such events come to pass.
Speaker Change: Our planning assumptions incorporate the current in effect policy as of April 29.
Speaker Change: Which includes a 145% incremental tariffs on China.
Speaker Change: 25% on non U S MCA compliant goods from Mexico.
Speaker Change: 10% for the rest of the World and the section 232 tariffs on steel and aluminum.
Speaker Change: Our commercial and operational mitigation strategies. We believe are designed to protect both cash generation and margins in response to the anticipated approximately $1 7 billion of estimated gross annualized tariffs.
Speaker Change: To be clear this amount is not what we expect to hit our P&L this year or even next year after taking into account cost mitigation in price.
Speaker Change: We estimate that 2025 net earnings per share headwind after supply chain adjustments and price increases to be 75, then the impact to 2025 is primarily due to the time required to activate pricing with our customers and the P&L cost of tariffs the timing of which is impacted by inventory accounting.
Speaker Change: Our ultimate goal is to strive to mitigate fully headwinds since.
Speaker Change: Since supply chain adjustments require time to implement.
Speaker Change: Pricing actions are the quickest countermeasure at our disposal.
Speaker Change: In addition to supply chain and price actions, we anticipate capturing cost savings in our core business from the final phase of our transformation plus incremental SG&A cost containment.
Speaker Change: Our intent is to protect growth investments that we believe will drive long term share gains and generate positive returns by remaining agile and pulling levers primarily within our control we remain focused on delivering our long term margin journey.
Speaker Change: Turning to our planning assumptions for 2025.
Speaker Change: We entered this period in a relatively stable demand environment characterized by consistent pro demand.
Speaker Change: And DIY softness and with aggregate U S tools and outdoor customer inventory levels consistent with historic norms.
Speaker Change: It is of Paramount importance to uphold our service levels to customers, while we take the necessary actions, we've discussed to protect the business as the trade environment evolves.
Speaker Change: Our 2025 GAAP earnings per share planning scenario is $3 and 30, plus or minus <unk> 15.
Speaker Change: Which translates to adjusted earnings per share of approximately $4 50.
Speaker Change: Full year GAAP earnings include pre tax non-GAAP adjustments, ranging from $195 million to $260 million adjusted earnings per share within our current planning assumption is 75 cents lower compared to the February pre tariff view.
Speaker Change: The main factor is the aforementioned net headwinds from tariffs. Additionally.
Speaker Change: Additionally, the negative impact from volume is fully offset by incremental SG&A cost containment.
Speaker Change: Favorable currency and a modest benefit to below the line items.
Speaker Change: We are managing capital spending and working capital to be responsive to the underlying environment with a plan for free cash flow to meet or exceed $500 million, assuming the operational characteristics of this planning framework.
Speaker Change: In our planning scenario total company sales is forecasted to increase low single digits and organic revenue growth is planned for low to mid single digit expansion driven by an assumption for mid single digit price, which is partially offset by a low single digit decline in volume curve.
Speaker Change: <unk> and the infrastructure business divestiture combined are expected to be a low single digit headwind to sales versus the prior year when looking at the segment level global tools and outdoor organic revenue is forecasted to expand low to mid single digits now driven by price rather than volume.
Speaker Change: Note U S tools and outdoor carries the greatest magnitude of price and volume tariff impacts for mid second quarter through December and therefore, the percentage magnitude of price and volume impacts within the U S business is expected to be greater than that for the overall segment during the second half.
Speaker Change: Engineered fastening is expected to contribute low single digit organic revenue growth. We believe these are prudent assumptions taking into account the impact of higher interest rates on housing and the soft DIY consumer our price increases and the potential short term tactical decisions that customers may make.
Speaker Change: As they respond to tariffs to help those who want to model volume or cost sensitivities against our planning assumptions, we have provided additional context.
Speaker Change: It is our expectation that a one percentage point change in U S. Volume would result in roughly a 13 cent impact to adjusted earnings per share. This assumption contains decrementals to 20% to 25% with cost control or similar incremental net of growth investment our intent is.
Speaker Change: To contain the profit downside to these levels, depending on the magnitude of any volume shifts in.
