Title

Presentation

Stanley Black & Decker, Inc. beats earnings expectations. Reported EPS is $0.75, expectations were $0.68.

Operator: 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.

Dennis M. Lange: Thank you, Shannon. Good morning, everyone and thanks for joining us for Stanley Black & Decker’s 2025 first quarter webcast. Here today, in addition to myself is Don Allan, President and CEO; Chris Nelson, COO, EVP, and President of Tools & Outdoor; and Pat Hallinan, EVP and CFO. Our earnings release, which was issued earlier this morning, and a supplemental presentation, which we will refer to, are available on the IR section of our website. A replay of this morning’s webcast will also be available beginning at 11 AM today. 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 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 today 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 filing. Additionally, 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 President and CEO, Don Allan.

Donald Allan, Jr.: Thank you, Dennis and good morning, everyone. 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 long-term opportunities within the attractive markets that we serve. As I’ve said many times, Stanley Black & Decker has incredibly talented people, powerful brands, and an amazing innovation machine. These foundational traits have made us an industry leader for many years. 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.

We also have been investing significantly in our end users and channel customers to provide the best innovation, service, and experience. 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 magnitude 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. 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.

Over the past several years, we have substantially reduced our China manufacturing footprint, which serves the U.S. market. We believe we have the most flexible supply chain footprint in the industry, as we now have significant hubs 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 hubs. We intend to build upon them to minimize the impact of higher input costs from tariffs over the next 12 to 24 months. Prices 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 goals.

Now I want to focus on our performance this quarter. I’m 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. Organic growth was up 1% led by solid outdoor performance. Our powerhouse and professionally focused to all brand extended its streak of year-over-year revenue growth with power tools, hand tools, accessories and storage and outdoor all contributing. 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.

Take it together, this resulted in total revenue of $3.7 billion, consistent with our plans. North American and end market demand, as measured by our retail POS, in the first quarter was generally consistent with the stable trends we observed exiting 2024. The year started slow, but March improved and April looked solid as well. Adjusted gross margin continued to improve on a year-over-year basis. The first quarter adjusted rate of 30.4% was up 140 basis points versus last year. Supply chain efficiencies and positive mixed benefits from new innovation launches were partially offset by freight inflation and the initial impact from China and Mexico tariffs initiated in February. We are firmly executing against our strategic objectives and are on track with our transformation plan.

We intend to successfully complete our transformation in 2025 and meet our $2 billion savings target. The organic growth we delivered in the first quarter, along with the year-over-year gross margin expansion, translated to solid adjusted EBITDA performance. Net of growth investments, adjusted EBITDA margin approached 10%, an increase of approximately 80 basis points versus the prior year. Adjusted earnings per share was $0.75, up 34% versus last year. First quarter free cash outflow was $485 million, relatively consistent with both the prior year and typical historical seasonality. And impressive results 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.

I want to thank the organization for staying focused on execution and making forward progress once again. We clearly are entering a dynamic period with reduced visibility albeit with relatively stable demand based on what we are seeing in the market and across the business. 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. And even though it’s too early to predict all 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. We will continue to monitor these evolving policies as well as project the potential effects on the operating and demand environments to remain agile and responsive to evolving market conditions.

Over the past few years we have strengthened our execution capability and have consistently delivered results in an overall weak market backdrop. Our strategic decisions are aimed at navigating the immediate challenges while positioning the company for sustained long-term success. 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 gains. We also expect commercial opportunities to emerge for our businesses, particularly as we further leverage our North American footprint to serve local markets. 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 controls, some of which are already in flight while some will take time to fully implement. As such, pricing is 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. 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 tariffs stay at current levels. 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.

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 are pursuing in just a moment. Pat then will share more detail on financial planning. Given the fluid environment, today we are providing our latest thoughts on 2025 with sensitivities to help model different scenarios. We have our sights set on share gain and long-term value creation and are committed to making the necessary decisions along the way to achieve our long-term financial objectives. 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 in a volatile trade environment.

Christopher J. Nelson: 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.

Patrick D. Hallinan: Thank you, Chris and greetings to everyone on the call today. I am going to devote the majority of my prepared remarks to discussing how we are approaching the current environment. 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. Now, turning to the balance of the year. 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 & 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.

We will leverage the internal team we assembled during 2024 to enable our organization to address tariffs while keeping our strategic objectives in focus. Our teams have conducted extensive internal planning to prepare for a range of scenarios during 2025 and beyond, and to facilitate our response. Today, we’ll present the scenario against which we are executing. 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 considers tactical adjustments retailers may make as they navigate tariffs. We believe we are prepared to adapt to changes in the economy and in our end markets if such events come to pass.

