ESS Tech Inc

NYSE:GWH

Welcome to the Fourth Quarter and Full Year 2024 Stanley Black & Decker Earnings Conference Call. My name is Shannon, and I will be your operator for today's call. [Operator Instructions] 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 Fourth Quarter and Full Year Webcast. Here today, in addition to myself, is Don Allen, 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 fourth quarter and full year 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 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 measure 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.

Thank you, Dennis, and good morning, everyone. I know many of you are ready to dig into 2025, but it's important to first mark the significant progress we achieved in 2024. We successfully advanced each of our key focus areas during 2024 by delivering continued gross margin expansion, solid free cash flow generation and a stronger balance sheet, all while making new investments aimed at driving sustainable market share growth. The progress we achieved was notable in the face of a mixed macroeconomic backdrop and is a testament to our team's relentless pursuit of our vision created 2.5 years ago.

Together, the leadership team and I are revitalizing the organization to be centered around our brands and end users, and we are reshaping the cost structure to be more efficient in the back office processes while investing in areas close to our end users and channel customers to drive sustainable share gain. The positive impact on our performance thus far is clear. In 2024, we overcame a soft consumer and DIY environment to deliver full year revenues of $15.4 billion, which was flat on an organic basis versus many markets that retracted, especially in the back half of the year.

We are encouraged by the growth and share gain progression in DEWALT, which grew mid-single digits organically in 2024. And a sign that our investments and focus is translating into positive top line momentum. Additionally, standout organic growth of 22% in aerospace fastening also contributed to our overall revenue results. As we completed year 2 of our transformational journey, we are proud to have delivered on key financial milestones including adjusted gross margin greater than 31% in the fourth quarter and 30% for the full year.

The full year margin expansion of 400 basis points was primarily driven by our reshaped supply chain and ongoing strategic initiatives. We see more opportunity ahead as we work to complete our transformational cost savings program in 2025 and push to our long-term target of greater than 35% adjusted gross margin. This significant progress related to stabilizing revenue and executing our cost transformational program while making ongoing growth investments resulted in full year 2024 adjusted EBITDA of $1.6 billion, with margin of 10.1%, which is an expansion of 290 basis points as compared to 2023.

This EBITDA outcome translated into full year adjusted earnings per share of $4.36, demonstrating significant growth over 2023 EPS. Our earnings growth and working capital efficiency improvements, both contributed to free cash flow of approximately $750 million. This strong free cash flow generation plus the proceeds from our infrastructure business divestiture supported $1.1 billion of debt reduction in 2024 and solid progress towards achieving our leverage targets.

Our strong execution in 2024 was the result of organizational alignment and focus, which helped us meet or exceed our goals. I want to thank our organization for their relentless focus and dedication to world-class service of our end users and channel customers while achieving these financial results. Our 2024 performance in combination with the activation of our growth culture across the company is setting a strong foundation for the next chapter of growth for Stanley Black & Decker. We are targeting over the midterm top line organic growth of mid-single digits in a low single-digit market with adjusted gross margins of 35-plus percent.

We believe that by continuing to advance against these measures, it will contribute to successfully achieving the adjusted EBITDA target of $2.5 billion that we shared at our recent Capital Markets Day. Now turning to performance in the fourth quarter. We delivered $3.7 billion of revenue, flat versus prior year, comprised of a solid 3% organic revenue growth, which was offset by a 2-point impact from the infrastructure business divestiture and deploying of currency headwinds. Our adjusted gross margin was 31.2%, up 140 basis points versus the fourth quarter of last year, mainly due to our global cost reduction program. These revenue and gross margin outcomes net of our continued funding of growth investments designed to deliver future sustainable market share gains resulted in adjusted EBITDA margin of 10.2%, which is up 80 basis points versus the prior year.

This fourth quarter EBITDA result translated into adjusted earnings per share of $1.49 for the quarter. Our free cash flow was $565 million in the fourth quarter, an outstanding performance that continues to support our ongoing capital allocation priorities, namely organic investments, shareholder dividends and debt reduction. Due to this weekend's announcement and ongoing shifts over the last 2 days, we decided to provide you our base case view for 2025, which excludes impact of any tariffs and demonstrates our underlying earnings power.

In addition, to help you size what we may have to navigate related to tariffs, we will provide cost of goods sold information based on country of origin for our U.S. businesses, which will allow all of you to correlate with the proposed policy the President announced over the weekend or how it evolves over the coming days or weeks. This is a dynamic environment. But as we shared with you last year, we have developed a plan that we are deploying with speed. We believe we can mitigate tariffs with supply chain repositioning and price, but do not believe it is something that will throw us off our long-term growth and EBITDA aspirations.