Speaker Change: In the event of tariff reductions the benefit would be from the relief date through the duration period. When these mitigation are assumed to be and in fact <unk>.
Speaker Change: Regarding our cost savings strategy, we anticipate achieving $500 million in supply chain cost savings in 2025.
Speaker Change: In addition to an assumption for savings from tariff mitigation actions.
Speaker Change: Additionally, we are striving to reduce SG&A, while protecting the priority growth investments contemplated in our twenty-five plan under these assumptions, we are expecting adjusted EBITDA margin rate to expand year over year.
Speaker Change: As it relates to the second quarter, we are planning for flat to low single digit organic revenue decline and an expectation for positive adjusted pretax earnings.
Speaker Change: The second quarter will carry a heavy tariff burden due to LIFO.
Speaker Change: In an environment characterized by reduced visibility and frequent changes our top priorities are unchanged.
Speaker Change: We are committed to advancing towards our long term strategic and financial goals and do not believe policy changes impact our ability to achieve those over time.
Speaker Change: Our effort to successfully finished the supply chain transformation in 2025 is pivotal in supporting gross margins and we are now pivoting to growth and striving to accelerate the company's share gain capabilities finally robust cash conversion and strengthening our balance sheet remain top priorities as we.
Speaker Change: Work to achieve our multi year deleveraging goal while.
Speaker Change: While tariffs present, a considerable challenge in the near term they do not detract from our long term shareholder value creation opportunity.
Speaker Change: We believe we are making the right adjustments to the company that are strategically designed to position us for sustained long term growth margin expansion and value creation.
Don: With that I will now return the call to Don.
Don Allen: Thank you Pat as you heard this morning, we are committed to continuing to make meaningful progress across our top priorities accelerating our growth culture to serve our end users and customers.
Don Allen: Generating cash and strengthening our balance sheet and progressing the transformation to support our long term margin journey.
Don Allen: While we don't know the ultimate trade policy outcome by thoughtfully preparing and being pragmatic in our decision, making we believe we can successfully manage through the changing environment.
Don Allen: We believe the actions we are taking today are positioning the company to deliver sustainable long term shareholder return.
Speaker Change: We are now ready for Q&A Dennis.
Dennis Lange: Thanks, Tom Shannon, we can now start Q&A. Please thank you.
Dennis Lange: Thank you to ask a question you will need to press star one on your telephone you live in here or not it made investments advising your hand this race to win.
Dennis Lange: Draw. Your question. Please press star one again.
We ask that you please limit yourself to one question. Please standby, while we compile the Q&A roster.
Dennis Lange: Okay.
Speaker Change: Our first question comes from the line of Jeffrey Sprague with vertical Research partners. Your line is now open.
Jeffrey Sprague: Hey, Thank you good morning.
Chris Nelson: Hey, Don Chris.
Chris Nelson: Little surprising actually fairly surprising that Mexico is only one third U S MCA compliant.
Chris Nelson: I Wonder if you could kind of go through why that is how quickly.
Chris Nelson: You can rectify that in.
Chris Nelson: The rest of the world tariffs.
Chris Nelson: 10%.
Chris Nelson: It seems a little low relative to my quick check, but maybe you could add.
Chris Nelson: Touch on that also why only a 10% on that other bucket.
Jeffrey Sprague: Okay. So good morning, Jeff.
Speaker Change: Hello, Chris take the first part and Pat you want to take the second part.
Chris Nelson: Okay.
Speaker Change: Good morning, Jeff So as far as U S. MCA compliance as we stated in the call were a little bit below one third right now and what.
Speaker Change: What I'd say is that as we transition from the original NAFTA to U S. MCA there are nuances in qualification that at the time.
Speaker Change: Work worth the cost benefit trade off there are fairly straightforward and were operationalized.
Speaker Change: Our plan is to get a much higher percentage of those.
Speaker Change: Those revenues or imports U S MCA qualified.
Speaker Change: So it's an ongoing project, it's not it's not overly operationally complex to complete.
Jeffrey Sprague: Yes, Jeff and on the other.
Jeffrey Sprague: What I'd say is what we tried to do in the planning assumption for the balance of the year.
Jeffrey Sprague: Stick with the policy as we know it today instead of.
