Snap-On Incorporated

Good day and welcome to the Snap-on Incorporated 2024 Second Quarter Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Sarah Verbsky Vice President, Investor Relations. Please go ahead.

Thank you, Cole, and good morning, everyone. We appreciate you joining us today as we review Snap-on's second 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 Paoliari, 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 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 Investor 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 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 counterbar. 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 with the highlights of our second quarter, and I'll provide my perspectives on the results on our markets and on our path ahead. After that, Aldo will give you a detailed review of the financials. Our second quarter, of course, there were challenges. Uncertainty remained prominent among our technician customers, but our repair systems and information, or RS&I group, with repair shop owners and managers, and our commercial and industrial, or CNI group, enabling critical tasks outside the vehicle shop, they both progressed very nicely, taking full advantage of their opportunities and balancing the tech turbulence in tools. So our results in the second quarter are clear and unmistakable demonstration that Snap-on's principle value creating mechanism, observing work right in the workplace, using the insights learned to create products that make critical tasks easier and more efficient, that works across many industries and in many environments. It highlights that our enterprise is not dependent on a particular customer base. We believe It shows that as we move forward, reaching higher, we do so with greater resilience and with expanding possibilities and with an enterprise that's broader and stronger than ever before. Like most quarters, we did have headwinds. We had opportunities with disparities from group to group and geography to geography. North America remained mixed with significant gains in critical industries. Internationally, our consolidated results were varied but reflected Overall positives. Europe showed some signs of recovery among the scattered economic disruptions from region to region, and the Asia-Pacific markets registered progress, overcoming the delayed recovery in China. So now let's talk about the results. Second quarter sales of $1,179,400,000 were slightly down from the $1,191,300,000 of last year. On an organic basis, excluding $5.7 million in unfavorable foreign currency, and 7.3 million from acquisitions, our sales were lower by 1.1%. The operating income or OI margin for the full quarter was 23.8%, up 50 basis points. Now with that said, that level included the benefit of a final payment from our recent legal win. Excluding that addition, the OI margin was 22.8% down from 2023. but still among our very best, surpassed only by the record-setting second quarter of last year. For financial services, the OI grew to $70.2 million from the $66.9 million recorded in 2023, a number that, when combined with our OPCO results, raised the consolidated OI margin to 27.4%, up 60 basis points over the 26.8 of 2023. And EPS? It was $5.07, which included a benefit from the legal payment of 16 cents. Again, excluding that legal item, EPS was $4.91, still above last year, and representing a new snap on level for any quarter. Strength and progress against the wind. So those are the overall numbers. Now for a view of the markets. The second quarter once again highlighted that the opportunities in automotive repair, they continue to be favorable, marked by the ever-expanding complexity of design, new and diverse powertrains, more interlocking systems to advance driving autonomy, arrays of drive-by-wire sensors, new body materials, and an aging car park now averaging 12.6 years. The opportunity in vehicle repair exists industry-wide, and they appear to be unwavering. The vehicle OEMs, the dealerships, and the independent shops recognizes the positive trend, and they continue to invest in tools and equipment that will expand their capabilities to support the influx of new models and the ever-rising complexity of repair. And in the quarter, our RSI group expanded our reach into OEM dealership programs and strengthened our position in independent garages with our repair management software packages and with great new hardware products. So the possibility with repair shop owners and managers are strong, the outlook looking forward is quite positive, and Snap-on is well positioned to seize the opportunities. Now let's shift to the technicians. These are the folks who turn the wrenches, make the diagnoses, and execute the repairs. Again, this quarter, I had multiple occasions to meet with the franchisees, the garage owners, and the techs, and it reconfirmed that the shops and the technicians are prospering. The microdata says it's true. Repair hours are up. Tech wages are healthy. The demand for techs is strong, and the number of techs is increasing. It makes sense. New systems, the rising complexity, the aging car park makes what the techs do more difficult and more valuable. So the economic trajectory of vehicle repair is quite positive. It's an attractive place to be. But it's also clear that while the techs are busy and have cash, their confidence in the way forward is still poor. Every day there's bad news. Two wars with no end in sight. The border unsettled. The shipping lanes disrupted. Tit for tat with China. Lingering inflation and the election. The election seems to get more unpredictable with every morning news cycle. The hits just keep on coming for bad news for breakfast. It's almost like the grassroots technicians have a fear of what may happen. And