Stanley Black & Decker, Inc. Q1 FY2024 Earnings Call

Welcome to the First Quarter 2024 Stanley Black & Decker Earnings Conference Call. My name is Shannon, and I will be your operator for today's call. 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, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2024 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 a.m. today. This morning, Don, Chris and Pat will review our 2024 first quarter results and various other matters followed by a Q&A session. Consistent with prior webcasts, 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 risks 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 in our most recent '34 Act filing. I'll now turn the call over to our President and CEO, Don Allan.

Thank you, Dennis, and good morning, everyone. Our first quarter performance was the result of consistent, solid execution, and we are making progress against key operational objectives. We continue to see significant value creation opportunities tied to our strategic business transformation and the entire company is focused on the disciplined execution of this strategy. We are encouraged by the momentum that is building across the organization. Two of our primary areas of emphasis are free cash flow generation and gross margin expansion. We are focused on what is within our control and are pleased with the momentum behind our gross margin. This is particularly notable considering a significantly worse negative macro environment and corresponding revenue performance in 2023 and 2024 versus our initial expectations at the outset of our transformation in mid-2022. Our global cost reduction program remains on track for expected run rate savings of $1.5 billion by the end of 2024. And $2 billion by the end of 2025. As we hit the halfway point of our journey, our decisive actions are delivering quantifiable results. Specifically, we have captured $1.2 billion of run rate savings program to date. We remain confident this will support 30% gross margins in 2024, consistent with our guidance. We are encouraged that approximately 80% of the company's revenue is expected to carry 2024 adjusted gross margins in excess of 30% and exit this year at or ahead of initial expectations. We believe these product lines will continue to improve upon their current adjusted gross margin profile over the next 18 to 24 months. As it relates to the rest of the portfolio or that 20%, which is predominantly our cyclically depressed outdoor business and the rapidly recovering aerospace fastener business. We are actioning significant cost efficiencies to make necessary improvements to the profitability of outdoor in response to the current market demand and refining the aerospace fastener product line cost base to drive significant growth leverage as wide-body plane production continues to recover. Our long-term success will be driven by improved profitability, coupled with consistent market share gains. We believe our share position in tools is now stable to increasing. For example, our 2023 point-of-sale data in tools performed better than the category average across the North American home centers, which was led by our iconic DEWALT Professional brand. We are also serving our customers better by delivering improved fill rates, earning the right for more activity across our brands. Retailers are recognizing this performance. For 2023, Ace Hardware named CRAFTSMAN as Vendor of the Year and Grainger recognized Stanley Black & Decker with their Partners and Performance Award. Congratulations to our organization. This is a testament to the team's efforts and as we work to get closer to our partners. It's an early indication that we are on the right track. As we report our first quarter performance, we are energized by how our transformation efforts are taking root. I am confident that by executing our strategy, we are positioning the company to deliver high levels of organic revenue growth, profitability, and cash flow to drive strong long-term shareholder return. Turning to the first quarter results. Our top line showed signs of stabilization with organic revenues down a point. Excluding the now divested infrastructure business, organic revenue was flat as Engineered Fastening and DEWALT growth was offset by muted consumer and DIY demand. Adjusted gross margin was 29%, up 590 basis points versus the first quarter of last year and 30 basis points above the second half of 2023. Adjusted diluted earnings per share was $0.56. Adjusted gross margin expansion and EPS growth were both supported by lower inventory destocking costs, supply chain transformation benefits and reduced shipping costs. We are reiterating our 2024 full year adjusted diluted EPS guidance range of $3.50 to $4.50 as well as our expected free cash flow of $600 million to $800 million. Pat will provide more color on this later in our presentation. On April 1, we completed the sale of Stanley Infrastructure Epiroc. We have already deployed net proceeds from the transaction to reduce short-term debt, demonstrating our commitment to further strengthening our balance sheet. Looking forward in 2024, we expect mixed demand trends to persist across our businesses. and we are driving supply chain cost improvements to expand margins, deliver earnings growth and generate strong cash flow. At the same time, we are funding investments designed to fuel targeted long-term growth and market share gains across our businesses. I want to thank our team members around the world for their contributions to the progress that we have made on our transformation journey and for their energy and focus as we continue to charge forward. I will now pass it to Chris Nelson to review the business segment performance.