We've successfully navigated this before and have a new seasoned management team in place to enable success once again. Our goal is to ensure that as the President and his administration works to accelerate growth in the United States and negotiate better trade deals with our country's major trading partners, we are positioned for success as the only significant U.S.-based manufacturer in our industry. We continue to engage with the President and his new administration to support them in achieving their goals in these areas while we navigate the next several months to minimize the impact of Stanley Black & Decker as we exit 2025.

The base case pre-tariff planning assumption for 2025 is adjusted EPS of $5.25, plus or minus $0.50. With $650 million to $850 million of free cash flow. During our October earnings call, we were among the first to describe the demand environment as softer for likely longer with an expectation that the first half of 2025 would likely remain choppy or sluggish. Three months later, we have seen little evidence to change that view.

And given the indicators that we do see, several end markets may not improve until 2026. Interest rate cuts in 2024 have had very little impact as mortgages continue to be well above 6%. Therefore, as we think about our base case operating environment, our current perspective on the market outlook assumes that aggregated [indiscernible] market demand is stable and expected to be relatively flat year-over-year. We believe this is consistent with how we exited 2024, and this underpins the midpoint of our base case earnings per share range.

In the back half of 2024, we delivered 0.5 point of organic growth. Our plan in the first half of 2025 and the full year assumes [indiscernible] behind our core brands of DEWALT, Stanley and Craftsman to serve our end users, combined with targeted market activation initiatives to drive low single-digit organic growth. We believe there is potential for a market-driven positive inflection to occur later in '25, but this is not reflected in our midpoint base case.

Stepping back from the short-term horizon, the long-term market trends are very attractive and the outlook for our industries remains incredibly positive. There is a large and growing gap in the North American residential housing inventory, which supports the need for increase in housing starts. In addition, existing home [indiscernible]. Existing home sales in 2024 fell to their lowest level since 1995, which just magnifies this point. And with the average age of a U.S. house at roughly 40 years old, we believe homeowners will reengage in an increased level of repair and renovation once interest rates decline to lower levels.

As construction activity accelerates over the long term, the trades people that we serve will benefit, and they will need our tools to help get the job done. We serve labor-constrained industries and our innovations are designed to deliver enhanced productivity with significant safety features. We are prudently investing across our portfolio to fuel enduser-inspired innovation and differentiated market activation designed to capture the share gain opportunities we anticipate in the near term and over the long-term horizon.

We are funding new growth investments in the relatively healthy markets such as DEWALT professional tools to build upon its seventh consecutive quarter of growth and market share gain, while continuously striving for excellence with how we serve our end users and channel customers.

In Engineered Fastening, we expect growth to again be led by Aerospace with OEM monthly build rates expected to step up year-over-year. 2025 projections for global industrial production are flat to positive and the automotive outlook continues to be pressured.

In summary, we do believe we can deliver organic revenue growth in 2025 through price increases and share gain in markets that will likely be relatively flat in aggregate. We are committed to continued long-term margin expansion driven by our supply chain transformation plan, Pat will share more detail on this in a moment as well as contextualize our planning framework and tariffs.

I want to thank our team members again for their dedication and a successful 2024. We remain committed to accelerating our growth culture with operational excellence at its core to position the company for sustainable success. I'm confident that we are equipped with the talent and experience to navigate whatever comes our way in 2025 and beyond. I will now pass it to Chris Nelson to review the business segment performance. Chris?

Thank you, Don, and good morning, everyone. First, turning to the Tools and Outdoor operating performance. Fourth quarter revenue was approximately $3.2 billion, driven by 3% organic revenue growth versus prior year. DEWALT delivered its seventh consecutive quarter of organic growth, which was complemented by a solid holiday season. These 2 positive drivers were partially offset by the weak consumer and DIY backdrop. Fourth quarter adjusted segment margin was 10.2%, a 20 basis point improvement versus the fourth quarter of 2023. We continue to leverage the supply chain transformation savings to deliver margin expansion while funding incremental growth investments.

Growth was broad-based across the segment, and all of our tools and outdoor product lines grew organically in the fourth quarter. Organic growth for power tools was 5% in the quarter, with new innovations pro-driven momentum and solid promotional activity offset by pressure from the soft DIY demand backdrop. Hand tools grew 2% organically. This performance was supported by new product listings notably DEWALT ToughSystem 2.0 DXL modular workstation, which provides PROS a solution that can be customized for optimal user productivity. Outdoor posted 3% organic growth in the quarter, supported by positive performance from the independent dealer channel as well as continued momentum with handheld battery offerings.

We believe that our customers have rightsized inventory levels exiting 2024, which should set up shipments to match demand in 2025. Turning to tools and outdoor fourth quarter performance by region. North America was up 2% organically with a solid holiday season. Organic growth in Europe was 4%, with positive contributions from most regions supported by investments in growth initiatives including the expansion of our professional product offerings in local and focused marketing activation. Rest of World grew 8% organically. This was driven by high single-digit growth in Latin America led by Brazil, along with mid-single-digit growth in India.

