Snap-On Incorporated

Good morning and welcome to the Snap-on Incorporated 2023 Second Quarter Results Conference Call. All participants will be in a listen-only mode for the duration of the call. And should you need any assistance at that time, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. And to withdraw your question, please press star, then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Sarah Verbsky, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Joe, and good morning, everyone. We appreciate you joining us today as we review Snap-on's second quarter results, which are details in our press release issued earlier this morning. We have on the call Nick Pinchuk, Snap-on's Chief Executive Officer, and Aldo Pagliari, Snap-on's Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we'll take your questions. As usual, we've provided slides to supplement our discussion. These slides can be accessed under the Downloads tab in the webcast viewer as well as on our website, snap-on.com, under the Investors section. These slides will be archived on our website along with the transcript of today's call. any statements made during this call relative to management's expectations, estimates, or beliefs, or that otherwise discuss management's or the company's outlook, plans, or projections are forward-looking statements and actual results may differ materially from those made in such statements. Additional information and the factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings. Finally, this presentation includes non-GAAP measures of financial performance which are not meant to be considered in isolation or as a substitute for their GAAP counterpart. Additional information regarding these measures is included in our earnings release issued today, which can be found on our website. With that said, I'd now like to turn the call over to Nick Pinchuk. Nick?

Thanks, Sarah. Good morning, everybody. Today I'll start the call by, as usual, by covering the highlights of the second quarter, and I'll give you my perspective on the environment and the trends we're seeing. Along the way, we'll cover the markets. They're encouraging, actually. And I'll take you through the segments and the advancements we've made. Then Aldo will provide a detailed review of the financials. We see the second quarter as a period of significance. You know, sometimes you see a performance where you break through to new heights, and this is one of those times. I'm going to tell you why we believe that to be true. In some ways, though, This period was similar to many periods we've seen over time. We continue to have significant headwinds, and there's always turbulence, variation from market to market. But we believe it's our job to confront and overcome these obstacles, and we did just that in the second quarter by wielding the strength of our advantages, executing our strategic runways for growth, making the most of our runways for improvement, and by relying on the skills and dedication of our people. And once again, it paid off. The numbers scream it's so. But here they are. As reported, second quarter sales of $1,191,000,000 were up 4.8% from 2022, including the impact of $8.3 million of unfavorable foreign currency translations. Organic activity was up 5.6%. The 12th straight quarter of year-over-year expansion beyond pre-pandemic levels, that's a trend that demonstrates what we believe is a solid consistency during pretty uncertain times. Now let's talk about the earnings. Earnings. Opco operating income for the quarter, including the effects of unfavorable foreign currency, was $277 million, up 12.3%. And our operating margin, the operating margin, it was 23.3%, up 160 basis points from last year. Boppo. When I said new levels, I meant it. For financial services, the OI of $66.9 million represented an increase of $1.6 million. And it all combined to author an overall consolidated operating margin of 26.8%, up 130 basis points from last year. And the second quarter EPS, it was $4.89, up 62 cents or 14.5% from last year's $4.27. I think I'll say it again, $4.89. Up 14.5%. The productivity and profitability of Snap-on operations shining through as the supply chain viscosity diminished. We believe Snap-on is stronger now than ever before, and the quarter's profitability makes that crystal clear. Well, those are the overall numbers. Now let's speak to the market. Auto repair. Again, this quarter, it's favorable. Miles driven are up. Spending on vehicle maintenance, up. Technician count, up. Technician wages, up. Consistently positive, year-over-year trajectory across all the essential categories. Drivers and vehicle repair are fairly understood. Car park's growing, getting older every year, and every year the tasks involved in maintaining and repairing the vehicle park get increasingly complex. requiring more hours, greater skill, increased wages, and more sophisticated tools, hands or power, or data-driven tools. There's a significant need for more technicians and greater capabilities. The competition for that talent is growing, and it's being reflected in the rising wages. At an everyday level, I think you can see this demand when you're trying to schedule a maintenance appointment. Or just by... visually seeing the abundance of cars and trucks in the repair bays or parked outside, crowded around the shops waiting for their turn to get in. And in fact, just this month, I was with a group of franchisees and customers in Bristol, Tennessee at the NHRA Thunder Nationals, the drag races, and they energetically expressed their enthusiasm during our conversations. You could feel their optimism resonating with an appreciation for our products, our solutions, and how we make work easier. So we expect that the trajectory of vehicle repair is solid and will continue through the quarters and on into the years ahead. We expect that vehicle repair is the, we believe that vehicle repair is a great place to operate and repair and the repair information, our repair information group and our tools group are well positioned to take advantage of that. Now onto the critical industries. Or a commercial industrial group or C&I takes our business out of the garage and solves tasks of consequence where the penalty for failure is high in a wide range of sectors where custom tools are often required to get the job done. This is also the segment where we have a most significant international presence and the attendant variations from country to country with many versions of economic and social headwinds. In the U.S., the landscape actually is pretty positive. We see progress