Thank you, Don, and good morning, everyone. Beginning with Tools & Outdoor, First quarter revenue was approximately $3.3 billion, down 1% organically versus the prior year, as growth in DEWALT was more than offset by muted consumer and DIY demand, which pressured volume. Pricing was relatively flat, consistent with our expectations. Adjusted segment margin was 8.5% in the first quarter, a 550 basis point improvement compared to the first quarter of 2023. This was achieved through lower inventory destocking costs, supply chain transformation savings and shipping cost reductions, which were partially offset with targeted investments designed to accelerate share gain in organic growth. Now turning to the product lines. Power Tools was up one point organically led by pro-driven growth into DEWALT and international sales. We are also seeing benefits from a return to historic promotional levels on high-margin DEWALT cordless. Organic revenue for hand tools declined 7% pressured by lower DIY demand. Outdoor product line organic revenue grew 2% in the quarter, driven by strong demand for handheld cordless outdoor power equipment and incremental retail product listings. We are encouraged by U.S. retail point-of-sale data, which showed an early start to the season versus the prior year. We are cautiously optimistic that demand can be better than the last two years. Our visibility will improve as we move through the second quarter and hit key U.S. holidays. The independent dealer channel continues to work through significant on-hand inventory, which pressured shipments in the quarter. We are monitoring POS trends in this channel and currently expect that they can clear their inventory during the 2024 season to set up a stronger 2025. As Don alluded earlier, the outdoor market remains soft versus 2019 volume levels. We are not standing still and are moving with speed to improve profitability by continuing to optimize our cost structure. Consistent with our overall strategy, our intent is to focus resources towards capturing targeted share gain opportunities in the most profitable and attractive growth segments such as electric handheld outdoor power equipment. Turning to Tools & Outdoor performance by region. North America was down 2% organically, driven by factors consistent with the overall segment. In Europe, organic revenue was down 3% as declines in France and Germany were partially offset by growth in the Nordics and the U.K. We are making targeted investments in the region to expand professional product offerings and activate these innovations in the market to capture share. In aggregate, all other regions were up 7% organically in the quarter, driven by mid-teens growth in Latin America, Brazil, Mexico, Central America and the Caribbean led this performance for the quarter. In summary, for Tools & Outdoor, we are acutely focused on successfully winning with our customers and winning with the Pro, while making profitability improvements. We are navigating mixed market conditions with the goal to capitalize on the areas of strength. We are making deliberate investments in our brands, market activation, and innovation to capture the growth and margin opportunities that will contribute to long-term shareholder returns. I will now discuss our Industrial segment performance. First quarter industrial revenue declined 5% versus last year. Price realization of 1% across the segment and Engineered Fastening volume growth was more than offset by infrastructure volume declines and a point of currency pressure. Within the Industrial segment, Engineered Fastening organic revenue growth of 5% includes aerospace growth of 30% and auto growth of 4%. We believe we are outpacing customer production levels as a result of targeted share gains, particularly in EV automotive. This growth was partially offset by market softness in general industrial fastening. Industrials adjusted segment margin was 12.1%, an improvement of 110 basis points versus prior year, driven by price realization and cost actions taken to improve productivity. This was a strong performance considering the infrastructure volume decline that the team faced. The quarter was a result of focused execution by our Industrial business associates. On behalf of the entire leadership team, I'd like to thank our colleagues around the world for delivering another solid quarter of results and a strong start to the year. Now turning to the next slide. I would like to now highlight a few of our recent DEWALT product introductions, which are the results of our investments in innovation. The new DEWALT 20V MAX XR cordless framing nailer is engineered for enhanced productivity and performs applications that are traditionally served by pneumatic tools. It is designed to allow the end user to sync framing nails consistently sub-flush into LVL material and when used in rapid sequential mode, ramp-up time is eliminated between shots. DEWALT is also introducing the world's first 20V MAX cordless 2.25 peak horsepower dedicated plunge router. It provides power like a corded midsized router with the convenience of a cordless tool, a prime example of how we continue to help our Pro users transition to a cordless job site. Additionally, our ToughSystem 2.0 DXL workstation is the industry's first portable storage solution with a 30-inch platform that helps pros maximize their productivity. This all-in-one workstation delivers customizable mobile storage and a functional worktop that is unlike anything else currently available for commercial construction job sites. These are just a few examples of how we continue driving our innovation engine in a manner that is centered on the professional with the intent of making our users more productive. We believe these innovations, coupled with our investments in brand and market activation will stimulate share gains. As we celebrate the DEWALT 100-year anniversary, we also reflect on our responsibility and commitment to serving the trades people around the world with brands like DEWALT, CRAFTSMAN and Stanley. Thank you, and I'll now pass the call over to Pat Hallinan.

