Prepared remarks
Welcome to the Second Quarter 2025 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 2025 Second Quarter Webcast. Here today, in addition to myself, is Don Allan, President and CEO; Chris Nelson, COO, EVP and President, 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 2025 second 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 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 in our most recent '34 Act filing. Additionally, we may also reference non-GAAP financial measures during the call. For applicable reconciliations to the related GAAP financial measures and additional information, please refer to the appendix of the supplemental presentation and the corresponding press release, which are available on our website under the IR section. I'll now turn the call over to our President and CEO, Don Allan.
Thank you, Dennis and good morning, everyone. As all of you are aware, this will be my last earnings call for Stanley Black & Decker, given our recent announcement that Chris Nelson will become the CEO effective October 1. I want to begin by sincerely thanking our shareholders, employees and customers for your continued trust and support throughout my tenure. Your commitment has been foundational to our progress and success, especially over the last 3 years. I believe now is the right moment to initiate this leadership transition, as I'm excited about how the team will build upon the significant company-wide transformation progress we have made since the summer of 2022. So in full alignment and with the support of our Board of Directors, I will move into the Executive Chair role, where I'll remain fully committed to supporting Chris and the company. I couldn't be more confident that Stanley Black & Decker is on a firm foundation for future growth and in excellent hands under Chris' leadership.
As we move through the final year of our multiyear supply chain transformation and I reflect on the progress over the past 3 years, we have significantly advanced the vision we set forth during the spring of 2022. We stabilized, simplified and focused the organization. As a result, we have and are continuing to improve our cost position, capitalize on our core strengths and prioritize investments designed to accelerate organic growth. We have assembled a strong management team with the right people in the right roles across the organization, blending experience in our business and the industry with an infusion of new perspectives from experienced dynamic talent. We streamlined our portfolio of iconic brands and businesses by divesting $2.6 billion of revenue. We have honed our focus on the core strengths of our portfolio of Tools & Outdoor and Engineered Fastening, which are both well positioned in very attractive industries that are forecasted to grow over the long term.
Finally, we have significantly improved our cost structure and strengthened our balance sheet through solid execution against our operational priorities set in mid-2022. Our simplified and more nimble supply chain is enabling us to deliver improved profitability, better service for our customers and end users and sustainable market share gains with iconic brands such as DEWALT. And today, the capabilities we built through our supply chain transformation are supporting the company as we navigate tariffs with agility and speed. As we continue to return our company to sustainable organic growth, we are deeply committed to fostering a growth-oriented culture within the organization. By enhancing our strong foundation of operational excellence and building a sustainable productivity engine, we are enabling resource allocation to fund future growth. Our investments are designed to continue driving innovation within our categories, accelerate organic growth through targeted local market initiatives and deliver new value-added solutions to our customers.
Stanley Black & Decker has long been an innovator and a growth-oriented company. We have the team to take this company forward. I am thrilled to have the opportunity to continue supporting the company and to see this next chapter of growth unfold in the quarters ahead, while we close out the final phase of the supply chain transformation in 2025, continue to drive towards our margin goal of 35-plus percent and achieve our deleveraging goal in 2026 via additional modest streamlining of the existing businesses portfolio. Now turning to our second quarter 2025 performance. Revenue was $3.9 billion, down 2% versus the previous year and down 3% organically. The quarter was impacted by a slow outdoor buying season and nontypical shipment disruptions related to our customers' reactions to tariffs, which contributed to a dynamic operating environment. Against that backdrop, we delivered solid second quarter revenue with continued growth of our DEWALT brand supported by relatively resilient professional demand.
Encouragingly, U.S. tools end user demand was resilient and stayed relatively consistent on a total dollar basis following our price increases. First half organic revenue was down 1% and we believe it will remain relatively flat in the second half as well. The second quarter adjusted gross margin rate was 27.5%, down versus last year due to a 3-point gross margin impact from tariffs and lower volume. This was partially offset by supply chain transformation efficiencies and the partial impact of our initial round of price actions, which became effective within the second quarter. Despite market volatility, adjusted gross margin for the first half was 28.9%, just 20 basis points behind the prior year. As you will hear from the team today, the organization is remaining focused on executing our robust plan designed to mitigate tariffs. We plan to leverage supply chain moves and targeted pricing actions to improve our gross margin in the coming quarters.
