Snap-On Incorporated

Good morning and welcome to the Snap-on Incorporated 2023 Third Quarter Conference Call. All participants will be in listen-only mode. Should you need assistance, 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. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Sarah Burski, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Rocco, and good morning, everyone. We appreciate you joining us today as we review Snap-on's third quarter results, which are detailed 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 a 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, our 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 our 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 counterparts. 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. As usual, I'll start by covering the highlights of the quarter, and then I'll provide an update on the general environment and on the trends we see. Aldo will then give you a detailed review of the financials. Speaking about the last three months, I can say without question or qualification, we are once again encouraged, fortified by the progress along our runways for growth and improvement. We encountered headwinds, and we engaged challenges in a number of geographies. Still, we capitalized on our opportunities, wielding our advantage, and overcame the potential for disruption. The franchising network remained resilient, generating positive gains, There were broad and sharp rises in critical industries, extending what is now a consistent upward trajectory enabled by the confluence of a robust market, a growing product line, and an effective expansion capacity in that business. And that progress was pretty evident in our numbers. They speak for themselves. Reported sales were $1,159,000,000, up 5.2% from last year, a 4.7% organic rise, and $4.4 million in favorable foreign currency effects with growth in every segment. This represents our 13th quarter, well above pre-pandemic levels. OPCO operating income OI before financial services grew up 9.7%, reaching $245.2 million. OPCO operating margin rose 90 basis points. to 21.2% with higher sales volumes, the benefits of great new products, and the ongoing efficiencies of rapid continuous improvement, or RCI, more than offsetting a 50 basis points of bad news from unfavorable foreign currency effects. 21.2% and 90 basis points. Nice. The operating income for our financial services operation grew $69.4 million from the $66.4 million last year, a 4.5% improvement. And that result combined with the opco performance to raise our consolidated operating margins to 25.1%, a 70 basis point rise from 2022. And EPS, EPS was $4.51, reflecting a 37 or 8.9% increase above last year. Strong. Well, those are the numbers, once again strong, signifying our corporation's continuing advance. You see, we again believe that Snap-on is stronger now than at any time in our history. And the results, they say it's so. Now let's review the markets. In vehicle repair, the key metrics continue to be favorable. The average age of vehicles on the road continuing to rise. And in turn, the number of techs in the garages In the garage, it's growing high to mid-single digits, maintaining a consistently positive trend period over period, period over period. That's clearly upward. And technician wages are robust and continuing to climb. So the market is favorable, and the metrics back it up. But more than the quantitative evidence, you get the feeling of optimism and potential when you speak with technicians. Recently, I had the chance to visit with our customers, Franchising Mechanics in New York, and I'm here to tell you the enthusiasm they displayed in the industry and the confidence they expressed in their future was something else. It was contagious. Even in this time of turbulence, the message was clear. They see opportunity, and they're looking for more, more innovative solutions that will increase productivity and take advantage of that potential. And their confidence on the way forward is palpable. And we believe... They see snap on products, brands, and people as the best way to ensure that positive future. Vehicle repair is a strong market. We see this confirmed throughout the franchisees network in North America and in our international operations. It's one of the reasons we've expanded capacity. We believe our franchisees and our technicians have never been more prosperous. It all makes sense. The car park increasingly requires more repairs of greater complexity, and our customers, the techs, are major participants in that reality. And they need new tools to follow the opportunity. Snap-on is positioned to take full advantage of that possibility. Another important sector for us is the vehicle repair shop owners and managers. These are people who stand right next to the text, but they buy at different cadences. This is where Repair Systems and Information Group, or RS&I, operates every day with advantage. The vehicle park is changing. The shops have to keep adjusting model by model. New challenges. New challenges that they have to navigate. Electronics to support more features. Automotive systems that enhance driver safety. New body materials to increase durability and reduce weight. Networks of sensors