across a number of sectors. Aerospace is strong. Increased demand in commercial aviation and momentum within space exploration. The military business was up. Another strong quarter of growth. Now better matching natural needs. Natural resources continue to advance in oil and gas and wind after the uncertainty of last fall. Energy repair is a positive place to be. Also began the period with industrial transportation. Supply chain turbulence increased. you know, I think has raised the attention on rail and heavy duty fleets. Society now more than ever sees the essential need to keep commercial supply moving, and it's accruing positively for us. Now, there are tepid spots across the globe, places traumatized by the Ukraine war. We see that. Weaknesses in some of the Asia-Pacific operations. But one of the clear and large positives in the period is the general rise of critical industries and our industrial division is well positioned and it's taking advantage with its capability to customize products to a large number of applications and it's working. Our critical industry teams are on an upward trajectory utilizing their capability and the enhanced capacity to capture significant gains. Overall, the story of Snap-on Outside the Garage looks quite promising, and as we move forward, we'll continue to capitalize on an abundant potential, and as part of that, we'll keep engaging Snap-on value creation, customer connection and innovation, developing profitable new products and solutions delivered by the insights and knowledge gained standing next to the customers right in the workplace. It will drive RCI all over the enterprise, including in the tools group. We'll keep working to increase our franchisees' selling capacity with efficient processes, with advanced training programs, with social media and digital content, and expanded manufacturing capacity to meet the rising demand, all combining to take full advantage of the opportunities and continue the positive trends we've seen into the future. Well, that's the market overview. Now let's move to the segments. For the CNI group, as reported sales rose 1.4%, including $5.6 million of unfavorable foreign currency. Organic volume was up by 3%. A quite strong performance in the industrial division was attenuated by shortfalls in some of our more challenged areas. Power tools had smaller volumes as customers anticipated the arrival of new products in the third quarter. Our European-based hand tool business, S&A Europe, and our Asia-Pacific operations demonstrated growth in several markets, but softness in Eastern Europe and currency pressure in Japan, the yen was weak, was some offset. But our industrial vision isn't just growing in volume. The margins are strong and rising. Customized products is a wonderful thing. So CNI OI was $58.1 million, a 12.4% increase over last year, and the operating margin was 16%, one of the highest ever for the group, representing a gain of 160 basis points over the second quarter of last year. The industrial division, wielding the capacity provided by our new building in Kenosha, registered significant sales progress. In April, we discussed the recovery of the military business in the military segment, and this quarter we continued that momentum, capturing significant long-term contracts. Our product line, wide and effective, produced in the U.S., made the difference. So we believe things look promising for the military business and for all our industrial segments. Beyond the industrial division and C&I, Our specialty tools operations continue to advance, meeting the need for precision with new torque products, covering a vast spectrum of clamping forces for challenging applications. Torque accuracy is rising in importance, and Snap-on is ready to capitalize. We are confident and committed to extending in critical industries. And that conviction is anchored by the ongoing expansion of our lineup of innovative products explicitly designed for particular tasks, offerings like our automated tool control, or ATC, enabled by proprietary digital imaging technology that scans toolbox drawers, recording in real time which tools are required or removed or replaced. It's an increasingly crucial feature for aerospace, for industrial manufacturing, and for and for commercial transportation operations. Imagine working on a plane or a locomotive engine and unknowingly leaving a tool behind in the workplace. Not good. Not good. This is a mistake that could result in a failure in any tight tolerance mechanism. One small item can be a huge problem. Well, ATC has an answer. Keeping track of the tools, identifying missing items, tracing who signed them out and where they're to be used, and giving the all clear when everything's returned. so the planes can take off. Snap-on critical industries are on the rise, and ATC is part of the reason. And in the quarter, we released our next generation of ATC, a larger touchscreen to improve the shop productivity, and upgraded processors with the latest technology for seamless integration with any central IT system. And as you might expect, our customers were enthusiastic. Sophisticated products for complex products. It's a winning combination for CNI, And you can see it in the quarter's results. Now on to the tools group. Organic sales grew 1.1%, which includes 60 basis points of unfavorable foreign currency. Growth in the international markets and slight improvement in the U.S. network. Based on our franchisees and customer feedback, like I said already, vehicle repair is robust. But in the period, our record demands met capacity constraints before our plant expanses were fully operational. limiting some of the potential possibilities and somewhat attenuating the volumes. But for operating earnings, they rose in the quarter by 13.3 million, or 10.7%, reaching 137.7 million. That's almost double, double the pre-pandemic level. The operating margin was 26.3%. a rise of 240 basis points against 50 basis points of negative currency. Let me say that again. Tools Group OI margin was 26.3%. Boom, shakalaka. This is an eye-popping number. So the Tools Group had another positive quarter with substantial profitability. We are confident in the strength of our VAND network, and that belief is born out of quantitative evidence, franchisee health metrics, We monitor them regularly, every quarter. And again this quarter, they remain strong. So whether you're talking to the franchisees at Thunder Valley or looking at the numbers, vehicle repair does appear robust and continues to be so. Now when you think of the tools for profitability, which is a pretty