We believe Q2 to be the low point for gross margins, barring any new large changes to government policies. We view these initiatives in conjunction with capturing the remaining supply chain transformation savings as the primary drivers to return our adjusted gross margin trajectory toward our goal of 35-plus percent. Second quarter adjusted EBITDA margin was 8.1%, down 260 basis points versus the prior year, reflecting the gross margin change and our growth investments, which were partially offset by targeted cost control measures. Adjusted earnings per share was $1.08, inclusive of a discrete tax benefit. Second quarter free cash flow was $135 million, a strong result considering the operational impact of new trade policies. Overall, a very solid quarter in a turbulent environment, with significant credit to the global Stanley Black & Decker team, as together, we all continue to make meaningful progress on what is within our control.
Thank you for your support. I will now pass it to Chris, who will review the business segment performance and provide more context on how we successfully execute our strategy in a volatile trade environment.
Thank you, Don, and good morning, everyone. On behalf of the entire Stanley Black & Decker team, I would like to begin by expressing our appreciation to Don for his leadership and dedication to the company over the past 26 years. His deep connection with our customers and brands, coupled with his unwavering commitment to our global team, has been instrumental in positioning the company for lasting success. I'd also like to personally thank him for his partnership over the past 2 years and his help preparing me for this moment. Looking ahead to October 1, I am honored and excited to become CEO of Stanley Black & Decker, an iconic American company with a proud heritage and a bright future. The opportunity to work with our teams around the world to unlock the tremendous potential of our brands and drive share gain in the marketplace is energizing and I look forward to doing so in collaboration with our valued channel partners.
Now turning to our second quarter operating performance. Our top priority continues to be serving our customers and accelerating initiatives to mitigate tariff-related headwinds, all while keeping our long-term financial objectives in sight. Beginning with Tools & Outdoor, revenue for the quarter was approximately $3.5 billion, representing a 2% decline as compared to the second quarter of 2024. Organic revenue decreased by 3% and price realization of 2% represents a partial quarter benefit from our late April U.S. price actions. Volume was down 5% due to a slow outdoor buying season and tariff-related shipment disruptions. We were encouraged to see continued top line expansion of DEWALT professional products as Pro demand remained relatively resilient. This marks over 2 years of consistent growth from our powerhouse DEWALT brand, which year-to-date has grown in every product line and region.
We clearly see the benefits from our prioritized innovation, marketing and activation investments. Our growth and share gain strategy is underpinned by accelerating DEWALT's success while we work to restore consistent share gain in STANLEY and CRAFTSMAN. Adjusted segment margin was 8%, a 240 basis point decline as compared to the second quarter of last year. The change was attributable to the impact from tariffs, lower volume and investments in growth initiatives, partially offset by the supply chain transformation efficiencies, price and cost control. Shifting to performance by product line, Power Tools organic revenue growth of 1% was driven by price, resilient Pro demand and solid performance in our key investment markets. Hand Tools organic revenue decline of 5% was primarily attributable to tariff-related shipment disruptions in North America. Outdoor organic revenue declined 7% related to a slow buying season.
Demand has picked up in July, but our expectation is that 2025 will carry a modest decline near or at minus 1% year-to-date performance. Now evaluating the Tools & Outdoor regions. In North America, organic revenue declined by 4%, driven by factors consistent with the segment's overall performance. Channel inventory remained in line with historical levels. POS dollar trends in tools remained stable, while outdoor POS was slow to start and improved throughout the quarter. Notably, following the recent price increases, we did not observe a shift in buying trends, which signals relatively healthy end demand. In Europe, organic revenue declined by 1%. Growth in the U.K. in key investment markets such as Central and Eastern Europe helped offset softer market demand in Germany and Italy. The Rest of World delivered 1% organic growth, driven by Latin America, Australia, New Zealand and the Middle East, led by strong performance from our professional brands.
Now let's transition to Engineered Fastening. On a reported basis, second quarter revenue was down 2% versus prior year and 1% on an organic basis. Price realization of 1% and 2% of currency favorability were more than offset by 2% volume declines and a 3% impact related to the previously disclosed product line transfer to the Tools & Outdoor segment. The automotive business experienced a mid-single-digit organic decline primarily due to reduced production schedules and restrained capital expenditures by OEMs. General industrial fasteners organic revenue declined high single digits. The aerospace business had another strong quarter with over 20% organic growth driven by strong performance in fasteners and fittings products. This business has achieved a new high of $400 million annualized run rate revenue with a solid multiyear backlog and growth outlook. The Engineered Fastening adjusted segment margin rate was 10.8% for the quarter.