Overall, we are pleased with the segment's fourth quarter top line performance. a strong end to a back half that delivered 0.5 point of organic growth with markets that continue to show more signs of stability. On a full year basis, we delivered slightly positive organic growth. DEWALT led the way and posted solid mid-single-digit growth for the year, which we estimate to be ahead of the market representing share gain. Our success was underpinned by innovation with new product launches such as PowerShift, the construction Jack and our new tough system. Additionally, with our supply chain improvements, we are focused on continuing to improve execution and service levels with our customers. This opens new opportunities for increased listings and placement for our powerful brands in stores.

Full year adjusted segment margin expanded by 350 basis points to 10.1%, which is a substantial improvement versus prior year primarily driven by the supply chain transformation initiatives. Now moving to Industrial. Fourth quarter revenue declined 15% on a reported basis versus the prior year, which was nearly all attributable to the infrastructure business divestiture. Organic revenue was flat with 2 points of price offset by a 2-point volume decline due to automotive market softness. The automotive business experienced a high single-digit organic decline as OEMs reduced light vehicle production schedules and tightened CapEx spending. The aerospace business posted organic growth in the mid-teens, supported by new content wins and a strong booking rate. Industrial fasteners organic growth was up high single digits. The Industrial adjusted segment margin rate was 10.7% in the quarter, a moderate contraction versus prior year due to the impact of automotive market softness on volumes.

For the full year, we delivered 2% organic growth in Engineered Fastening. Total Industrial adjusted segment margin expanded 70 basis points to 12.5%. This margin expansion was driven by the price realization and cost productivity we generated throughout the year. I would like to acknowledge both the tools and outdoor and industrial teams for their focused efforts and solid execution in 2024 against a mixed macroeconomic backdrop and thank the teams for positioning us well as we work through the final innings of the transformation.

Moving to the next slide. I'd like to share more about how we are operationalizing our strategy of thoughtfully and aggressively prioritizing resources to accelerate growth in Tools and Outdoor. Our brand-centered teams studied the category trends in the marketplace to prioritize investments in the fastest-growing user segments. We continue to cultivate deep connections with those end users to gain a well-informed understanding of unique trade and application-based needs, which helps us to prioritize the most impactful innovations in our robust product and technology pipeline.

At the same time, our centralized engineering organization is focused on standardizing innovation processes and implementing a platform approach to design with the eye towards improving our speed, cost and effectiveness. As we shared at our Capital Markets Day, we believe platforming can be a major unlock as we leverage the benefit of common components to reduce complexity while continuing to deliver on our traditional strength of purpose-built innovation. The result is innovative new products developed with speed and at the best cost, solutions that address specific challenges of the priority trade groups.

We have multiple examples of this, but today, I'm going to highlight carpentry. For the last century and still today, sweat equity has been at the core of our respect for the carpentry trade. Our DEWALT carpentry total solutions offer tools that can keep Pros productive in every phase of a job with confidence in every application. With that in mind, we are developing end-to-end solutions to deliver a best-in-class user experience with features to make carpenters as efficient and effective as possible. We provide tailored solutions for demanding applications from framing to building and installing custom cabin [indiscernible] to molding trim for baseboards, windows and doors.

A few new powerful additions to highlight from the expanded lineup of next-generation 20-volt MAX XR tools include the 3 speed hammer drill. This is our most powerful 20-volt MAX hammer drill which is equipped with the anti rotation system, a perform and protect safety feature that shuts the tool down if rotational motion is excessive. We've also highlighted our new quarter-inch quiet hydraulic impact driver. This is the industry's highest rated MAX torque hydraulic impact driver. It features quieter operation for volume-sensitive environments and an advanced hydraulic mechanism for consistent performance in tight or tough conditions. We believe concentrating investments behind our core brands and priority trade groups will help us to deliver consistent, profitable share gain in an attractive and growing market.

We expect our efforts to again outperform the market this year. We have what it takes to win and are moving with a sense of urgency to accelerate our organic growth trajectory to step up and consistently deliver 200 to 300 basis points of growth above the market over the midterm. Thank you very much, and I'll now pass the call over to Pat Hallinan.

Thanks, Chris, and good morning. As you've heard from us throughout this past year, we made meaningful progress on our transformation journey in 2024. I will now highlight the financial accomplishments achieved during the fourth quarter and then detail how we plan to continue towards our cost savings and margin targets to complete our strategic transformation and pivot to accelerated growth and continual margin expansion. In the fourth quarter, we achieved approximately $110 million of pretax run rate cost savings.

For 2024, in total, we generated approximately $500 million of pretax run rate cost savings. This result is in line with the framework we set both at the outset of the transformation and in the beginning of the year despite continued volume headwinds. This brings our aggregate savings to approximately $1.5 billion since the program's inception. Of the $1.5 billion, approximately $1 billion has come from the supply chain transformation with material productivity and operations excellence driving approximately 75% of these savings captured to date. Our 2024 and program-to-date performance demonstrates strong execution by our teams. We've achieved sequential adjusted gross margin improvement over each half year period for the last 2 years. I would like to commend my colleagues across the organization for diligently continuing to pursue the cost reduction goals of our transformation.