Thanks, Chris, and good morning. Turning to the next slide. I would like to highlight the progress we've made along our transformation journey in the first quarter. We achieved approximately $145 million pretax run rate cost savings in the period, bringing our aggregate savings to approximately $1.2 billion since program inception. As we focus our portfolio, streamline our business structure and transform our operations, our teams are actively identifying and prioritizing opportunities to further optimize our cost structure. Given the dynamic macro environment, we continue to refine and mobilize plans to deliver targeted savings. We are confident in our ability to execute those plans. We continue to target $1.5 billion of pretax run rate savings by the end of 2024 and $2 billion pretax run rate cost savings by the end of 2025. Strategic sourcing remains the largest contributor to our transformation savings to date. We are leveraging savings on the $5 billion of addressable spend across areas such as materials and components, finished goods and indirect expenditures. Our operations excellence program, which leverages lean manufacturing principles is driving productivity improvements. The scope of this work stream improves efficiency and effectiveness within our production and distribution facilities. A pipeline of projects is robust with initiatives lined up to deliver efficiency gains in 2024 and beyond. Footprint-related projects and product platforming, which are more event-driven, will become increasingly important throughout the remainder of our transformation. We are optimizing our distribution footprint as well as redesigning our manufacturing network to leverage centers of excellence and to optimize our operations. This multiyear endeavor is accelerating in 2024 as we plan to exit or transform a number of facilities across the globe during 2024 and 2025. The manufacturing sites we previously announced for closure have ceased production, and we expect to exit these sites in the near future. We continue to execute manufacturing footprint changes during the first quarter, which affected five sites with the goal to complete these site modifications this year regarding product platforming. This initiative will unlock value by reducing complexity across our value chain. This savings initiative identifies various parts and components that can be standardized across a product family, which eliminates complexity and improves procurement scale. In aggregate, our supply chain transformation initiatives are expected to generate approximately $0.5 billion of savings in 2024, improving margins and generating resources for additional growth investments in our core business. We remain confident that our transformation can support the sustainable cost structure and efficiency needed to return our adjusted gross margin to 35% or greater, while enabling targeted growth investments. Moving to the next slide. We continue prioritizing free cash flow generation and gross margin expansion to support long-term growth and value creation. First quarter free cash outflow was in line with typical historical trends due to seasonal account receivable increases. This quarter, our inventory control contained the working capital build to approximately $360 million, where we've traditionally averaged a roughly $700 million increase in the first quarter of the year. Days of inventory is now approximately 150 days, an improvement of 10 days versus the prior year and moving toward our long-term target of approximately 120 to 130 days. We used the net proceeds from the infrastructure sale to reduce our commercial paper balance in the beginning of the second quarter. Because this occurred subsequent to the first quarter close, it is not reflected in the first quarter balance sheet. We remain focused on working capital optimization and profitability improvement to generate strong free cash flow in 2024. For the full year 2024, we plan to reduce inventory by $400 million to $500 million as we continue prioritizing working capital efficiency. CapEx is expected to range between $400 million to $500 million, which includes support for the footprint-related transformation initiatives. These items, combined with organic cash generation, support our full year free cash flow range of $600 million to $800 million, which is unchanged from our guidance communicated earlier in the year. Our capital deployment priorities remain consistent. Investing in organic growth and our transformation, funding our long-standing