This is a decline from the previous year, largely due to softness in the higher-margin automotive fasteners. In summary, with focused execution, our teams' accelerated cost control measures and adjustments to our supply chain neutralize the impacts from tariffs as quickly as possible within the period. Implementation of our robust and flexible plans to mitigate tariffs is ongoing, as we navigate this dynamic operating environment. We have entered the final innings of our multiyear supply chain transformation. Successfully completing the transformation this year remains a top priority and is fundamental to optimizing our cost structure, advancing customer-focused innovation and driving our growth initiatives. These efforts are all aimed towards delivering profitable organic growth and sustainable market share gains. With respect to cost management, we are continuing to execute a comprehensive series of initiatives expected to deliver approximately $2 billion in pretax run rate cost savings with $1.5 billion attributable to improvements within our supply chain.
We have clearly identified the principal sources of incremental savings and are making steady progress toward our full-year 2025 target of $500 million in cost reductions. In the second quarter, we achieved approximately $150 million in pretax run rate cost savings, bringing our total savings to approximately $1.8 billion since the program's inception. We remain committed to strengthening our culture of operational excellence and building our sustainable productivity engine. These efforts are essential to further improving customer fill rates, funding growth investments and achieving our long-term goal of maintaining an adjusted gross margin of 35% or higher. I will now take a moment to highlight a Pro-focused innovation we recently introduced. As a leader in total jobsite solutions, DEWALT is advancing its construction technology offerings of productivity solutions for trade contractors with MSUITE.
MSUITE is a cloud-based management software which improves coordination between building information modeling, fabrication and field construction teams. MSUITE helps users track, manage and share data throughout the entire life cycle of a construction project. We introduced the MSUITE Hangers automation tool in May as one of three product offerings on the platform. This software solution redefines how our targeted mechanical, electrical, plumbing and industrial contractors approach hanger layout and modeling. It delivers significant efficiency improvements as they route building systems like pipes, ducts, conduits and cable trays. Early adopters of MSUITE Hanger software are already reporting remarkable gains in productivity. For instance, what traditionally took 10 manual steps and a disproportionate amount of time within the building information modeling project is now a single automated step.
This system simultaneously adjusts to building system model changes by adding or removing hangers and rapidly creates simple or complex configurations. Additionally, it can generate bills of material for fabrication, streamlining hanger installation. These functionalities enhance accuracy, save important coordination time in the field and reduce the costly risk of errors. This innovative tool enables the user to design their job using DEWALT hardware solutions, including DEWALT anchors and TOUGHWIRE. These kinds of comprehensive workflow solutions help DEWALT to win with the professional on commercial and industrial job sites. We are building a future where technology empowers end users on every job site to drive productivity with greater accuracy and confidence while also expanding the breadth and depth of our solutions. As we continue executing with an end-user and customer-first mindset, we are focused on balancing the near-term needs of the business with preserving and delivering long-term growth, share gain and shareholder value.
As we navigate this environment, we're taking the necessary measures to stay on our margin trajectory. Ultimately, a key milestone of success is achieving 35% or greater adjusted gross margins. Consistent with this aim, we are prioritizing our efforts to successfully navigate tariffs. As we have previously shared, our tariff mitigation strategy is guided by four key principles. First, our primary commitment is to serve our customers and end users as we navigate this evolving environment. We are collaborating with our customers to develop the optimal product assortment for our end users given the new landscape. Additionally, we are prioritizing high service levels and supply continuity. Secondly, we are accelerating supply chain adjustments to leverage our North American footprint and attain USMCA compliance rates that are in line with other manufacturing-based industries. Our current plan is expected to reduce our Chinese production for the U.S. to less than 5% by the end of 2026.