Our planning assumptions incorporate the current in effect policy as of April 29th, which includes 145% incremental tariffs on China, 25% on non-USMCA compliant goods from Mexico, 10% for the rest of the world, and the Section 232 tariffs on steel and aluminum. 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. 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 and price. We estimate the 2025 net earnings per share headwind after supply chain adjustments and price increases to be $0.75. The impact to 2025 is primarily due to the time required to activate pricing with our customers and the P&L costs of tariffs, the timing of which is impacted by inventory accounting.

Our ultimate goal is to strive to mitigate fully headwinds. Since supply chain adjustments require time to implement, pricing actions are the quickest counter measure at our disposal. In addition to supply chain and price actions, we anticipate capturing cost savings in the core business from the final phase of our transformation, plus incremental SG&A cost containment. 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. Turning to our planning assumptions for 2025. We entered this period in a relatively stable demand environment characterized by consistent pro demand and DIY softness and with aggregate U.S. tools and outdoor customer inventory levels consistent with historic norms.

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. Our 2025 GAAP earnings per share planning scenario is $3.30 plus or minus $0.15 which translates to adjusted earnings per share of approximately $4.50. 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 $0.75 lower compared to the February pre-tariff view. The main factor is the aforementioned net headwinds from tariffs. Additionally, the negative impact from volume is fully offset by incremental SG&A cost containment, favorable currency, and a modest benefit to below the line items.

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. 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. Currency 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.

Note, U.S. Tools and Outdoor carries the greatest magnitude of price and volume tariff impacts from 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. 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 as they respond to tariffs. To help those who want to model volume or cost sensitivities against our playing assumptions, we have provided additional context.

It is our expectation that a 1 percentage point change in U.S. volume would result in roughly a $0.13 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 to contain the profit downside to these levels, depending on the magnitude of any volume shifts. In the event of tariff reductions, the benefit would be from the release date through the duration period when these mitigations are assumed to be an impact. Regarding our cost savings strategy, we anticipate achieving $500 million in supply chain cost savings in 2025, in addition to an assumption for savings from tariff mitigation actions. Additionally, we are striving to reduce SG&A, while protecting the priority growth investments contemplated in our 2025 plan.

Under these assumptions, we are expecting adjusted EBITDA margin rate to expand year-over-year. 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. The second quarter will carry a heavy tariff burden due to LIFO. In an environment characterized by reduced visibility and frequent changes, our top priorities are unchanged. 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. Our effort to successfully finish 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 work to achieve our multiyear deleveraging goal. While tariffs present a considerable challenge in the near term, they do not detract from our long-term shareholder value creation opportunity. 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. With that, I will now return the call to Don.

Donald Allan, Jr.: 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, generating cash and strengthening our balance sheet, and progressing the transformation to support our long-term margin journey. 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. We believe the actions we are taking today are positioning the company to deliver sustainable long-term shareholder returns. We are now ready for Q&A. Dennis?

Dennis M. Lange: Thanks, Don. Shannon, we can now start Q&A, please. Thank you.

Operator: Thank you. [Operator Instructions]. 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. Hey Don, Chris, a little surprising actually, fairly surprising that Mexico is only one third USMCA compliant. I wonder if you could kind of go through why that is, how quickly you can rectify that, and the rest of world tariffs at 10% seems a little low relative to my quick check, but maybe you could touch on that also why you only have 10% on that other bucket?

Donald Allan, Jr.: Okay. So, good morning Jeff, and I’ll let Chris take the first part. And Pat, you want to take the second part.

Christopher J. Nelson: 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.

Patrick D. Hallinan: 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.

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

Timothy Wojs: Hey guys, good morning. Thanks for all the details. I guess my question, just as you think about the $1.7 billion of gross kind of tariff impacts. How would you bucket what you expect to kind of offset with price, SG&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 a demand kind of sensitivity or elasticity perspective?

Donald Allan, Jr.: Yes, Tim. So what I would say is there’s a near term and then there’s the long term. I’d say, for 2025, we’re expecting tariff expense in 2025 to hit our P&L kind of in the $1 billion-ish plus or minus $100 million. 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 price and price will make up the majority of the mitigation. As our script and the deck that came out with it, there’s about $140 million delta between the tariff expense this year and the netted amount, and that $140 million is the $0.75. 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 it’s probably in the $125 million, plus or minus $25 million this year.

As we go forward from this year, obviously, be working to drive the tariff expense out of our P&L to the greatest extent possible as quickly as possible with supply chain moves. And we think we can get away from COGS — China COGS for the U.S., mostly most of that done within about two years’ time. In terms of volume, as you mentioned, the planning assumption does have a full year enterprise-wide volume hit that’s a little bit more than 2% or around U.S. $400 million, which might sound like, but that’s a full year global volume. When you put that in the U.S., that’s 4% plus, kind of 4% to 5%, probably closer to 4% for the full year in the U.S., but on a back half basis, you’re getting to high single-digit volume hit in the U.S. And what I would tell you is, I’m not quite sure we have a model that tells us with precision elasticity under these circumstances.