commitment to return value to shareholders through cash dividends and further strengthening our balance sheet. Turning to profitability. Adjusted gross margin of 29% in the first quarter improved 590 basis points versus prior year, driven by lower inventory destocking costs, supply chain transformation benefits and lower shipping costs. We expect to increase adjusted gross margin sequentially in each half of 2024, and we are planning for total company adjusted gross margin to approximate 30% for the full year. We continue to expect to exit the year at an adjusted gross margin rate in the low 30s. We are off to a solid start in 2024 and the hard work we've done to make adjusted gross margin progress allows us to fund incremental investments to accelerate long-term organic revenue growth. Now turning to the 2024 guidance and the remaining key assumptions. In addition to the free cash flow guidance I just covered, we are reiterating GAAP earnings per share range of $1.60 to $2.85 and an adjusted earnings per share range of $3.50 to $4.50. We are maintaining the range of organic revenue assumptions to be plus or minus low single digits. We believe the most likely outcome for organic revenue is to be flat to down 1%. At this level, we expect to achieve the midpoint of our adjusted EPS range through cost controls. Our view incorporates modest headwinds in aggregate for our markets, and we remain focused on gaining share in this environment. We are maintaining a disciplined approach to cost management and remain committed to funding investments for long-term organic growth. Turning to the segments. Tools & Outdoor organic revenue is expected to be plus or minus low single digits, most likely below flat consistent with the total company. The Industrial segment organic revenue is expected to be relatively flat to slightly positive. Infrastructure's first quarter decline will impact the segment's full year organic growth. And now that the deal is closed, we will report the divestiture revenue impact quarterly. Our planning assumption for growth investments is approximately an incremental $100 million in 2024. These are designed to accelerate innovation, market activation and to support our powerful DEWALT, CRAFTSMAN and Stanley brands. This should result in 2024 SG&A as a percentage of sales in the mid-21% zone for the full year. We will remain agile with the pace of investments should the demand outlook swing in or out of our favor. Turning to profitability. We expect total company adjusted EBITDA margin to approximate 10% for the full year, supported by the benefits of the transformation program. Segment margin in Tools & Outdoor is planned to be up year-over-year, also driven by continued momentum from our ongoing strategic transformation. The Industrial segment margin is expected to be flat to slightly positive versus prior year as operating improvement in Engineered Fastening is offset by the dilution from the infrastructure business divestiture. Our adjusted EPS range remains $1, with variability in market demand being the largest contributor, we will work to optimize adjusted gross margin and manage SG&A thoughtfully throughout the year to balance the macro uncertainty, while working hard to preserve investments to position the business for longer-term growth. Turning to other elements of guidance. GAAP earnings include pretax non-GAAP adjustments ranging from $290 million to $340 million, largely relating to the supply chain transformation program, with approximately 25% of these expenses being noncash footprint rationalization costs. Our adjusted tax rate is expected to be 10% for 2024, with the second and third quarters in the low 30s. Discrete tax planning items are expected to reduce the full-year rate and primarily impact the fourth quarter. Other 2024 guidance assumptions at the midpoint are noted on the slide to assist with modeling. We expect the second quarter adjusted earnings per share to be approximately 21% to 22% of the full year at the midpoint. Adjusted EBITDA for the second quarter as a percentage of the full year is expected to exceed 25%, with EPS contribution lower due to the quarterly tax profile. In summary, we continue to make progress on our transformation journey with an unwavering focus on gross margin expansion, cash generation, balance sheet strength and share gains in a soft market. We are confident that successful execution of our strategy can position the company for long-term growth and value creation. With that, I will now pass the call back to Don.

