SWK - NYSE

Welcome to the First Quarter 2025 Stanley Black & Decker Earnings Conference Call. My name is Shannon, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to the Vice President of Investor Relations, Dennis Lange. Mr. Lange, you may begin.

Thank you, Don and good morning, everyone. I will start with the tools and outdoor first quarter operating performance. Revenue was approximately $3.3 billion flat versus the first quarter 2024. Organic revenue grew 1% driven by volume. DEWALT 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 addition, we had strong outdoor product shipments ahead of the season. These positive factors were partially offset by a cautious consumer and continued softness in the DIY market. Adjusted segment margin was 9.6%, a 110 basis point improvement as compared to the first quarter of last year. This was largely attributable to supply chain efficiencies and new 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. Turning to performance by product line, Power Tools experienced a 2% organic revenue decline as the consumer DIY category remained pressured. Hand 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. A couple of examples include the DEWALT Construction Jack, which offers hands-free lift assistance, and the DEWALT TOUGHSYSTEM 2.0 DXL Modular Workstation System. 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. Focusing on tools and outdoor performance by region, North America recorded a 2% organic revenue increase, reflecting the overall segment's growth factors. As Don 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, especially as our first round of price increases begin to hit the shelf. Europe organic growth was flat, as our investments in Eastern Europe are yielding results, which counteracted a generally weak market backdrop due to macro factors. 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 for the segment. Now, let's transition to engineered fastening, which was our former industrial segment. We made this name change to reflect the segment's more focused portfolio. 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, 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. All told, there was a slight organic revenue decline of 1%. The automotive business faced a high single-digit organic decline, primarily due to OEMs reducing light vehicle production schedules and tightening capital expenditures. The aerospace business generated robust mid-teens organic growth driven by strong performance in fasteners and fittings. This business has a multi-year backlog and growth outlook reinforced by new content wins and a high booking rate. General industrial fasteners achieved low single-digit organic growth reflecting steady demand. The Engineered Fastening adjusted segment margin rate was 10.1% for the quarter. This is a decline from the previous year largely due to softness in high margin automotive products. Successfully completing 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. As it relates to costs, we continue actively implementing our series of initiatives which are projected to yield approximately $2 billion of pre-tax run rate cost savings, of which $1.5 billion is coming from the supply chain. 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 pre-tax run rate cost savings, bringing our total savings to approximately $1.7 billion since the program's inception. 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 enhancing 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. One key initiative is increasing DEWALT 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. One strategy we're pursuing to drive growth is portable jobsite 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. This quarter, we also launched DEWALT TOUGHWIRE, a versatile cable hanger system revolutionizing HVAC, 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 efficiency and simplify installations. 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 gain. Like many companies with global supply chains, we are currently navigating a frequently changing and complex operating environment. 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 balance meeting the near-term needs of the business with preserving and maximizing long-term value, all while maintaining our customer-first mindset. Our business teams are continuously assessing the evolving trade policies and diligently evaluating their impacts on our global supply chain and our business. In October of last year, we outlined how we were enhancing our preparations to mitigate the potential impact of higher tariffs, and we have continued to stay true to our plans and the four guiding principles behind them. First and foremost, we are committed to serving our customers and end-users during this dynamic period. 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. 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. Today, approximately 15% of our supply chain for the U.S. comes from China. Through our mitigation efforts, we're focused on effectively being out of China supply for the U.S. business in the 12 to 24-month time period. This is a high priority and will remain a key focus even if China tariffs go to lower levels. We also have plans to increase our USMCA compliance from where it stands today at just below one-third of Mexico's supply for the U.S. Third, we are moving with speed on price increases. We are taking a judicious approach, maintaining a long-term perspective as we make the adjustments necessary to protect our cash flow, EBITDA, and margin structure. Finally, we continue to engage with the U.S. administration as they work to achieve their trade-related goals. 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. It's important to note that we have developed a flexible footprint to leverage as trade policy evolves. Of the $1.5 billion 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. 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. 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. A few updates on the mitigation actions. First on price. In April, we successfully implemented a high single-digit average price increase across our United States retail partners. 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 pace. For example, we have opportunities in our supply chain to move dual-sourced SKUs out of China and into Mexico. Additionally, we are pursuing relatively straightforward supply adjustments to increase the amount of USMCA-qualified product coming from Mexico. 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 $0.75 on an adjusted EPS basis. In addition to pursuing mitigation actions, we are also evaluating new commercial opportunities which 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. When presented with an environment like this current one, it requires strong coordination across our enterprise to ensure our response is 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. Thank you, and I'll now pass the call over to Pat Hallinan.