Jeffrey Sprague: Making a bunch of different permutations on policy right now.
Jeffrey Sprague: For us the rest of World, which is about $1 5 billion ish of U S card.
Jeffrey Sprague: <unk> is predominantly for southeast Asian countries make up about 75%.
Jeffrey Sprague: That $1 5 billion and right now the tariff rate on those specific countries and all the others in that bucket is 10%. So we're kind of just sticking with with existing policy, obviously policy may shift and as it does.
Jeffrey Sprague: We will shift.
Jeffrey Sprague: Some of our priorities, if merited, but right now thats the current policy.
Speaker Change: Thank you. Our next question comes from the line of Tim <unk> with Baird. Your line is now open.
Tim <unk>: Hey, guys.
Speaker Change: Good morning, Thanks for all the details.
Speaker Change: I guess my question just as you think about the <unk>.
Speaker Change: <unk> 7 billion of gross.
Speaker Change: Kind of tariffs.
Speaker Change: Impacts how would you bucket.
Speaker Change: What you expect to kind of offset with price.
Speaker Change: G&A cost reductions and then facility moves and I guess, how did you think about kind of that low single digit kind of volume decline from from a demand kind of kind of sensitivity or elasticity perspective.
Speaker Change: Yes, Tim So what I would what I would say is.
Speaker Change: There is there is the near term and then there is a long term I'd say for 'twenty five.
Speaker Change: We're expecting.
Speaker Change: Tariff expense in 'twenty five.
Speaker Change: To hit our P&L.
Speaker Change: In the.
Speaker Change: $1 billion ish, plus or minus $100 million.
Speaker Change: And the near term mitigation, just with the magnitude and the pace at which things have come at us the near term mitigation is dominated by.
Speaker Change: By price.
Speaker Change: And price will make up.
Speaker Change: The majority of the mitigation as you know as our script and.
Speaker Change: The deck that came out with it.
Speaker Change: About $140 million Delta between the tariff expense this year and then netted amount in that $140 million is the 75.
Speaker Change: In terms of how we expect to offset the volume hit that's going to be mostly through SG&A expense management, we're going to have incremental SG&A expense management that.
Speaker Change: And the $125 million plus or minus $25 million.
Speaker Change: This year.
Speaker Change: As we go forward from this year, obviously be working.
Speaker Change: To drive the tariff expense out of our P&L to the greatest extent possible as quickly as possible with supply chain moves.
Speaker Change: And we think we can get.
Speaker Change: Away from Todd was trying to Cogs for the U S mostly.
Speaker Change: Most of that done within about two years' time.
Speaker Change: In terms of volume as you mentioned.
Speaker Change: Yes.
Speaker Change: The planning assumption.
Speaker Change: Does have a full year enterprise wide vol.
Speaker Change: Volume hit that a little bit more than 2% or around.
Speaker Change: $400 million U S.
Speaker Change: Which which might sound right, but thats a full year global volume when you when you put that in the U S.
Speaker Change: That's four plus percent kind of 4% to 5% probably closer to four for the full year in the U S. But on a back half basis Youre getting to high single digit volume hit in the U S and what I would tell you is I.
Speaker Change: Im not quite sure we have a model that tells us with precision elasticity under these circumstances, what we tried to bake in what some of the early year DIY softness we've seen in expectation that under the current circumstances thats going to continue.
Speaker Change: We anticipate a little bit of the weight of.
Speaker Change: Higher 10 year Treasury bond on the U S housing market and then some of the disruption.
Speaker Change: Certain to arise as retailers decide in these very early days, how to navigate tariffs and whether to take.
Speaker Change: Full shipments of China goods right now so thats really what that volume assumes it's pretty considerable volume.
Speaker Change: But I wouldn't peg it to a precise elasticity model or a strong form macro conclusion that presumes a recession.
Speaker Change: Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Your line is now open.
Julian Mitchell: Hi, good morning.
Speaker Change: I just.
Speaker Change: Wanted to home in on a little bit on the sort of the phasing through the year I suppose of that $140 million.
Speaker Change: Net.
Speaker Change: Headwinds from tariffs that you just mentioned the Darling dialed into the guide.