Thank you, Pat. As we report another quarter of progress, our consistent execution against our plan is building momentum and energizing our team. As our profitability continues to improve, we are focusing organic growth investments behind our most powerful brands, particularly DEWALT, CRAFTSMAN and Stanley. We believe these investments can enable organic growth to outpace the market by 2 to 3 times. Stanley Black & Decker continues to become a more streamlined business built on the strength of our people and culture, with an intensified emphasis on our core market leadership positions in Tools & Outdoor and Engineered Fastening. We are focused on consistent execution while positioning the company to deliver higher levels of sustainable organic revenue growth, profitability and cash flow to drive strong long-term shareholder returns. With that, we are now ready for Q&A, Dennis.

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

Our first question is from Julian Mitchell of Barclays.

Maybe just my question would be around the second quarter, just honing in on that a little bit. I guess, just to make sure, based on the seasonality comment and I think the low 30s tax rate, are we sort of thinking it's flattish sequential revenue in Q2 and then a kind of 9% operating margin? Just wanted to make sure that's the broad assumption and to check what you're assuming for Outdoor? And also for Q2, how we think about free cash. Is that sort of flattish year-on-year or still down year-on-year like in Q1?

Yes, Julian, I’ll try to address all of those points. Starting with sales, I expect them to be flat to slightly down, just a small decrease. I don't anticipate the decline being as steep as the one point drop we saw in the first quarter. Regarding your operating margin of around 9 percent, that aligns well with expectations. The first half of the year appears to be progressing in a way that is generally consistent with our initial guidance. In terms of cash, I believe it will be flat to slightly up for the quarter. It's important to note that our cash flow this year will be influenced differently than last year. Last year, we significantly reduced our inventory by over $1 billion, which was a major factor for our cash flow in 2023. This year, we will still use inventory to enhance cash flow, but it will be in the range of $400 million to $500 million. Additionally, income expansion through margin increase will account for the remainder of our cash generation. The sources of cash this year will be similar in magnitude, but will be more heavily driven by operating profits. These operating profits will follow the trends in quarterly revenue and margin expansion. In the first quarter, we experienced commendable organic cash flow, although there was less inventory reduction than expected, which accounts for the year-over-year difference. I anticipate that in the second quarter, cash flow will be more flat to slightly up compared to last year. Concerning Outdoor, as Chris highlighted, we've observed a more typical timing and scale for the start of the outdoor season, which is a positive development, and hopefully this trend continues. However, since it's still early in the season, we’ll have to see how it unfolds throughout. After two challenging seasons, we would certainly welcome a positive trajectory for Outdoor.

I was just hoping maybe you could expand a little bit on the DEWALT growth. Just maybe some color on the underlying drivers of growth there, just whether it's kind of organic user kind of growth and expansion or just inventory availability or Outdoor, just some color there and maybe the sustainability of the growth trajectory. And then maybe just as you think about SG&A reinvestment this year, just how much are you specifically looking at kind of reinvesting that into DEWALT specifically versus some of the other brands?

Thank you, Tim. This is Chris. We're really encouraged by DEWALT's growth, which continues to be a highlight in our portfolio, and we anticipate it will keep gaining momentum. The primary driver of this growth is our supply chain transformation, which has improved fill levels and service rates for our customers. Additionally, we're focusing our investments on the professional end user, enhancing our product development and marketplace engagement while emphasizing the DEWALT brand. This strategy seems to establish a long-term sustainable trend, and we plan to continue investing in it. Most of our investments are directed toward product development and activation, ensuring we create innovative products for our professional users and providing them resources to successfully understand and launch these products. Overall, we're optimistic about the sustainability of our growth and pleased with the progress we're making in prioritizing these efforts. Pat, would you like to add anything?

Yes. I mean I think in terms of SG&A for the year, Tim, I think it's 21% in kind of the middle fractions, 21.5-ish plus or minus 20 basis points is kind of where SG&A is for the year. And as our opening comments mentioned, that's about $100 million of incremental investment. I'd say $60 million to $70 million of that in the Tools & Outdoor business. And as Chris mentioned, a lot of that is on innovation. And therefore, a healthy portion of that goes to DEWALT. A lot of it is on field activation and so again, because DEWALT is the biggest brand out in the field, a lot of that ends up going to DEWALT.

I have a broad question for Don and some additional inquiries for Pat. First, can you clarify the after-tax proceeds on infrastructure? Also, Pat, could you explain the cash outflow of approximately $250 million for the quarter? Don, could you provide insight on the portfolio, particularly regarding infrastructure and how the portfolio simplification fits into your vision? Are we concentrating on the operational elements crucial to the margin improvement plan, or are there other developments we should anticipate as we move forward?

Sure, Jeff. Pat, maybe you take those questions and I'll answer Jeff's second question.

Jeff, the after-tax proceeds on the infrastructure deal, I'd say the pretax are in the 730-ish range. 730, 729, a fraction. And the tax impact to that will be de minimis, probably in the 10% or less range when is all said and done. And that all went down to pay the commercial paper balance down. And that all happened in the front of the second quarter. Therefore, it's in the second quarter financials that you'll see 90 days down the road. In terms of other cash outflows, that is driven by, let's say, two things predominantly. There's many things in that bucket. One is a return to normal MICP or annual compensation, variable compensation payments, which go out in the first quarter. You can imagine 2022 was very, very low by traditional standards. And so the payout for '22 that happened in '23 was very low by traditional standards. And the payout that happened in the first quarter of this year for '23 was kind of back to normal standards, and then cash taxes. Those are the two big drivers of that outflow in the other bucket.