Third, we are taking a judicious approach to price actions, maintaining a long-term perspective as we make the adjustments necessary to protect our cash flow, EBITDA and margin structure while supporting investments for growth. Our April price increase was implemented on plan and began contributing during the second quarter. We are in the initial stages of customer discussions and intend to implement a second more modest increase early in the fourth quarter. Finally, we continue to proactively engage with the U.S. administration to ensure our interests and those of our stakeholders are expressed and considered, as they work to achieve their trade-related goals. In summary, our disciplined approach positions us to address immediate challenges while building a strong foundation for future growth and returning to our targeted margin trajectory. I will now pass the call to Pat Hallinan to lay out our financial assumptions for tariffs in our current planning scenario.
Thank you, Chris and good morning, everyone. I would like to emphasize the importance of the strategic countermeasures that we are actively implementing. These coordinated efforts across our global teams are essential to protect our business, as we advance towards our long-term financial objectives, inclusive of growth and margin accretion. We currently estimate the annualized gross tariff cost from policy actions is approximately $800 million, excluding mitigation actions. The factors that underpin our cost estimates incorporate the most recent policy changes announced in July and those expected to be enacted within the next few days. These assumptions include 30% incremental tariffs on goods from China, 30% on non-USMCA-compliant goods from Mexico, over 20% in aggregate on goods from the Rest of the World and 50% Section 232 metal tariffs. However, the impact on our 2025 P&L is expected to be partially mitigated through a combination of ongoing targeted initiatives in addition to strategic pricing measures.
Taken together, we currently estimate the net P&L impact for our 2025 to be approximately $0.65, reflecting the timing and costs required to implement mitigation strategies. In this estimate, we have included costs to accelerate the planning and execution of our supply chain initiatives as well as the anticipated increase in expenses required to manage current rare earth supply constraints. In the appendix, we have included an illustration that is consistent with prior disclosure of our U.S. cost of goods sold by country of origin to assist in modeling sensitivities relative to these assumptions. Now to unpack our remaining planning assumptions. Our earnings outlook for the year includes GAAP earnings per share of $3.45, plus/minus $0.10. Adjusted earnings per share is expected to be approximately $4.65. Pretax non-GAAP adjustments are estimated to range between $205 million and $250 million, primarily related to the supply chain transformation and other cost actions that will benefit SG&A. Looking ahead, our planning is based on the generally stable demand trends experienced throughout much of this year.
These include relatively strong professional demand, continued relative softness in the DIY and outdoor product lines and a certain degree of retailer disruptions associated with efforts to optimize sourcing and product assortments in response to tariffs. These are underpinned by our readiness to respond with agility and speed to changes in the operating and market backdrop. We anticipate 2025 total company sales to retract slightly as compared to 2024. Year-over-year organic revenue is expected to be in line with the total company, as price increases are offset by the aforementioned volume pressures. Back half organic revenue is planned to be relatively flat, largely consistent with the performance we delivered in the first half. Our top line elasticity assumptions suggest an approximate one-for-one relationship between price and volume, meaning that each incremental point of price is expected to be offset by a corresponding point of volume decline.
Currency is now projected to contribute a positive 1 percentage point, which will be offset by the first quarter comparable impact from the infrastructure divestiture. Organic revenue for the global Tools & Outdoor segment is projected to decline approximately 1 point. The Engineered Fastening segment is anticipated to achieve 1% organic growth, driven by sustained momentum in aerospace. Our supply chain transformation initiative maintains an incremental 2025 cost savings target of $500 million. Back half adjusted gross margin is assumed to deliver year-over-year expansion in both quarters, with the fourth quarter to show slightly stronger performance, taking into account our transformation and tariff mitigation actions. Assuming that future tariff announcements lead to only modest adjustments and the U.S. government makes meaningful progress on rare earth initiatives, we believe we can sustain this positive momentum in adjusted gross margin into 2026.
We remain dedicated to investing in high-growth, high-return opportunities, and we'll reinvest over $100 million in 2025 to drive market activation, strengthen our brands and support commercial expansion. Full year adjusted EBITDA margins are expected to expand year-over-year on the strength of gross margin, supported by the cost actions that we are implementing. Other 2025 modeling assumptions, which are relatively similar to prior assumptions, are noted on the slide. In the near term, we anticipate that third quarter organic revenue will present a 1 percentage point decline, as we manage the impact of global tariff disruptions in conjunction with the subdued consumer DIY market environment. For the third quarter, we expect adjusted earnings per share to represent approximately 25% of the full year adjusted EPS contribution factoring in a decline in organic revenue, balanced with a solid step forward in gross margins.