We continue to target $2 billion of pretax run rate cost savings by the end of 2025 as we complete the transformation. Of the $2 billion, we expect $1.5 billion to be delivered through our 4 core supply chain transformation initiatives of material productivity, operations excellence, footprint actions and complexity reduction. We are activating a robust pipeline of savings initiatives to support our expected gross margin expansion momentum. Overall, we remain confident in our ability to achieve our target of 35% plus adjusted gross margin.

Moving to the next slide. We had a strong finish to the year as we continue to make progress on 2 of our most important focus areas, cash generation and gross margin expansion. We generated $565 million of free cash flow in the fourth quarter, bringing 2024 free cash flow generation to just over $750 million, which was near the top end of our initial 2024 guidance range of $600 million to $800 million. Our solid operational performance along with the proceeds from the infrastructure divestiture helped fund our dividend and reduce debt by $1.1 billion. Drivers of 2024 free cash flow were year-over-year growth in cash earnings driven by operational improvements, along with over $300 million of working capital benefit.

Before year-end, we made the strategic decision to invest in roughly $200 million of strategic inventory to buffer the potential impact of changes to the operating environment. Overall, it is encouraging to see higher earnings as a result of operational improvements become a predominant driver of free cash flow as these profitability enhancements are sustainable to our future free cash flow. Regarding capital allocation, in the near and medium term, our priorities are to fund the transformation and our acceleration of organic growth to support our long-standing dividend and to reduce debt. We remain committed to maintaining a solid investment-grade credit rating.

In 2025, we plan to further reduce debt, working towards our target leverage metric of approximately at or below 2.5x net debt to adjusted EBITDA. We expect to achieve this objective over the next 12 to 18 months, depending on the timing of modest portfolio pruning actions which we expect to generate greater than $500 million of proceeds.

Turning to profitability. Adjusted gross margin was 31.2% in the fourth quarter, a 140 basis point improvement versus prior year, primarily driven by savings from the supply chain transformation, net of freight inflation as well as normal wage and benefit inflation.

With our performance this quarter, we achieved our long-held interim transformation goal of 30% adjusted gross margin in 2024. Given the dynamic nature of currently surrounding tariff policies, we believe it is prudent to provide our 2025 planning assumptions today, excluding the impact of new tariffs. Additionally, we have provided a view of our enterprise-wide U.S. cost of goods sold by country of origin. Regarding tariffs, ultimately, we expect to mitigate the impact of potential scenarios through a combination of supply chain and price adjustments.

I will now walk you through the 2025 planning assumptions for our company which exclude the impact of potential tariffs, I will then conclude by sharing our general approach to potential tariff mitigation. The 2025 pre-tariff base case implies a full year GAAP earnings per share midpoint of $4.05, plus or minus $0.65 as well as adjusted earnings per share midpoint of $5.25, plus or minus $0.50. Our pre-tariff free cash flow base is $750 million, plus or minus $100 million, with the midpoint in a similar zone to 2024, led by operational earnings expansion. We will continue to prioritize inventory effectiveness in 2025 with the plan to reduce total working capital by $250 million to $350 million.

This includes persisting roughly $150 million of targeted inventory investments to facilitate an acceleration of supply chain changes to reduce U.S. exposure to China production. Our 2025 outlook for capital expenditures is $350 million to $400 million, approximately 2.5% of sales. We expect first quarter free cash flow to be an outflow consistent with typical historic working capital trend. This base case called for earning expansion in 2025 through organic growth from modest share gains and price increases in response to currency headwinds, combined with supply chain cost structure improvement that are primarily in our control.

We are planning for the first half 2025 aggregate market demand to remain muted at relatively stable levels compared to the second half of 2024 with the potential for a positive inflection later in the year. At our midpoint, we are expecting approximately 1% to 2% organic growth in the front half compared to approximately 0.5 point of growth in the second half of 2024. This assumes modest share gain and easier comps against 2024 channel inventory reduction. The back half is expected to be modestly stronger supported in part by the price increases we are implementing in response to currency. The underlying demand assumptions are for a continuation of relative strength for professional tools as well as aerospace and industrial fastening. This is accompanied by an expectation for the presently soft automotive, consumer and DIY demand trends to persist with the potential to inflect positive in the middle of 2025.

These assumptions underpin our full year plan for total company reported revenue to be relatively flat year-over-year, with organic revenue growth roughly offsetting headwinds from currency and the final quarter of the infrastructure divestiture. Organic revenue growth is planned to be up just over 2% at the midpoint, outpacing the overall market supported by targeted share gains in our businesses and modest pricing to offset currency pressure. Our planning range contemplates plus or minus 150 basis points of volume growth with the variances driven by market demand.