Thanks, Pat. And so on the portfolio question, as we all know, we've done a fair amount of work of pruning the portfolio of businesses here at Stanley Black & Decker, in particular, the Security segment, which had two businesses. And then in Industrial, we've done some things related to not only infrastructure, but oil and gas a little while back as well. We will continue to evaluate other things to prune going forward based on value creation opportunities. I think we've gotten ourselves down to a place where we have some very high-quality assets in our portfolio. And there's not an urgent need to do anything at this stage. As we look at the portfolio going forward, there will be more opportunities likely in the next 18 to 24 months to do a little bit more pruning. Some of it could actually be in Tools & Outdoor as we put more and more emphasis on the three big brands that Chris has talked about in a couple of different settings over the last six months. And we'll look at some of the smaller assets we have and decide whether those make sense for it to be part of the portfolio over the long term. And so we will continue to be active. I think we've demonstrated over the years that pruning the portfolio is something that is important to do, but you need to do it in a way that creates value for your shareholders.

I wanted to just kind of dial in a little bit more on how you're thinking about the demand trends playing out for the rest of the year in Tools & Storage. You have 1Q organic revenue growth down 1%. You're talking about the full year flat to maybe down a little bit as the most likely scenario. So are we to assume kind of the current trend more or less persisting through 2Q and the back half? And I'm also curious about how in the first quarter, you had the 7% drop in hand tools and storage, if there was any inventory destocking or anything going on that drove that adjustment? Separately, if I can sneak in another one on the mid-21% SG&A, if that's something where just given the backdrop and your goals around share gains over the next couple of years, if we should think about that as a sustainable rate over the next 12, 18, 24 months?

Mike, this is Pat. I'll take your kind of balance of the year revenue flows and SG&A, and then I'll let Chris expand on a few things. I think as you think of year-over-year revenue for the balance of the year, I think any given quarter is going to be in that down 50 to down 200 basis points across the quarter, probably averaging down 1-ish for the year, if I had to kind of point you in a direction for the balance of the year. And any one of those quarters, the difference probably more to do with year-over-year comps and promotional activity or currency than some really noteworthy demand dynamic that we're expecting to change from one quarter to the next. I'd say in terms of the SG&A at kind of 21.5% plus or minus 20 basis points, I think that's likely where we are in a year like this where we're being thoughtful to manage expenses across our enterprise while preserving growth investments to still deliver profit and cash on our transformation journey. And I certainly think, as you look longer term, that could be a sustainable percentage as well. We have talked about in a number of forms over the last year or two that once we start seeing the market growth and we're a bit farther down the AGM journey, we may choose for a period of time to take that percentage to 22% or potentially even a little above 22% for a while as we invest for growth on the backs of a little more gross margin and macro demand. We're not quite there yet. So I think kind of managing in that 21% and a fraction range for this year and for the long term is probably a decent modeling assumption. But like we've said, we may choose at periods of time to go to 22% plus when we feel that there's good returns for those growth investments.

Yes. So if I take a step back and talk a little bit about where we see the markets from a macro perspective for the year. I think that what we're talking about is within a very tight range, up a point, down a point, and we're kind of thinking that we're trending towards. And there are specific areas that remain tepid, specifically, if we think about we've talked about the challenges in the outdoor market. We're encouraged by what we're seeing early. But we haven't hit the season yet for really any of our businesses. And specifically in outdoor. And then as is widely understood, the DIY and in some areas, general construction remains a little bit muted as well. That being said, we do see some bright spots as we look at the professional markets and as the earlier conversation, as we hone in on where we're going to really look for driving share and investments, a lot of our opportunities are there. So we remain optimistic there. I would just say, although there are certainly scenarios that you could see some level of back half acceleration, we think it's prudent to be looking at the outlook that we discussed earlier because really, if you think about it, a lot of our businesses are fairly interest-rate-sensitive and with the current environment and how we're thinking about what we see for residential, construction as well as renovation there certainly will be an unlock coming. I think it's just a matter of timing. And we think it's prudent to be looking at more of that flattish revenue environment for those reasons.