With respect to cash flow and capital management, we remain committed to disciplined oversight of working capital and capital expenditures, targeting approximately $600 million in free cash flow in 2025. This objective is supported by disciplined inventory management with an emphasis on customer order fulfillment alongside prudent expenditure controls. Cash generation will be utilized to fund our dividend with the remainder intended to be used for debt repayment. Deleveraging continues to be a top priority, as we are committed to maintaining a strong and resilient balance sheet and working towards achieving less than or equal to 2.5x net debt to adjusted EBITDA. Our plan to achieve this outcome includes using excess free cash flow and an assumed $500 million to $1 billion in proceeds from portfolio pruning for further debt repayment. To conclude, we are pleased with the performance we have delivered in the first half of the year, responding decisively to external challenges through targeted operational and supply chain adjustments, underscoring our unwavering commitment to meeting the needs of our end-users and customers.
The organization has demonstrated exceptional agility in this environment. The organization's efforts have put us in a position to quickly restore profitability while taking the measures to position Stanley Black & Decker for sustained growth, margin expansion and long-term value creation. Thank you, and I will now return the call to Don.
Thank you, Pat. I am grateful to have had the opportunity to serve as CEO of Stanley Black & Decker and work alongside an extraordinarily talented and resilient team. As I have said many times, Stanley Black & Decker is built on the strength of our people, iconic brands and a powerful innovation engine. These foundational attributes transcend external market conditions and I am confident that these traits are what position Stanley Black & Decker to thrive well into the future and generate sustainable long-term growth and value creation. We are now ready for Q&A, Dennis.
Thanks, Don. Shannon, we can now start Q&A, please.
Questions and answers
Our first question comes from Julian Mitchell with Barclays.
I just wanted to say congratulations, Chris and thanks, Don, for all the hard work and wish you well in the Board transition role.
Thank you.
Maybe just my question would be around the gross margin outlook. Just trying to understand, I heard Pat say gross margins are up year-on-year, both third and fourth quarter. Looks like you're embedding organic sales growth year-on-year in Q4 and there should be some good volume leverage perhaps there. So just trying to understand what's the kind of Q4 or exit gross margin that you're embedding for this year? And as you think into next year, I realize that the cost productivity program, the $2 billion number is largely in the run rate going into next year. So maybe any early thoughts on further gross margin expansion drivers, as I think you'd mentioned gross margin should rise again in the next year?
Yes, we're anticipating a year-over-year increase in gross margin for both the third and fourth quarters. In the third quarter, we expect it to be in the range of 1.5 to 2 percentage points, and in the fourth quarter, potentially even higher, possibly exceeding the 200 percentage point range. We expect to reach a gross margin of around 33% to 34% in the fourth quarter of '25. This reflects the dedicated efforts of our teams in both managing costs and adjusting pricing. We remain committed to achieving a 35% gross margin. Although tariffs have posed challenges, our team is actively addressing these issues. The gross margin results in the latter half are a direct outcome of our mitigation strategies and pricing efforts. Looking ahead to next year, I hesitate to provide specific quarterly guidance for '26 at this moment, but we plan to sustain our pursuit of over 35% gross margin. We anticipate that by the second half of next year, we will be on track toward that goal.
The timing of tariffs has likely caused a 9 to 12-month setback in reaching 35%. However, we expect that by the second half of next year, we will be in the mid-30s and approaching the 35% mark by year-end. For the earlier part of next year, we need to see how things develop this year and into next year, as we will be navigating some complexities related to tariff impacts. Regarding sales volume, we saw an approximate 1-point increase in the fourth quarter this year. While volume may decline, pricing is on the rise. The changes in gross margin are not driven by volume leverage, but rather by our mitigation efforts and continued transformation initiatives.
Our next question comes from the line of Michael Rehaut with JPMorgan.
Congrats, Chris and Don, wishing you the best, great working with you.
Thank you, Michael.
Wanted to kind of unpack a couple of elements of the updated guidance and with some of the moving parts here. First, if you could kind of hit on the 2Q upside that we saw, what are the offsets that didn't allow that upside on 2Q to fully translate to the full year guide? And secondly, how should we think about the $0.65 headwind as it relates to 2026? In other words, do you expect to recover all of that through various actions or part of it? If you can kind of walk through those 2 elements.