Speaker Change: How does that differ maybe from the phasing of that $1 billion gross headwind in the P&L.
Speaker Change: Maybe pat sort of light to that.
Speaker Change: From the outside its a little bit confusing of sort of the flows of LIFO accounting plus the fact, you had a lot of low cost inventory pre.
Speaker Change: Tariff hikes.
Speaker Change: So kind of how are those playing out and what does that mean feel free cash flow phasing I think youre guiding for about $1 billion of free cash generation in Q2 to Q4. This year. Thank you.
Speaker Change: Yes Julien.
Julian Mitchell: There is definitely going to be.
Speaker Change: Hum.
Speaker Change: Unusual pressure to the second and the third quarter and particularly the second quarter I think.
Speaker Change: Again.
Speaker Change: We're going to be focused on serving our customers and our customers are navigating this in real time as well.
Speaker Change: But as best we can tell.
Speaker Change: We do expect some shipments softness the back part of the second quarter.
Speaker Change: And we do expect because of LIFO accounting.
Speaker Change: A pretty heavy.
Tariff expense burden in the P&L.
Speaker Change: In the second quarter.
Speaker Change: And so our likely our second quarter on a pre tax operating earnings basis, it's probably.
Speaker Change: Positive, but only slightly so and that would be our expectation.
As we go through the year.
Speaker Change: Even in a normal year, our cash flow is heavily weighted towards the latter third of the year.
Speaker Change: And I expect that to be roughly the same and just in the sense that that'll be about a point in time when.
Speaker Change: Price increases fully catch up the tariff expense what will be happening at a cash flow perspective.
Speaker Change: Is by about mid May plus or minus.
Speaker Change: A couple of weeks, we'll be at kind of the full monthly cash expense of those tariffs kind of monthly run rate of that $1 7 billion will be fully upon us by about mid may.
Speaker Change: And pricing in total.
Speaker Change: Anticipated to be fully in place by the early part of the third quarter.
Speaker Change: So from a cash flow perspective.
Speaker Change: Probably it takes us until the early days of the third quarter to have pricing matching tariff expense.
Speaker Change: I'd expect that.
Speaker Change: The back part of the year in particular, the fourth quarter to be from this point forward in the year, the strongest EPS and cash quarter by far by far.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is now open.
Joe Ritchie: Hey, good morning, guys.
Speaker Change: Good morning.
Speaker Change: So you mentioned you mentioned, putting through high single digit pricing increases at this point with your retail partners. The math implies that you need roughly call it $850 million or so in pricing for the year, just to offset and get to that net tariff impact.
Speaker Change: So how much what is what is high single digit to your retail partners how much pricing has actually come through and then and then maybe just give us a little bit more color on how those conversations are going and your confidence in your ability to get the additional pricing as we progress through the year.
Chris Nelson: Hey, Joe This is Chris So I'll start with the first price increase which as we as we mentioned is live and is in is.
Chris Nelson: It's showing up on the shelves as we speak.
Speaker Change: And that was an across the board high single digit price increase and would be expected to.
Speaker Change: Be that way for the balance of the year, obviously, so thats kind of completely flow through.
Speaker Change: But as I as I would transition to the second part of the conversation which is what next.
Speaker Change: Is that I think it's important to take a step back and understand that this is.
Pat Hallinan: As Pat mentioned, the speed and magnitude.
Speaker Change: The changes based on trade policy makes pricing something that we.
Pat Hallinan: We have to do out of the gate.
Pat Hallinan: <unk>.
Pat Hallinan: As we look at the industry dynamics.
Pat Hallinan: Certainly.
Pat Hallinan: It's not we're not alone and actually as we take a look at our current footprint and are 60% of our volume being North America base, and only 15% coming from China with the highest tariff burdens. We feel that we are in an advantaged position and we will continue to extend that advantage as we as we further mitigate.
Pat Hallinan: Along those lines, we are in the early stages of conversations with our customers and our collective goal is to make sure that we work together to have an optimal selection for our end users through this whole thing and given the flexibility and footprint that we have right now we feel that we're in a <unk>.