I want to revisit Jeff's question about the portfolio. I don't believe that the remaining industrial businesses, particularly the fastening segment, are being viewed as noncore. That's my main concern. Additionally, I would like to confirm that the Infrastructure business has guided expectations for the first quarter. I'm also curious if the stranded costs from that Infrastructure business are affecting the margin progression for the rest of the year. Is this significant, and is it something we need to take into account?

Nigel, this is Pat. I'll discuss the infrastructure and then turn it over to Don for the portfolio. The infrastructure sale in April was included in our original guidance. Both our initial and current guidance reflect an early April infrastructure sale, which we anticipated would be part of our Q1 results as a continuing operation and then effectively removed from our results starting around April 2. Therefore, there is no need to adjust the guidance; it remains as stated. We structured our costs this year to accommodate fixed costs in the Industrial business that were previously supporting that operation. The Industrial team has done an excellent job gaining market share in their remaining sectors, particularly in automotive and aerospace, while proactively managing their cost structure to maintain roughly flat margins for the year, with even a slight improvement despite having a substantial business to divest this year.

Yes. And the question on the portfolio, Nigel, and specifically around industrial. So what we're left with after the sale of Infrastructure is the Engineered Fastening business that we acquired with Black & Decker a few other fastening businesses we acquired since then. And then, of course, CAM, the Aerospace Fastener business is in there as well. When we look at the different portions of that, one, there's pieces that certainly could be evaluated for the word I use pruning in the future in the next 18 to 24 months, and we will continue to look at that. The overall platform of Engineered Fastening is still a very substantial portion of Stanley Black & Decker. It contributes a significant amount to the EBITDA, to the cash flow of the company. And as the Tools & Outdoor portion of the business, the company continues to improve and EBITDA continues to grow as we improve our gross margins back up to 35% or more. As we get back to gaining market share and organic growth in a much more substantial way, it will provide us more flexibility further down the road to decide ultimately what do we do with the entirety of the Engineered Fastening business. But I think if you think about it in chunks of time in the next 18 to 24 months, there's probably opportunity to do a little pruning in industrial. And then beyond 24 months, it's a question of do you do something more substantial from a capital allocation point of view? Time will tell.

Just a question on POS, what you saw throughout the quarter and into April at this point.

So POS was, I'd say, in Q1, it was negative, but in line with our plan or largely in line with our plan. And we remain fairly confident in supporting the outlook that we have for the balance of the year. As noted, we have seen some progress and pick up with a little bit earlier start to the season from the outdoor perspective that as of late has given a little bit more strength to POS and what we're trying to see now is how much of that carries through and how that continues to ramp up as we get further into the season. But the highlight would be that we're fairly in line with projections from what we're seeing with POS, and we're encouraged with the areas of progress we're seeing from some nice movement on growth with some of our key brands.

Just wanted to ask on Outdoor and as you see a more traditional start to the season, just any context on how you're thinking about 2024 demand in outdoor relative to 2019, trying to understand whether this is a return to a more normal demand environment? And then also thinking about what a normal environment means for Outdoor margins relative to where we are today to appreciate how much margin upside there could be there on just volume coming back.

Yes, there are several good questions regarding the Outdoor business. In my presentation, I mentioned that around 80% of the company is currently performing at or above the average line. The remaining 20%, which includes Outdoor and Aerospace Fasteners, is currently below the line average. However, there are opportunities to make adjustments. Firstly, we are actively recalibrating our cost structure to align with the reduced demand we have seen over the past 12 to 15 months, particularly in the Outdoor segment, and this process will unfold over the next quarter or two. Secondly, we will be focusing on identifying parts of the business we want to retain and those we wish to minimize. We believe this approach will help enhance the profitability of the Outdoor division, and we plan to concentrate on this in the upcoming quarters and into next year. For more specific questions, Pat or Chris, do you want to take that?

Yes. I'd say on the volume, this year is certainly still going to be down substantially versus 2019 even if the shape of the trend line starts and starts to look more like a normal trend line. The absolute volume in dollars will be down substantially from 2019. And I would still say that most likely next year would be below 2019 as well, but starting to recover. And to Don's comment the big headwind in this business has been the volume retrenching more than we would have anticipated a year or two ago. And so a lot of our actions are both around the fixed cost base and then what we can do with product cost structure to drive profit improvement in that business.