What we tried to bake in was some of the early year DIY softness we’ve seen and an expectation that under the current circumstances, that’s going to continue. Anticipate a little bit of the weight of a higher 10-year treasury bond on the U.S. housing market. And then some of the disruption that’s certain to arise as retailers decide in these very early days, how to navigate tariffs and whether to take full shipments of China goods right now. And so that’s really what that volume assumes, it’s pretty considerable volume. But I wouldn’t peg it to a precise elasticity model or a strong form macro conclusion that presumes a recession.

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

Julian Mitchell: Hi, good morning. I just wanted to home in a little bit on the sort of the phasing through the year, I suppose, of that $140 million net headwind from tariffs that you just mentioned that dialed into the guide. How does that differ maybe from the phasing of that $1 billion gross headwind in the P&L? And maybe, Pat, sort of allied to that, from the outside, it’s a little bit confusing of sort of the flows of LIFO accounting plus the fact you had a lot of low-cost inventory pre the tariff hikes. So kind of how are those playing out and what does that mean for your free cash flow phasing, I think you’re guiding for about $1 billion of free cash generation in Q2 to Q4 this year? Thank you.

Donald Allan, Jr.: Yes, Julian, there’s definitely going to be some unusual pressure to the second and the third quarter, in particular, the second quarter. I think, again, we’re going to be focused on serving our customers and our customers are navigating this in real time as well. But as best we can tell, we do expect some shipment softness in the back part of the second quarter. And we do expect because of LIFO accounting, a pretty heavy tariff expense burden in the P&L in the second quarter. And so our likely our second quarter on a pretax operating earnings basis is probably positive, but only slightly so. And that would be our expectation. As we go through the year, even in a normal year, our cash flow is heavily weighted towards the latter third of the year, and I expect that to be roughly the same just in the sense that, that will be about the point in time when price increases fully catch up the tariff expense.

What will be happening in a cash flow perspective, is by about mid-May, plus or minus a couple of weeks, we’ll be at kind of the full monthly cash expense of those tariffs to kind of monthly run rate of that $1.7 billion will be fully upon us by about mid-May. And pricing in total anticipated to be fully in place by the early part of the third quarter. So from a cash flow perspective, it probably takes us until the early days of the third quarter to have pricing matching tariff expense. But I would expect that the back part of the year, in particular the fourth quarter to be from this point forward in the year, the strongest EPS in cash quarter by far.

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

Joseph Ritchie: 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?

Christopher J. Nelson: 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.

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

Michael Rehaut: 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?

Christopher J. Nelson: 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.

Patrick D. Hallinan: 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.

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

Nigel Coe: 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?

Patrick D. Hallinan: 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.

Christopher J. Nelson: 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.

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

Christopher Snyder: 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.

Patrick D. Hallinan: 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.

Operator: Thank you. Our next question comes from the line of Joe O’Dea with Wells Fargo. Your line is now open.

Joseph O’Dea: Hi, good morning. Thanks for taking my questions. 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 pretax earnings in Q2? And then bigger picture, just when you sized the $1.7 billion annualized gross impact, if you address the strategies that are underway, can you size the opportunity through what you can do on USMCA and getting higher coverage there, what a move of that 15% of China would mean, and so based on those strategies, what that $1.7 billion would be going to?

Patrick D. Hallinan: 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.

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

Nicole DeBlase: 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.

Patrick D. Hallinan: Yes, Nicole, I would say, I would be modeling it roughly flat across the three quarters. The levers will be a little bit different across the three quarters. It will be close to that approximation. I mean, maybe slightly biased to the second half, but I don’t think by large amounts. And as our planning assumption and the scenario guidance suggest, I mean, yes, we do have more levers to pull. But as we work through this year and through 2026 and beyond we’re going to have a twofold focus. One is preserving the growth investments that we think are critical to building the business and driving growth over the long term and everywhere possible being as efficient in supporting the business in the back part of 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.

Donald Allan, Jr.: The only thing I would add as it relates to your supply chain question is that as we’ve been stating all along through the transformation, 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. That — there’s a lot more that we will continue to do there. And it’s actually what we’re doing in the mitigation front 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 — 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 gross margin journey. It’s just that there are some things that we now have to adjust as we prioritize some of the mitigation efforts. But it’s not anything that would be counter to that supply chain strategy.

Operator: 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 M. Lange: 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.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.