For the quarter, the outperformance compared to our revised outlook and the consensus was primarily $0.15 from operational factors, with the remaining impact due to tax timing. We anticipated certain discrete tax items, mainly a settlement with the IRS, and roughly half of this was confirmed earlier than we expected in the second quarter. The $0.15 operational impact included about $0.10 resulting from lower tariff expenses in this quarter, influenced by our inventory accounting methods, which doesn’t alter our overall tariff expense outlook for the year. Additionally, we experienced some favorable foreign exchange rates, which we hope will continue in the second half of the year, although the strengthening U.S. dollar may reduce some of that benefit. However, this is counterbalanced by increased mitigation expenses within our SG&A. Overall, the operational performance this quarter had some positive elements, predominantly due to timing of tariff expenses.
As we move forward, we're actively adjusting our forecasts to better predict tariff developments, expecting certain countries with pending letters to be subject to higher tariffs, while the rest of the world may see increases from 10% to 20%. Some timing related to rare earths will lead to increased tariffs from China for a while, translating into about $65 million in tariff expenses for the year, with a small increase in pricing helping to offset that. This explains the adjustment to our $0.65 difference in the full-year outlook, largely driven by updates on tariff spending, mitigation efforts, and pricing. Looking ahead to next year, we anticipate that our mitigation and pricing strategies will mainly cover what we project as $800 million in ongoing tariff expenses. The first half of the year may experience some fluctuations due to the tariff expenses reflected on our balance sheet, but by the latter part of the year, we expect our margins to improve significantly.
We're aiming for mid-30% margins, targeting 35% in either the third or fourth quarter, and by then, we should significantly reduce our exposure to China, getting it down to 5% or less by the end of next year.
Our next question comes from the line of Tim Wojs with Baird.
I'll echo the same comments on Chris and Don, thanks for everything and Chris, good luck. I guess maybe just on pricing. Just kind of curious if you could elaborate a little bit how the pricing increases are tracking versus your expectations. I think the 2% in the tools segment might be a little bit below what some are looking for and I think that should accelerate into the second half. So just maybe a little color on how the price is being accepted, if there's any kind of elasticity that you point out and how to think about pricing in the second half?
Yes, this is Chris. From a pricing perspective, our price increase was implemented as scheduled and has progressed and been realized in line with our expectations. We feel confident about our current position and the competitive dynamics we've observed. After the price increase, we haven’t noticed any significant changes in demand patterns or buying behaviors. Regarding elasticity, we are experiencing a one-for-one offset price for volume trade-off, which aligns with our projections. The timing is on track, and the competitive environment appears solid. Looking ahead, recent changes in tariff policy allow us to implement well-planned mitigation actions as we prepare for our next price increase. This increase, set for the beginning of Q4, will be more modest, about half of the previous increase. We believe we can maintain the same dynamics moving forward. Since the last increase, our sales data has remained stable, showing flat to slight declines in low single digits, with some acceleration into Q3. The pricing strategy is strong, and we see it being effectively executed as we anticipated.
And Tim, the only thing I'd add to that is, you'll see the full run rate, obviously over the back part of the year and you're probably going to be seeing in the T&O business the high single digits range of a price increase. And as Chris was saying, a like offset in the volume netting to flattish total organic revenue performance for the back half.
Our next question comes from the line of Nigel Coe with Wolfe Research.
Don, it's quite a run there, so congratulations. Hope you enjoy some retirement; and Chris, congrats on getting the big seat.
Thanks, Nigel.
On the pricing, I just want to confirm if those actions are currently being implemented and communicated through the channel, or if that is still pending for the quarter. Additionally, can you provide more detail on the $800 million in tariffs? It seems to change daily, but will the copper tariffs be included in that? If they are not confirmed, please discuss that as well. Another significant factor in the calculations appears to be the USMCA compliance in Mexico. Could you provide an update on how that is progressing?
I’ll begin by addressing the pricing in the USMCA. The initial round of pricing is fully implemented and already available on the shelves. We have been monitoring its impact for several weeks. Regarding the second round of pricing, we have informed our channel partners and are discussing its implementation, which will be more modest, roughly half of the first round, starting at the beginning of Q4. We have been working hard on USMCA compliance and believe we have plans and programs that will help us reach an average compliance level typical for a manufacturing company over time. These initiatives vary in complexity, from straightforward adjustments in bills of materials to more time-consuming changes involving component suppliers and supply chain localization. Nonetheless, we see no structural barriers that would hinder our progress toward achieving industry average compliance.