important subject this time, you think about hand tools. That high margin lineup was up in the period. and new products led the way. One example of successful innovation that came from another customer connection was a number of franchises observed that diesel technicians struggling to access sensors on Class 8 semi-trucks, they were struggling to do that. So to change the part without risking damage, the path had to be cleared by removing several other blocking components. Believe me, that's a time-consuming process. So armed with Customer Connection Insights, Those customer connection insights, our engineers developed an innovative design, quickly produced a 3D prototype, and confirmed that it solved the problem. And that new tool, the SWR 590-degree special crowfoot wrench, is being made right now at our Elizabethan, Tennessee plant, and it's getting a lot of attention. It really does make truck repair easier. The techs love it, and we kind of like the margins. Profitable customer connection is one of the drivers behind the tools group's success. And another example authored this quarter is our two-piece horizontal bushing adapter set, the BGP1BKS2. These names are something. Tech said a Subaru dealership, they were taking a lot of time to remove and install control arm bushings from suspension setups on the newer models. Our team assessed the procedure and designed two new adapters to integrate with our existing ball joint press. And that enabled a good fit for the new Subaru suspension and saved two hours in repair time per procedure. That's a big savings in the garage generated by customer connection and innovation. You know, SNLs... A while ago, SNL's Roseanne said, it's always something. And it's true. There are always new repair challenges, whether the powertrain is internal combustion, plug-in hybrids, or EV platforms. Vehicle architecture is getting tighter, packed with more devices, creating additional accessibility constraints. It's all music to our ears. Our franchisees and engineers observe the work, identify complications, and simplify the complex and multifaceted tasks to raise efficiency and keep the world moving. And the attendant value is considerable. You can see that in the tools group profits. Now, one of the highlights of the quarter was the continuing growth of our big ticket sales, a sign of technician confidence in the vehicle repair shop. Driving some of that trend was our latest tool storage unit, the KMP1023ZLT7, a 72-inch Master Series roll cab painted with a unique appearance scheme we call Green Envy. A bright green body paired with black trim, it stands out and makes a statement at any repair shop, but beyond the eye-popping optics, The box is also a productivity-enhancing powerhouse equipped with 14 drawers, including three spanning the full width of the unit, putting the most important tools of any size right at hand. It also offers our popular power drawer a dedicated space equipped with five power outlets and two USB ports for charging a full array of cordless accessories. And for the hard-to-manage small parts, our 2-inch speed drawer makes for easy organization with green NV color-coordinated dividers, custom slots for components of various sizes. The box is already one of our hit products. It really energized franchisees and was well-received by our customers. And as I said, it helped keep the big-ticket train moving. Well, that's a tools group. Strong profitability. Built on solid foundations of innovative products and franchisee success mixed with a considerable portion of RCI gain. Now visible as supply. That RCI gain is now clearly visible as a supply chain turbulence recedes. Now let's go on to RS&I. Sales, as reported, reached $452 million. That represented a $35.2 million or 8.4% increase. Gains in the equipment and OEM essential programs paired with gains in equipment and OEM paired with our successful rollout of our new handheld diagnostic platform. The OI in the period was 110.4 million, up 14.7% or 15.4%. Up 14.7 million or 15.4%. And the operating margin was 24.4%, a rise of 140 basis points. Nice. Nice. As we said, the vehicle repair environment is strong, offering significant opportunity in the second quarter results for CNI says it's so. And the recent launch of our new SOLUS Plus diagnostic platform was a big key to that success. Great new features. including a two-second boot up, the fastest in the industry, and an eight-inch colored touchscreen with 60% higher resolution, making it much easier for technicians to view in brighter lighting. It supports the latest in vehicle communication protocols, and it offers access to SureTrack. That's our library of vehicle-specific real fixes and repair tips and commonly replaced parts that wields our proprietary database of 2.5 billion repair records and 325 billion vehicle events. The franchisees have been positive, the customers have been excited, and the sales have been robust. New powertrains are driving the need for expanding product lines, including vehicle lifts, enabling independent shops and dealerships to accommodate the new models. And in meeting this opportunity with advantage, Part of RS&I's success has been our undercar equipment division. It's one of the drivers behind RS&I's strong growth. Take our Challenger lift operation in Louisville. The plant offers thousands of SKUs matched to separate lifting tasks, and the number has been growing to meet the specific challenges of EV lifting. And in the quarter, that facility hosted Chief Executive Magazine's Smart Manufacturing Summit, and the event underlined The power of product customization and driving expansion. And the extraordinary ability of RCI to render that low volume production quite profitable. It's that approach that drove RCI's gains. OI up 140 basis points in a quarter. And we expect that it will keep doing just that as we go forward throughout the group and all across Snap-on. RS&I, improving position with repair shop owners and managers. Growing OEM relationships, expanding the product offerings, wielding RCI everywhere, and it all combines to deliver substantial growth and strong profitability. The snap-on second quarter. Continued opportunities in vehicle repair and critical industries. Progress along our runways for coherent growth and advancements down our runways for improvement. Overall sales increasing organically, 5.6%. Margin strong in every segment. Opco OI margin, 23.3%. Up 160 basis points, overcoming unfavorable currency. And EPS, $4.89. Up versus all comparisons. It was another encouraging quarter. Now I'll turn the call over to Aldo. Aldo?