to anticipate traffic and road conditions. New powertrains. Enhanced internal combustion engines. EVs and plug-in hybrids to conserve energy, and on and on and on. Each of these trends creates opportunity for garages, and they know it. But they also know it requires new and more sophisticated equipment. That opportunity, we see, shines right through political uncertainty or economic turbulence. We see them and their needs every day when we call on the garages. New software to guide repairs or manage the shop. Essential programs to accommodate the idiosyncrasies of new vehicles. Calibration protocols and advanced systems for sensor arrays. Advanced undercar equipment to accommodate the precision that supports efficient driving. And we see the shop owners and managers eager to take advantage of those trends. Snap-on has the hardware and software to enable that pursuit, bringing prosperity to the shops. And the results in RS&I are confirming the strength of that market and our strong position in it. Finally, let's discuss the critical industries. This is where we extend outside the garage, solving tasks that really matter. This is where commercial industrial or C&I lives and where much of our international activity happens. This is the arena of critical applications, space declarations, wind tower maintenance, subsea mining, smelting that exceeds 2,300 degrees Fahrenheit, the mobilization of first responders, all critical environments where the penalty for failure was high and the need for repeatability and reliability often requires custom tools engineered for a single purpose. In other words, tasks that require a snap-on solution. Just like in previous quarters, the market is booming. Momentum in multiple sectors, like the military, general industry, aerospace, heavy duty, and aviation. Of course, We just see variations from geography to geography. This is an international business. Areas impacted by external factors that create disruptions. Europe, with the uncertainty associated with the Ukraine war. And Asia, where the remnants of the pandemic are still pretty apparent. There's turbulence in China. And the weakening of currencies these days are impacting particular countries. But overall, the critical industries are robust, offering us significant potential for taking advantage and making significant gains. And in the quarter, we did just that. So our markets are resilient and are on a positive trajectory. And we believe that our runways for growth will present clear and abundant opportunities as we move forward, enhancing the franchise network, expanding where we pair shop owners and managers, extending to those critical industries, and building in emerging markets, rising by leverage, and going forward by leveraging our broadening product line, wielding our strengthening brand, and deploying the increasing understanding of the work that is the hallmark of the Snap-on team. That's the markets. Now let's turn to the segments. In the C&I group, third quarter sales reached $366.4 million, up $9.6 million, which includes $1.6 million in unfavorable currency effects and an organic sales growth of 3.2% above last year. From an earnings perspective, CNI's operating income was $58.1 million, up 11.1%, double digits, including $2.9 million of unfavorable foreign currency. And the operating margin was 15.9%, an increase of 120 basis points, overcoming 70 basis points of negative currency. We did have some variation across the group. across the group business units with substantial gains in industrial vision, offsetting declines in the Asia operations. But as usual, The CNI rise showed the power of our SAP on value creation, particularly in customer connection innovation, offering great new products, solutions that make critical tasks easier, like our new CT9038 power tool. We talked about this tool last quarter, saying that the franchisees were waiting for its launch. Well, it was worth the wait. It's a special tool. a 3-inch drive, 18-volt impact unit that offers compact housing measuring only 5 inches long. That's why we call it the Stubby. The unique silhouette is made possible by engineering the overall housing mechanism to stabilize the electric motor rather than the standard approach of adding a whole independent structure to support the drive components. It's an innovation that reduces overall body dimensions, allowing users to navigate really tight spaces. And believe me, That's an attractive advantage for engine and suspension work on newer vehicles. And it does that while still delivering 520 foot-pounds of bolt breakaway torque, power capable of busting loose even the most stubborn of seized fasteners. It's what you would expect from Snap-on. It's an ergonomically balanced, greatly reducing user fatigue. It's equipped with a super bright LED light to clearly illuminate the workplace. It also offers three torque settings in forward and reverse and includes a variable speed trigger, enabling text to apply just that necessary force, avoiding the fastener damage that, you know, often can happen in tight spaces. The September launch was big, way oversubscribed. Clear testimony to the appreciation of the Stubby's compact power, and it's still showing great momentum. The orders remain very strong.