Tools and Outdoor organic revenue growth is expected to be in the low single digits at the midpoint, supported by the same organic factors as the total company. Volume growth will be fueled by strategic investments focused on our core brands and directed towards pro led and industry-leading innovation as well as local and focused market activation with additional field resources and targeted marketing initiatives. Industrial organic revenue is expected to be in the low single digits, primarily driven by an aerospace market recovery as well as market outperformance in industrial fasteners, driven by investments in end market penetration.

The automotive outlook, which is tied to light vehicle production is muted, and as such, we are planning for this business to be negative in 2025, while prioritizing regions with share gain opportunities. From a reporting perspective, in 2025, we are shifting a small storage business from industrial into the Tools and Outdoor segment. We will disclose the impact of this change on a quarterly basis and it will not be included in either segments reported organic growth. Our transformation program will be a positive contributor to adjusted gross margin again in 2025, and we will invest a portion of those savings for long-term organic growth and share gain.

This year, we plan to invest an incremental $100 million to further advance our robust innovation pipeline and fuel market activation aimed to improve brand health and accelerate organic growth. Our planning expectation is that SG&A as a percentage of sales in 2025 remains around 22%. We will manage SG&A thoughtfully with the intent to preserve the investments designed to position the business for long-term growth.

Turning to profitability, we expect total company adjusted EBITDA margin to improve for the full year supported by top line expansion and the benefits of the supply chain transformation program with a neutral input cost outlook for 2025. Currency represents a $100 million headwind to profit based on the midpoint of January rates. A subset of this, approximately $40 million is a transactional headwind to gross margin and is expected to be fully covered by price this year. We are implementing price with speed but expect a slight net headwind in the front half of 2025.

Segment margin in Tools & Outdoor is planned to be up year-over-year, also driven by low single-digit growth and continued momentum from our ongoing strategic transformation. The Industrial segment is expected to decline versus prior year as volume growth and operating improvements are offset by the mix pressures from automotive.

Turning to other 2025 pre-tariff assumptions. GAAP earnings include pretax non-GAAP adjustments ranging from $195 million to $260 million largely related to the supply chain transformation program with approximately 25% expected to be noncash footprint rationalization costs. Our adjusted tax rate is expected to step up in 2025 to 15%, with the first 2 quarters consistent with the first half rates experienced last year at around 30%. Other 2025 modeling assumptions are noted on the slide. We expect the first quarter adjusted earnings per share to be approximately 12% to 13% of the $5.25 planning assumption underpinned by total company organic sales growth that is expected to be low single digits.

The range around the quarter is likely greater than normal given potential tariffs might change first quarter ordering behavior. The EPS in the quarter is impacted by the tax profile discussed earlier. Adjusted first quarter EBITDA is expected to be roughly 20% of our full year expectation in this planning assumption relatively consistent with pre-pandemic history, which brings me to the impacts that are possible if tariffs are enacted and persist. We previously disclosed tools and outdoor U.S. manufacturing footprint details in late 2024. We have updated the disclosure to reference U.S. COGS for the entire company and share the latest information based on U.S. trade defined country of origin.

Our latest view of China is lower at $900 million to $1 billion of imports into the United States and we continue to work to reduce this exposure. Our approach to any tariff scenario will be to offset the impacts with a mix of supply chain and pricing actions, which might lag the formalization of tariffs by 2 to 3 months. therefore, limiting P&L headwinds in the near term and maintaining our long-term margin objectives. If the current addition of 10% tariffs on China remains in place, we would expect an annualized unmitigated impact of approximately $90 million to $100 million. Based on how we would react, this will result in a 2025 net impact of $10 million to $20 million, accounting for the time needed to deploy countermeasures.

We expect the current situation to remain dynamic. We expect to await greater clarity before enacting any new measures beyond the work of accelerating U.S. COGS out of China, which was underway and was accelerated during the second half of 2024. In summary, 2025 represents the final step along our transformation journey with a continued focus on gross margin and cash as well as a return to organic growth. Our top priorities remain delivering margin expansion, cash generation and balance sheet strength to 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 you heard this morning, the company is committed to continuing to make meaningful progress across our key priorities of margin improvement, cash generation and restoring balance sheet strength, while also investing in future sustainable growth to drive share gains. Even as we draw closer to the end of our strategic transformation, we are keeping the pedal down and moving decisively to drive results. While we don't know the ultimate tariff policy environment at this time, we believe we can successfully manage through them and achieve our long-term financial goals. By accelerating our growth culture with operational excellence at its core, we are positioning the company to deliver improved sustainable organic growth, margins and cash flow to support strong long-term shareholder return via significant EBITDA expansion. We are now ready for Q&A, Dennis.