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

Thank you. [Operator Instructions]. Our first question comes from the line of Jeffrey Sprague with Vertical Research Partners. Your line is now open.

Good morning Jeff. So as far as USMCA compliance, as we stated in the call, we're a little bit below one third right now. And what I'd say is that as we transitioned from the original NAFTA to USMCA, there were nuances in qualification that at the time, weren't worth the cost-benefit trade-off. They're fairly straightforward, and we're operationalizing plans to get a much higher percentage of those revenues or imports USMCA qualified. So it's an ongoing project. It's not overly operationally complex to complete.

Yes, Jeff, and on the other, what I'd say is what we try to do in the planning assumption for the balance of the year is kind of stick with the policy as we know it today instead of making a bunch of different permutations on policy. And right now, for us the rest of world, which is about $1.5 billion-ish of U.S. COGS is predominantly four Southeast Asian countries make up about 75% of 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 existing policy. Obviously, policy may shift and as it does, we'll shift some of our priorities at merited. But right now, that's the current policy.

Thank you. Our next question comes from the line of Tim Wojs with Baird. Your line is now open.

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

Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is now open.

Hey, good morning guys. So 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. So how much -- what is high single digit to your retail partners, how much pricing has actually come through? 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?

Hey Joe, this is Chris. So I'll start with the first price increase, which, as we mentioned is live and is in -- it's showing up on the shelves as we speak. And that was and across the board, high single-digit price increase and would be expected to be that way for the balance of the year, obviously. So that's going to completely flow through. But as I would transition to the second part of the conversation, which is what next is that I think it's important to take a step back and understand that this is -- the -- as Pat mentioned, the speed and magnitude of the change is based on trade policy makes pricing something that we have to do out of the gate. As we look at the industry dynamics, certainly, it's not -- we're not alone. And actually, as we take a look at our current footprint and our 60% of our volume being North America based 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 further mitigate. Along those lines, we're 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 very 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 effectively and quickly, but then also keeping an eye on what we need to do for our end users and as Pat said, being judicious about the long term. Our retailers understand that this has been something that has taken all of us 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 in front of us, keep the end user 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 the end of the day, it is 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 execute every day, and we're going to be there with them with our channel partners to make sure that, that is the case.

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

Thanks. Good morning everyone. Thanks for taking my questions. A lot of numbers here, and I obviously appreciate all the detail and the thoughtfulness. Just wanted to clarify a couple of points, I guess. If I have the math right, 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 in order to get to the $850 million of price offset for the year? And secondly, with the guidance for 2Q being positive pretax earnings, I assume given the fact that you're not giving a number and obviously a bigger hit in the second quarter, we should be thinking about 2Q EPS being minimally positive if that's fair to say?

So this is Chris. I'll start with the pricing question and then turn it over to Pat. First and foremost, we don't have nor would it be appropriate for us to talk about the actual price increase for Q3 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 proper assortment. We understand what mitigation and what we're going to be able to fulfill for our end users. So there is no price increase that we've arrived at right now. The timing that you referenced is correct. But I would just for point of view, say, it's likely higher than the first price increase that we went out with.

In terms of second quarter, Mike, I think you're right. It's going to be positive, but minimally so on both pretax and after-tax earnings basis.

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

Oh, thanks. Good morning. So Pat, I think I just want to respond to the intricacies of this LIFO charge in 2Q. Is it because your LIFO and therefore, you have to basically mark-to-market the inventory on hand pre-tariffs to the tariff cost coming through the cash flow in 2Q. So that's a onetime noncash charge because of the LIFO accounting. And then just my real question is, when you think about the USMCA compliance, I think we all expected it to be quite low because of the sourcing of batteries and Powertronics, which largely resides today in China. So I'm just curious, how do you pivot away from China given the importance of those components to your power tool franchise?