Pat Hallinan: Good position to do that with the lowest tariff burden possible. So we're working not only on kind of the ways that we can set up our selection for our customers the ways that we can mitigate.
Pat Hallinan: Effectively and quickly, but then also keeping an eye on what what.
Pat Hallinan: What we need to do for our end users and as Pat said being judicious about the long term.
Pat Hallinan: Our retailers understand that this has been something that has taken all of us.
Pat Hallinan: By storm, if you will with the speed of it and we're working certainly with them hand in hand and want to make sure that we collectively.
Pat Hallinan: In front of us keep the end user and the and the purchaser of those products in front of us to make sure that they have what they need for their applications. Because this is at.
Pat Hallinan: At the end of the day.
Pat Hallinan: Part of the beauty of this business and why it's such a great business, we serve great markets and we know that our end users need those products for the applications that they that they execute everyday and we're going to be there with them with our channel partners to make sure that that is the case.
Speaker Change: Thank you. Our next question comes from the line of Michael Rehaut with Jpmorgan. Your line is now open.
Pat Hallinan: Yeah.
Pat Hallinan: Thanks.
Pat Hallinan: Good morning, everyone. Thanks for taking my questions.
Pat Hallinan: A lot of numbers here and obviously appreciate all the detail and the thoughtfulness.
Pat Hallinan: Just wanted to clarify a couple of points I guess if.
Pat Hallinan: If I have the math right.
Pat Hallinan: The second price increase would be something in the order of another mid single digit price increase to North America tools, just wanted to make sure that I'm thinking about that right.
Pat Hallinan: In order to get to the $8 50 price offset for the year.
Pat Hallinan: Secondly.
Pat Hallinan: With the guidance for <unk> being positive.
Pat Hallinan: Pre tax earnings I assume.
Pat Hallinan: Given the fact that youre, not giving you a number and obviously a bigger hit in the second quarter, we should be thinking about <unk> EPS being minimally positive if thats fair to say.
Pat Hallinan: So this is Chris I'll start with the pricing question and then turn it over to Pat is that.
Yes.
Speaker Change: First and foremost we don't have nor would it be appropriate for us to talk about the actual.
Speaker Change: Price increase for Q3.
Speaker Change: We've talked to that we referenced first because we're still working through that with our customers as we referenced we want to make sure that we work very closely with them to make sure that we have the.
Speaker Change: The proper assortment and we understand what mitigation of what we're going to be able to fulfill for our end users. So there is no <unk>.
Speaker Change: Rice increase that we've arrived at right now.
Speaker Change: The timing that you referenced is correct, but I would just for <unk>.
Speaker Change: For a point of view say, it's likely higher than the first price increase that we went out with.
Speaker Change: In terms of the second quarter, Mike I think Youre right.
Speaker Change: It's going to be.
Speaker Change: Positive, but minimally so.
Speaker Change: On both.
Speaker Change: Pre tax and after tax earnings basis.
Speaker Change: Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Your line is now open.
Speaker Change: Oh, Thanks, good morning.
Speaker Change: So Pat I think I was just wondering if it's run through the intricacies of this LIFO charge in <unk> is it because.
Speaker Change: Your LIFO and therefore, you have to basically mark to market the inventory on hand pre tariffs to the tariff cost commensurate thats coming through the cash flow and <unk>. So that's a onetime noncash charge because of the LIFO accounting.
Speaker Change: Then just.
Speaker Change: My real question is.
Speaker Change: When you think about the U S MCA compliance.
Speaker Change: I think we all expected to be quite low because of the sourcing of batteries.
Speaker Change: Palo <unk>, which largely relates today in China. So I'm just curious how do you pivot away from China, given the importance of those components to a T.
Speaker Change: <unk> powerful franchise.
Speaker Change: Hey, Nigel I'll start with LIFO and I'll try not to take us all down a rat hole because our.
Speaker Change: Our financials actually have both FIFO and LIFO just to keep everyone on their toes, but in simple terms.
Speaker Change: Tariffs.
Speaker Change: Our incremental unfavorable variance to standard cost of goods sold.
Speaker Change: And the way our LIFO works is every time, we have a new variable that affects our cost structure.