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

[Operator Instructions] Our first question comes from the line of Julian Mitchell with Barclays.

Maybe just a first question, please, around the margin outlook. So maybe just remind us sort of what exit gross margin rate we should assume from this year. And on the operating margin line, I think the guide implies maybe 150 bps or so of increase this year versus 2024. Just wanted to check if that's the right ballpark and any kind of cadence of that expansion through the year. .

Julien, yes, gross margin obviously remains a priority for us and our full year objectives in '25 versus '24 are approaching 250-ish basis points of full year margin expansion. Some headwinds will temper the first half will be 100-plus basis points up year-over-year in the first half gross margin-wise. Some of those headwinds are some of the carrying costs like logistics, and absorption costs from the back half of last year, the lower automotive mix and some FX. And then in the back half, we'll get the pricing we're going to put in place due to FX. So you'll have 100-plus basis points of expansion year-over-year in the first half and like 300 plus in the back half to drive that full year.

I'd say for the fourth quarter, we're expecting to exit somewhere right in that midpoint between 34% and 35% on the quarter. And certainly, I think your second question was around operating margin, which both operating and EBITDA margin you're in the ZIP code of being kind of 150-plus basis points and obviously, some of the same gross margin dynamics will cover the op and EBITDA margin throughout the year

Our next question comes from the line of Nigel Coe with Wolfe Research.

Thanks for the comments on the gross margin. I'm just wondering the -- what sort of SG&A investments or you planning for the year. And I'm just wondering, the step-up we saw this quarter, is that in the run rate in 2025 because it does feel like you're really sort of raising the answer on growth here. So I'm just wondering what sort of investments you're making to support that growth. .

Nigel, it's Chris. Hope you're doing well. I'll start out and then pass it over to Pat. But specifically, where we're looking to invest and where we are continuing to invest as we focused more on our core brands starting last year is, first and foremost, in making sure that we really drive outsized investment towards the professional in making sure that we have our pipeline of innovations really targeted towards that end user and making sure that we're accelerating product launches to make that end user safer and more productive on the job site. That's kind of job number one.

And then as we've talked about in the past couple of announcements has been really focusing on making sure that we're putting local market activation resources in the field. We are -- I think we've been roughly 400 incremental folks in the field over the past -- over the past 12 months or so. And that is making sure that we can obviously in areas that we are underpenetrated, we can look to drive the market share growth that we see as an opportunity, not only in our largest market in the U.S., but obviously, we're looking at some other developing markets, specifically in EMEA.

And then lastly, we are as we focus on those core brands of DEWALT, Stanley and Craftsman, we are investing incremental dollars into driving that brand health through increased promotion as well as advertising dollars there to really help drive those as our core brands moving forward. As far as the actual math on the run rate, I'll turn that over to Pat.

Yes. Nigel, for the full year, we would expect SG&A as a percentage of net sales to be around 22%, maybe a little bit shy of exactly that amount. And any given quarter kind of bouncing around 22% to 21%, I think mostly around 22%. You could just with the normal seasonal sales surge in the second quarter, see it get closer to 21% in the second quarter, but that has more to do with the seasonality of sales than a real meaningful change in investment cadence throughout the quarter. I kind of just -- you're going to be closer to 22% quarter in, quarter out.

Our next question comes from the line of Tim Wojs with Baird.

Thanks for the time. I guess as you think about share gains and kind of further share gains in 2025 and targeting low single-digit organic growth in tools. Could you just maybe discuss the puts and takes to that? And I guess really what I'm wondering is how much of it is really accelerating and investing in DEWALT growth and maybe seeing acceleration from that mid-single-digit growth you posted in 2025 versus maybe seeing some of the non-DEWALT businesses kind of getting back to market growth rates? .

Tim, this is Chris. I'll jump on that one. First, I would say that, absolutely, we have seen nice progress in DEWALT over the past 7 quarters as we noted earlier. And we are certainly, as we look at emphasizing the professional, we are going to continue to build on that success and look for continued acceleration in the DEWALT brand. But the other 2 brands that we -- that we're making sure that we investing as our core brand being Stanley and Craftsman, we do expect to see stabilization and starting to see some modest share gains as we move into this year as well. And we've been taking steps to we're starting to see the progress there.

So it's -- certainly, we're going to continue to build on the momentum that we've established in DEWALT, and we want to see and establish another couple of areas of momentum with both Craftsman and Stanley.

I'd say 1 of the things, Tim, to keep in mind is we're really excited about the growth we're seeing in the 7 quarters of DEWALT growth. I would just kind of remind you and others, in the back half, we have about a percentage point of FX-related price in there, just so you're kind of -- if you're trying to build a walk year-over-year second half to second half, you got about percentage point of FX price that's also in the mix of that sales growth.

Our next question comes from the line of Brett Linzey with Mizuho.