paraphrasing the movie Dune, fear is the outlook killer. The franchisees also confirmed to us that with the general uncertainty, the techs are leaning toward purchases that provide quick paybacks while making the work easier right away. They're kind of cool on longer-term, bigger-ticket items. And knowing that, the tools group continues to focus on near-term product development, manufacturing changes, and selling efforts that match those preferences. So now let's talk about the critical industries, where Snap-on rolls out of the garage, solving tasks of significant consequence. This is where the CNI group operates, and it's our most significant international presence, the area where we're most subject to global headwinds. But the news was still reasonably encouraging. For the sectors, the critical industries kept rising in the period. The military, aviation, and education segments led the way. For geographies, Europe was mixed, several countries in recession, and the ongoing impacts of the Ukraine war. Asia-Pacific also remained mixed. China was weak, driven by its delayed financial recovery, and Southeast Asia, again, had its difficulties. But both regions, for CNI and for the corporation in total, were positive in the quarter. despite the variations. Now I'd like to speak more about the critical industries. The demand for customized solutions to drive reliability and productivity keeps rising, and CNI continues to show significant and broad advances in that arena, and we believe there's more coming. So that's the markets. Vehicle techs, cash rich but confidence poor. Preferring quick payback products. Repair shop owners and managers moving upward to match the car park. And the critical industries booming outside the garage. In C&I, so let's cover the groups now. In C&I, sales were 372 million. representing an organic sales gain of 1.2%, excluding $7.3 million of acquisition-related sales and $3.8 million in unfavorable foreign currency. Higher activity with customers based in those critical industries and a gain in Asia that defies the turbulence more than offset declines in our power tool and European-based hand tool operations. From an earnings perspective... CNI OI of 62.2 million improved 4.1 million, or 7.1% above last year. And the OI margin? It was 16.7%. Up 70 basis points, representing a new record for that group. Gangbusters. Gangbusters for those guys. And the big driver was our international division. continuing its upward trajectory with a double-digit rise and very strong profitability. You know, about 18 months ago, we expanded our capability to make work easier outside the garage by adding another building for industrial custom kitting, serving a range of critical segments. And it's paid off. It's paid off big. Since then, that business has been on a tear. Bopple. Cranking out more and more bespoke product bundles, sophisticated solutions like our automated tool control units that have become the standard for a range of industries. Custom kit offerings aimed at specific applications and at making the critical work easier and more reliable. It's driven some nice gains all around the world. And we believe we see many more possibilities in that arena. So we continue to invest in critical industries, expanding capabilities like in our custom tool machine shop in Kenosha, producing low-volume, high-reward items for the most essential tasks. For example, visiting an oil drilling site, we saw that adding a section of pipe on the rigs requires technicians to move around the circumference, constantly repositioning the turning tool. It's a slow and clumsy and imprecise effort. Our custom team tackled the problem, designing both a new bespoke wrench, both designing a new bespoke wrench specifically for the task and enabled by our new Kenosha machine shop, configured a special machining process to produce it. And it all worked. The special oil rig pipe wrench greatly reduced the rework associated with misalignment and substantially decreased the task time, getting the job done more efficiently and more reliably. And along the way, expanding the Snap-on reputation in the critical oil and gas sector. Also in the quarter, we introduced a new line of 14.4 volts micropower drills aimed specifically at diverse applications in aviation and general manufacturing. Tests in those sectors vary from inserting wood screws to drilling accurate holes in airframes to high volumes on production lines. To span the variety, each tool in the new line and there's a range of them, is set to a different RPM range, enabling the tech to fit the speed to the job, substantially reducing rework or irreversible damage. The drill, it's also designed for two operating stages. The first, slower. allowing the tools to bite into the materials, securing a position for the serious drilling. And the second stage, performing that serious drilling at the predetermined RPM, making a quick and clear cut. Our new industrial micro drills, two-stage design, matched to the task, bringing new levels of accuracy, consistency, and reliability to the work. It's a superior tool for the varied tasks of those sectors, and the customers have noticed. CNI in the quarter. launching customized solutions, maintaining its strong momentum in the critical industry, extending out of the garage, and reaching new heights in profitability. Now for the tools group. Sales in the second quarter of $482 million included an organic decrease of 7.7%. The group's OI margin of the period was 23.8%, down 250 basis points due to the lower volumes. But gross margins... held down 20 basis points, almost flat. The benefits of new product, manufacturing efficiencies, and rapid continuous improvement, or RCI, is written all over those numbers. And during the quarter, we continue to focus