Speaker Change: Anticipate that variance for the full year across the volumes, we expect to buy or make for the full year.
Speaker Change: And then.
Speaker Change: That total variance.
Speaker Change: Rolls off the balance sheet okay.
According to inventory turns and so whats ended up happening in the second quarter as you have a balance of the year total variance for think of it as about 10 months of the year.
LIFO variants that will roll off according to inventory turns.
Speaker Change: LIFO portion of it kind of Disproportionally hits, the first quarter or the second quarter rather.
Speaker Change: <unk>.
Speaker Change: And so that's the simple accounting of it is.
Speaker Change: About $1 7 million billion.
Speaker Change: Is going into basically a cogs variance.
Chris Nelson: Nigel This is Chris.
Chris Nelson: Thanks for the question I think.
Speaker Change: Certainly as you pointed out the dynamic that you are.
Speaker Change: You expressed on the.
Speaker Change: Especially the battery is the operative question and therefore, USA U S. MCA compliance is more.
Speaker Change: More of an issue that we've got to sort through on the power tools side and what I'd say is that we are we will continue to look at options for us in how we import how we package and how we marry that that battery with the tool.
Speaker Change: And the shipping dynamics and then the importing dynamics to make sure that we are fully U S. MCA compliant.
Speaker Change: And maintain our technology advantage that we have on our battery tool combinations.
Chris Snyder: Thank you. Our next question comes from the line of Chris Snyder with Morgan Stanley. Your line is now open.
Chris Snyder: Thank you I wanted to ask about customer inventory levels and specifically.
Chris Snyder: Some of the big retailers.
Chris Snyder: Sounds like from the commentary that you guys see those as largely normalized but the guide does include some level of destock.
Chris Snyder: So I guess, if any kind of color on what's in the guide around potential destock. There and then just how have those conversations gone with retailers. If we look at the January.
Chris Snyder: Their inventories were all up across the board so.
Chris Snyder: Any view on when you think they could start destocking is that a Q2 risk is it more of a Q3 risks given theres another price increase coming from you guys. In Q3, so any color on that would be appreciated. Thank you.
Pat Hallinan: Chris This is Pat I'll start and I don't know Chris will have anything to add he can decide after I'm done.
Pat Hallinan: When we went into the year I would say broadly.
Pat Hallinan: And almost at every point inventory levels across our big customers in our customer base in general was was quite normal in the scheme of things.
Pat Hallinan: We've been in an environment, where I would say they are all for the most part stayed at the midpoint or low side of their normal range, just with all the cost of short term money.
Pat Hallinan: And the fact that our service levels have recovered.
Speaker Change: I would say for us relative to our plan and our experience through.
Speaker Change: Through most of the first quarter, we did have some demand strength.
Speaker Change: In March that might have been associated with tariff pre buying but for the most of the first quarter. The DIY customer was soft and as you heard in my earlier response to the volume question.
Speaker Change: I'd say of the 400 ish million versus prior year volume out assumption, we have in our planning assumption.
Speaker Change: Probably half of that is just.
Speaker Change: Carrying forward some of that soft DIY trend and anticipation of.
Speaker Change: What the higher tenure will do to the U S housing market.
Speaker Change: I suppose that that at.
Speaker Change: At certain retailers could mean, those that have disproportionate DIY volumes, some slight inventory reset.
Speaker Change: But I would say that that would be pretty focused product lines and retailers I don't think thats a broad based dynamic.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question comes from the line of Joe O'dea with Wells Fargo. Your line is now open.
Hi, good morning, Thanks for taking my question.
Speaker Change: Probably enough LIFO questions to get you to switch to fully FIFO, but just a clarification on if you could size what that LIFO headwind is to pre tax earnings in Q2.
Speaker Change: And then bigger picture just when you size the $1 7 billion annualized gross impact.
Speaker Change: If you could address the strategies that are underway can you size the opportunity through what you can do on U S MCA and getting higher coverage there.
Speaker Change: Of that 15% of China would mean.
Speaker Change: Based on those strategies, what that $1 7 billion would be going to.
Speaker Change: I'll start on the first one and then maybe ask for some clarification on the on the second one.
Speaker Change: On the first one Joe I would say.