I appreciate all the details on the tariffs. I know it's a fluid situation. But as it relates to the $10 million to $20 million net impact for '25. Can you just mention how much of the offsetting actions are price mitigation versus the supply chain reconfiguration? And then maybe any color on this, the pricing assumption embedded on a full year basis.

We obviously shared that, that full year impact unmitigated is in that $90 million to $100 million range. And our ultimate job is to keep our brands competitive and to work with our channel partners to keep them competitive. And so we're going to be working to accelerate as we already were U.S. COGS base out of China. And in the interim, we will have to use some price on that, and we'll be working that in as appropriate in the coming weeks or months. The real net impact is just the lag of getting measures in place and in particular, some of the LIFO effects of when that forces some expense into our income statement in this first half of the year ahead of -- ahead of some of those actions actually hitting the P&L in the front half of this part of the year.

Now we're going to try to work it to 0. We're just trying to give people a range to think about, which, I'd say, $10 million to $20 million is certainly a workable range. And again, we'll try to work it to 0 if we can throughout the year.

And thank you, Pat. That's a good answer to the question. But since you brought up tariffs, it's an opportunity actually to talk a little bit about why we feel like we built a really solid plan to help us navigate through this period of time. And as we talked through probably for the last 3 or 4 earnings calls, we've been working through a planning process and then subsequent to that and execution process. And for many of you who have followed us for a long time, we went through tariffs in the first President Trump administration. We figured out how to navigate it back then, and we built some muscle.

We also have a really strong team that we've built here over the last couple of years. And as I mentioned in my opening comments, we feel like we are well prepared to mitigate this again. It will create a modest disruption for periods of time in the short term. But a reminder to everybody is that we back in 7, 8 years ago, about 40% of what we sold in the U.S. came from China. And now we're down to a number that's closer to the mid-teens and around 15%. And so substantial progress has been made, not only in the last 6 months but in the last 6 to 7 years. And as Pat said in his comments, and just mentioned again, we're going to continue to migrate away from China as a source for the U.S. market.

China will continue to be a source for other markets for us because it is a very strong operation from a manufacturing point of view. But I'll let Chris talk a little bit about what the execution plans are as much as we can because this is very fluid.

Yes. And Don, thanks. You mentioned that we've really been working on not only the plan, but the execution since earlier last year. And it's really a 3-pronged plan the first one has been working with for direct engagement with the policymakers. And we certainly look forward to continuing to work with the new administration and we have been meeting with many of the key constituents in or around the new Trump administration since late last August. And making sure that as the administration navigates how and how they would or could implement new tariffs. We are there and a voice to be heard as that happens. And I think that, that has been -- we found that to be a very positive relationship and a positive interaction thus far, and we plan to continue.

Secondly, and this is kind of a continuation, but certainly, we've accelerated over the past 6 to 9 months is continuing to mitigate with a specific eye to derisking China, our supply chain. As Don mentioned, we've made significant progress since the last tariff policy was put in place. And we've been accelerating in the back half, and you can see the results of where we are now. Now, we are going to continue to drive those actions, and we're going to continue to accelerate those supply chain moves. And we know how to do it. We're in the process of doing it. And candidly, we really have never stopped doing it. It's right on strategy for us as an organization because we do have a very large U.S. manufacturing footprint which is unique from our competition that we will continue to leverage as we go forward.

And then lastly and kind of the more shorter-term aspect is saying, how do we need to make sure that we -- while we are working those other angles and those other parts of the plan are able to offset the immediate impact working with our channel partners and our end users on pricing actions.

Now as we look to continue to mitigate that will be a part of the of the mix, but -- and it will certainly be the nearest term impact on that, which is remaining that we have yet to mitigate. So we feel really good about the plan we have in place and more importantly, the team we have executing. And I think that I would just underscore the comments that we made earlier that we have full confidence in our long-term financial targets and margin aspirations that we talked about during the Investor Day. And as tariffs come into place, it may be a temporary headwind as we navigate the implementation plan we talked about, but it's not going to have any long-term impact on our ability to reach those targets that we've laid out.

Our next question comes from the line of Michael Rehaut with JPMorgan.

I wanted to maybe just circle back a little bit. appreciating the answer -- the detailed answer you just gave before on tariffs. But maybe just to kind of -- if I missed a couple of elements of it and just wanted to zero in on a couple of areas of clarification. First off, I believe at the Investor Day and previously, you talked about a potential $200 million headwind from China if tariffs went from 25% to 60%. How does that reconcile with the 10% incremental on China tariffs being 90 to 100. So it feels like I'm missing something there on the prior math or the current math.

And also just to confirm in terms of the plan to mitigate, I would think and I appreciate the fact that maybe these components are a little fluid, but I would think that in 2025, it would be primarily done through price and at the same time, setting up actions maybe for '26 to have any benefits from supply chain changes, if that's the right way to think about it? And if there's also any similar types of thoughts around your exposure to Mexico if those tariffs do come down the line also if there are any similar plans in place?