Maybe just focusing on pricing a little bit. I think the original expectation was for a price to be kind of slightly negative in Tools & Outdoor in the first half, and it looks like maybe it came in a bit better than that in the quarter. So can you just talk about the expectation for price for the rest of the year as well as what you guys are seeing from a competitive perspective?

Yes, this is Chris. Overall, we expect to be price and cost neutral for the year. When we assess all our goods and input costs, we perceive a mildly inflationary environment, but we aim to maintain neutrality in that context. It's essential to note that in 2022, we experienced a unique situation with historically high inflation impacting our input costs significantly while our volume peaked and then began to decline. Looking at the bigger picture and over a longer timeframe, we've recouped around 85 percent of the overall costs we've faced. We are actively working to enhance our pricing strategies to respond more swiftly to inflation and, more importantly, to drive innovation that leads to differentiated products with improved margins. In terms of the competitive landscape, it has remained stable so far. We're returning to historical promotional levels, which we see as positive, and we're focusing on key promotions, particularly for our cordless DEWALT products. Overall, we feel confident in our position and the stability of the market.

I have another question on the Outdoor side. I think you made positive comment on market share for DEWALT, I suppose more on the tool side. I wanted to hear how you think you're positioned on breadth of portfolio and status of innovation, et cetera, on Outdoor? Do you need more investment to kind of achieve the same share gain? What do you think the season hold? And then it may be very early for the second part of the question, but any split on big ticket versus small ticket in Outdoor? Just budget sensitivity among your customers?

We feel well positioned with our outdoor portfolio. Our goal is to ensure we are prioritizing our innovation dollars in categories where we see the greatest opportunity for gaining market share and improving margins. Specifically, we are focused on expanding our presence in the outdoor handheld electric market, which is making significant progress. Year-to-date, we are optimistic about our market position and the listings we have acquired. Regarding larger versus smaller ticket items, we've observed some consumer hesitance in bigger ticket purchases, and we'll keep monitoring this. However, we remain cautiously optimistic about the start of the season and will continue to invest in innovation in areas that are crucial for our future success.

I wanted to ask about the progress of your supply chain transformation, particularly regarding tariffs. Can you discuss the changes in your sourcing and procurement operations since the tariffs were imposed? If all the import tariffs from 2017 or 2018 were reimposed tomorrow, how would your total tariff expense compare to what you reported previously?

Sure. I recall the impact of tariffs from 2016 quite vividly. At that time, we faced around $300 million in tariffs, which led us to make significant production adjustments that reduced that figure to approximately $100 million, or perhaps slightly less. This remaining amount was largely offset by price increases in the market. Those tariffs remain unchanged even under the current administration. If we consider possible future changes, particularly with a new administration in early 2025, the situation has evolved. Back then, products sold in the U.S. that were made in China accounted for about 40% of our U.S. revenue, whereas now that number has dropped to around 20% to 25%. As we progress with our supply chain transformation, which I mentioned in the last quarter, we are establishing centers of excellence for manufacturing in various global locations. Some of these centers will be in Asia, but not necessarily in China, alongside others in the Americas and Eastern Europe. This strategy will help us respond to any changes with tariffs in 2025 or later, allowing us to make necessary supply chain adjustments. If there are tariff changes, we may also need to implement specific price adjustments. We have begun planning for these scenarios about three months ago and will continue to develop our strategies. The positive aspect is that this planning is integrated into our supply chain transformation efforts rather than being a separate initiative.

A follow-up, if I could. Hand Tools down 7%. I'm just curious, a little bit more color there. And then also as you think about where retail inventories are now and the path forward, what retailer's mindset is about inventories and what they're ordering relative to what they're selling.

I'll start with the second question first. Regarding our inventories in the retail channel, we are at historical levels, or in some areas, slightly below. We are seeing a strong correlation between our point of sale data and our sales figures, which is encouraging. We're generally aligned with what we're observing from point of sale. In terms of Hand Tools, there aren't any significant outliers. However, there are some segments within the Hand Tools and Storage business that involve larger purchases, which have been more impacted by the current consumer environment. Overall, we feel positive about the direction of that business, the point of sale data, and the inventory levels, which are consistent with what we've seen across the company.

Thank you. I would now like to hand the conference 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, just please contact me if you have any further questions. Thank you.

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