Speaker Change: The LIFO impact to the second quarter is probably in the two to $2 50 range $100 million 200 to 250.
Speaker Change: Really the dynamic I should've said on the earlier responses youre getting that before youre getting all the price and that's why it's a.
Speaker Change: More dramatic effect in the second quarter than it is in the third and the fourth quarter.
Speaker Change: When we talk about U S MCA and Chris or Dan May add to this.
Theres a two fold benefit.
Speaker Change: Two addressing U S MCA compliance right.
Speaker Change: As we stated earlier in the call and in the Q&A. We're about one third U S. MCA compliant from our Cogs from Mexico to the U S. Today.
Speaker Change: The obvious benefit of then reducing that tariff burden from Mexico at 25%.
Speaker Change: But we have a lot of great assets and capacity in Mexico, and so the extent to which we dual source already.
Speaker Change: Products that we can move more of the volume to Mexico or to the extent.
Speaker Change: With some minor modest equipment, moving or capability building in Mexico take volumes that arent dual source today. So there is a there is a twofold benefit.
Speaker Change: To the U S MCA compliance angle.
Speaker Change: And it would be a big part of us mitigating.
Speaker Change: What we expect to be half or more of the tariff burden over two years.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Nicole to place with Deutsche Bank. Your line is now open.
Speaker Change: Yeah. Thanks, good morning, guys.
Speaker Change: Good morning, good morning.
Speaker Change: Just wanted to ask on the SG&A savings plan any help with respect to quarterly cadence like how quickly you can start to take those actions and I guess if demand weekend. If we were to go into more of a recessionary environment as all of this unfolds do you have more that you can do on the cost side, whether its cogs or SG&A you guys have just been focused on.
Speaker Change: Cost for some time now thank you.
Speaker Change: Yes, Nicole I would say.
Speaker Change: I would be modeling roughly flat across the three quarters, the levers will be a little bit different across the three quarters it will be it'll.
Speaker Change: It'll be close to that approximation I mean may be slightly biased to the second half, but I don't think by by larger miles and.
Speaker Change: As our planning assumption and the scenario guidance suggests I mean, yes.
Speaker Change: Do a more level levers to Paul.
Speaker Change: But as we.
Speaker Change: Work.
Speaker Change: Through this year and through 2006 and beyond.
Speaker Change: We're going to have.
Speaker Change: A twofold focus one is preserving the growth investments that we think are critical.
Speaker Change: To building the business.
Speaker Change: And driving growth over the long term.
Speaker Change: And everywhere possible being as efficient and supporting the business in the back part of.
Speaker Change: The enterprise so that we're maximizing the amount we can invest that's customer facing and then keeping our total expense base sound relative to the volume of the enterprise.
Speaker Change: The only thing I would add is as it relates to your supply chain question is that you know as.
Speaker Change: As we've been stating all along through the transformation.
Speaker Change: What we have been concentrating on doing is being more flexible more efficient and then also adjusting our footprint to reflect a more focused company.
Speaker Change: There is a lot more that we will continue to do there and it's actually what we're doing and the mitigation front is is in support of and in line with that so not only is there more that will support us through this time, but it will ultimately be something that certainly moves us well.
Speaker Change: We will continue moving us along on the journey that we had planned out and we do feel confident about the ability to continue on towards that 35 plus percent.
Speaker Change: Gross margin journey, it's just that there are some things that we now have to adjust as we as we prioritize some of the mitigation efforts, but it's not anything that would be counter to that supply chain strategy.
Speaker Change: Thank you. This concludes the question and answer session I would now like to hand, the call back over to Dennis Lange for closing remarks.
Dennis Lange: Thanks, Shannon wed like to thank everyone again for their time and participation on the call. Obviously, please contact me if you have further questions. Thank you.
Dennis Lange: This concludes today's conference call. Thank you for your participation you may now disconnect.
Dennis Lange: Okay.
Dennis Lange: [music].
Dennis Lange: Okay.
Dennis Lange: Okay.
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Dennis Lange: Okay.
Dennis Lange: <unk>.
Dennis Lange: Okay.
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Dennis Lange: Okay.
Dennis Lange: Hum.
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