Yes, and Nigel, on the tariffs, yes, it does change with frequency but we've kind of been anchored to around 3 numbers, now $800 million being the third and the current run rate. It was as high as $1.7 billion annualized run rate back in early April when China was at about $145 million-plus. Then in the middle of the quarter when there was relief, the 90-day relief period, it went down to $600 million. Our best estimate of where things are likely to go inclusive of us paying a bit more in China tariffs as some of the rare earth timing works itself out is around $800 million annualized. The change from $600 million to $800 million is mostly our best estimate of us paying marginally a bit more in China tariffs as both of our governments work through rare earth licensing. The Rest of World, which is 23% of our U.S. COGS base going from 10% to 20% and a few above that, like Thailand and Cambodia, which are 36%; and Malaysia is at 25%; and then Mexico going from 25% to 30%, that's the estimate. And in the simplest rule of thumb, what we would expect in our income statement this year is about 60% to 65% of that annualized run rate in that ZIP code.
Our next question comes from the line of Chris Snyder with Morgan Stanley.
I wanted to ask on customer buying patterns. It sounded like maybe that signaled there were some inventory that came out in Q2 from the channel. I guess, was that the correct takeaway? And then any expectation on potential destock into the back half of the year? Do you have visibility into that when you speak with the customers, particularly on the home center side?
Yes, this is Chris. I'll address the second question first by stating that we view our inventory levels as healthy and consistent with historical trends. In discussions with our channel partners, we expect this to remain the case, so there's no significant concern about destocking. The volatility in buying patterns we experienced during the quarter can be attributed to attempts by everyone to formulate optimal plans in light of changes in trade policy. There were adjustments in promotional strategies, where decisions were made regarding what to promote and how to manage promotional inventories for Q2 and Q3. This led to a temporary disruption that was expected as all parties, including us, worked extensively with channel partners to provide a competitive assortment of products in a tariff environment that we believe end users would favor. This planning process contributed to the temporary dynamics we observed in promotional inventory and shipment timing during Q2 and Q3.
Our last question comes from the line of Rob Wertheimer with Melius Research.
Congrats. I wanted to start with the commentary around outdoor and was curious if you have any additional information on that. Is it related to market share or just the overall category? Does it extend into other areas of outdoor products, which might be more seasonal or related to consumer-grade or DIY tools?
No. This is Chris. We had a later start to the season due to wet weather, but recently we've seen much stronger point of sale activity. As Pat mentioned earlier, we view the market as stable for the year, slightly down overall, but there haven’t been any major changes in buying patterns or competitive dynamics. Based on broader industry data, we believe we are in a favorable position in terms of market share, and we have seen positive momentum with DEWALT and CUB CADET in those areas.
Our last question comes from the line of Jonathan Matuszewski with Jefferies.
Nice to see the ongoing momentum at DEWALT. Can you spend some time discussing the trend at CRAFTSMAN? What are you seeing in the competitive landscape there? And how do you think about factors beyond potential interest rate cuts stimulating demand on the DIY side?
Thank you very much. We are very pleased with the continued momentum and success we’ve experienced with DEWALT over several quarters. Regarding the CRAFTSMAN brand and its presence in the DIY segment, that particular segment has faced more challenges recently compared to the professional side. Our analysis of point-of-sale data in relation to credit card activity indicates that our performance aligns with overall market trends. This suggests that the challenges are more related to market conditions, which are influenced by interest rate sensitivity. However, we believe there are opportunities for the CRAFTSMAN brand to expand our product range, particularly in power tools, allowing us to strengthen the brand, maintain control over what we can influence, and drive organic growth irrespective of market conditions. This remains our primary focus. We have excellent channel partners, and everyone is committed to moving forward together. We anticipate making significant progress in the next 12 to 24 months. When the market rebounds, especially with changes in repair and remodel activities, we will be well-positioned to capitalize on that growth across the company. CRAFTSMAN is a strong brand.
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, just please contact me if you have further questions. Thank you.
This concludes today's conference call. Thank you for your participation. You may now disconnect.