Hey Nigel, I'll start with LIFO, and I'll try not to take us all down a rat hole because our financials actually have both FIFO and LIFO just to keep everyone on their toes. But in the simple term, tariffs are an incremental unfavorable variance to standard cost of goods sold. And the way our LIFO works is every time we have a new variable that affects our cost structure, we have to anticipate that variance for the full year across the volumes we expect to buy or make for the full year. And then that total variance rolls off the balance sheet according to inventory turns. And so what's ended up happening in the second quarter is 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 and the LIFO portion of it just kind of disproportionately hits the first quarter or the second quarter, rather. And so that's the simple accounting of it is that $1.7 billion is going into basically a COGS variance.

Nigel, this is Chris. Thanks for the question. And I think certainly, as you pointed out, the dynamic that you expressed on the -- especially the battery is the operative question. And therefore, USMCA compliance is more of an issue that we've got to sort through on the power tools side. And what I would 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 battery with the tool and the shipping dynamics and then the importing dynamics to make sure that we are fully USMCA compliant and maintain our technology advantage that we have on our battery tool combinations.

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

Thank you. I wanted to ask about customer inventory levels and specifically at some of the big retailers. And it sounds like from the commentary that you guys view those as largely normalized but the guide does include some level of destock. 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 quarter, their inventories were all up across the board. So I guess any view on when you think they could upstart destocking, is that a Q2 risk, is it more of a Q3 risk given there's another price increase coming from you guys in Q3, so any color on that would be appreciated? Thank you.

Chris, this is Pat. I'll start and I don't know if Chris will have anything to add, he can decide after I'm done. When we went into the year, I would say broadly, and almost at every point, inventory levels across our big customers and our customer base in general was quite normal in the scheme of things. I mean we've been in an environment where I'd say they've all for the most part, stayed at the midpoint or low side of their normal range just with the cost of short-term money and the fact that our service levels have recovered. I would say for us relative to our plan and our experience through most of the first quarter, we did have some demand strength 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, I'd say of the $400-ish million versus prior year of volume out assumption we have in our planning assumption, probably half of that is just carrying forward some of that soft DIY trend and in anticipation of what the higher tenure will do to the U.S. housing market. I suppose that, that at certain retailers could mean those that have disproportionate DIY volumes, some slight inventory reset. But I'd say that, that would be pretty focused to product lines and retailers. I don't think that's a broad-based dynamic.

I'll start on the first one and then maybe ask for some clarification on the second one. On the first one, Joe, I would say the LIFO impact to the second quarter is probably in the $200 million to $250 million range, $100 million, $200 million to $250 million. And really, the dynamic I should have said on the earlier response is you're getting that before you're getting all the price. And that's why it's a more dramatic effect in the second quarter than it is in the third and the fourth quarter. When we talk about USMCA and Chris or Don may add to this, there's a twofold benefit to addressing USMCA compliance, right. As we stated earlier in the call and in the Q&A, we're about one third USMCA compliant from our COGS from the Mexico to the U.S. today. There's the obvious benefit of then reducing the tariff burden from Mexico at 25%. But we have a lot of great assets and capacity in Mexico. And so the extent to which we dual source already products that we can move more of the volume to Mexico or to the extent with some modest equipment moving or capability building in Mexico take volumes that aren't dual source today. So there's a twofold benefit to the USMCA compliance angle, and it would be a big part of us mitigating what we expect to be half or more of the tariff burden over two years.

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

Yeah, thanks. Good morning guys. 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 weakened if we were to go into more of a recessionary environment as all of this unfolds, do you have more that you could do on the cost side, whether it's COGS or SG&A, you guys have just been focused on costs for some time now? Thank you.

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.

Thanks, Shannon. We'd like to thank everyone again for their time and participation on the call. Obviously, please contact me if you have further questions. Thank you.