Yes.Well, I'll start. So I think Chris did a very good job articulating our plan around tariffs. And yes, as you said, the first steps will be around price. There will be obviously delays associated with that because we have to work with our customers to get these types of things in place. We also have to see if the situation settles down, it's still very fluid right now. And so those are all factors that we'll consider.

In the meantime, as Chris said, we are continuing to move forward in our supply chain mitigation actions. If anything, we're accelerating them even faster than we were in the back half of last year. And so we will continue to move quickly to make permanent fixes versus just pricing fixes. And so there's things that we'll continue to focus our energy on and we feel like we have a very good plan to address this that both he and I mentioned.

Mexico, you can see from the pie chart, what the number is. And so it's a guess as to where that might go, but you can do the math yourself on that particular one. And I'll have Pat answer the question on the $200 million versus this current scenario.

Thanks, Don. And I'd start just with echoing what Chris was communicating is we're focused on our long-term margin objectives. And so everything we're doing in addressing the tariff situation is to keep ourselves on the appropriate margin trajectory so we can invest in innovation and brand building and field support. So that's -- what underpins all of this, Mike. The first question you had around the difference between the China scenario, we communicated in the fall versus the present is really the fall scenario was confined to List 301 up through Part 4A. And so it was a narrower set of SKUs, but a higher obvious increase. And this is a lower increase, but basically, as we understand the current executive order, it's not confined to any set of SKUs. So that's the difference between the 2 scenarios of $90 million to $100 million. Today is an incremental 10% on everything versus in the past, it was going from 25% to 60% on a narrower set of things. And that's really the difference.

And then as Don mentioned, about 20-ish percent of our global COGS base predominantly in the tools and outdoor business comes from Mexico. But just as we're doing right now with China, should anything materialize in Mexico, we will wait some days or weeks to make sure the dust has settled and -- or at least settled sufficiently so that any move we're making kind of reflects potential knock-on effects, and we're kind of making one set of moves with our channel partners instead of whipsawing day-to-day or week-to-week.

Our next question comes from the line of Rob Wertheimer with Melius Research.

And just you guys have covered tariffs pretty well and just to switch away for a minute. I wanted to ask about the composition of core growth and tools of core growth basically, where you had 2% North America, 8% rest of the world [indiscernible] Europe. So kind of the ops what I would have guessed some ways. Anything structural going on there with share gain with presence? Maybe you could just comment on that.

So I think that we -- I'll cover North America first and just say that we -- our -- the strategy and the focus that we laid out over a year ago is bearing fruit with the professional as we see a stronger professional market and a stronger professional end user. And specifically, you can see that progress with the DEWALT. And That, coupled with the fact that we have continued to make progress, specifically in North America on our ability to service our customers and improving our fill rates that will allow us to continue to be able to entertain new opportunities for increased presence in their assortment has made a nice difference that we see in North America.

As far as, if I go over to EMEA, I would say that a part of what we laid out as well is that we were going to look at making incremental investments in key markets that we saw not only a share gain opportunity, but we also saw evolving in a better growth trajectory than some of the other more traditional markets. We've made those investments, and we're seeing tremendous payback on those, and we're seeing a lot of a lot of progress and once again, specifically with some of our DEWALT offerings. So those are kind of like the key underpinnings that we see in the share growth that we would -- as we pointed out, in a market that we're thinking about for 2025 is being relatively flat, and then we are reflecting the progress that we're seeing in those areas into our guide.

Our next question comes from the line of Adam Baumgarten with Zelman & Associates. .

Just on the promotional environment, you did mention a solid promotional season. Did that have any negative impact on gross margin in the quarter? And then maybe how you're thinking about '25 from a promotional perspective.

Yes, Adam. I wouldn't call it negative because we're quite satisfied with the promotional placement that we had in the fourth quarter and the way we executed with our channel partners and what it delivered in the terms of growth. It was a slight marginal headwind to the quarter. obviously, because of what a promotion is. But I would say that '24 was a year where like at the end of '23, we were getting very much back towards our traditional promotional cadence, '24 was probably the first full year where we had both the supply chain and the calendarization back at the level we would expect to persist. And so I think it played a great role in making for a strong fourth quarter for us. And on the margin, it was a bit of a gross margin headwind. But I would say that things like automotive mix were a bit a bit more of a headwind in the quarter than promotion. But Chris, anything you would add on the promotional.

The only thing I would add to that is while it does manifest itself with a very modest price impact in the quarter that we talked about. The placement that we received and getting back to the kind of where we see the healthy level of placement from a promotion that the space that we captured was to promote products that are accretive. So we feel good about our promotional positioning and feel good about coming back and capturing some of that share of that promotional space.

This concludes the question-and-answer session. I would now like to turn the call back over to Dennis Lange for closing remarks.

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

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