our product development, redirect our plans, and guide our selling programs toward innovative, quick payback solutions that drive productivity. A cornerstone for the pivot is rooted in our customer connection, standing side-by-side with the technicians, observing the work, witnessing the difficulties of modern and complex repair, and using the insights gained to create a tool that makes especially difficult tasks much easier. In the second quarter, those insights led the tool group to design a new torque adapter for use on Ford E-Series commercial vans. The standard procedure for basic brake repair on that model requires the rear caliber bolts to be torqued at over 160 foot-pounds. Not so easy. And the task is made doubly difficult because the bolt is obstructed, making it impossible to access the area with standard tooling without removing auxiliary parts. a big time eater. So we've specifically configured a 21-millimeter, 12.6-inch flat adapter with a half-inch hex drive to make the work easier and specification. The device nestles perfectly between the particular obstructions on the model, engaging the fastener, turning a time-consuming task into one of just seconds, and freeing the tech up to tackle the next repair order. It's made in our Elizabethan, Tennessee plant, and it brings great value to the techs working on the E-Series, and you know there's a lot of them. Another example is the struggle we observed when removing a canister cap that houses the fuel filter on Ford Super Duty trucks. Access to the 36 millimeter hex structure on the top of the cap is impeded by other components. Standard pliers or sockets are out. Seeing the problem, our team created a special low-profile socket, tapered gradually, just to slide into position under the blocking hoses, and then, using a standard ratchet and extension, easily removing the cap, complete the repair, and complete the repair. A complicated job made much easier. Produced in our Milwaukee plant, it's another quick-buy-back item that makes a substantial difference, and the techs love it. A final example comes from observing technicians walking to and from the workpiece, back and forth from their parts, to achieve standard pliers for basic tasks. A compact design seemed to be the solution, so we expanded our triple joint plier line to develop a small 4.5-inch plier set with three models, a combination of long nose and a flank drive slip joint version for versatility. And they were all pocket-sized to be always at the ready. Pull it out of your pocket, and you're ready to go. And all designed to allow immediate access to remove low-torque fasteners in places to pull fuses, to adjust hoses, or provide some additional gripping leverage for basic repairs or just inspections. The new units save steps and make work easier in tight spaces, and they're offered in two handle models, a cushioned grip addition to reduce hand fatigue, And for the first time, our bare metal diamond plate texture that provides a superior grip even with sweaty or oily hands. Cold forge in the U.S., the new pliers are a game changer. And the rollout was a huge hit, making our million-dollar hit product status just during the initial launch. Well, that's the tools group. Pivoting to technicians' preferences. Producing innovative, quick paybacks. Making work easier. New tools matched to the task and guided by customer connection. Bringing quick value to the text and you can see the value play out in the gross margins. Bringing quick value to the text and you can see that play out in the gross margins. Almost flattened the downturn. You can also see, I think, our unwavering support for the franchisees and the operating expense. It was about flat, even in the turbulence, even in the downturn, even with the lower sales. We'll maintain our training, our programs, and our efforts in the field, even in this turbulence. You see, we believe the uncertainty will recede, and we want the network to be strong and fully loaded when that occurs. Now for RS&I. Group sales of 458.8 million in the quarter representing a 4.3 million or 1% organic increase that was partially offset by 1.5 million of unfavorable foreign currency translations. Those gains reflected higher activity with OEM dealerships attenuated by lower sales in the diagnostics division. The OI margin, it was an even 25%, rising 60 basis points and among the group's best. The numbers reflect the strength of RS&I products and programs for repair shop owners and managers as we help them match the evolving challenges of the modern car park. Speaking of the product evolutions and our progress with OEM programs, the traditional method of lifting vehicles is becoming more complex with the onset of new hybrid and EV platforms. The batteries require changes in lift points to adjust for the different center of gravity on EVs. And to complicate the matter... Each model design presents a different problem. In response, we designed steel floor plates matched to particular models that serve as guides in positioning the vehicle in the exact location that puts the lift arms in the proper place for that vehicle, enabling a safe procedure and an easy lift. The OEMs and the shops, they enthusiastically received the innovation as another in a long line of the modifications needed to match the evolving car parts. They need to facilitate to match that change, and we're helping them do it. Another successful RS&I release was the ProCut X1HD on-vehicle brake lathe, specifically for heavy-duty platforms like buses, fire engines, and semi-trucks. The lathe cuts away imperfections and abrasions on a brake's rotor surface that always arise during regular operations. The result is a fully restored component that supports optimized brake performance without the need of a replacement. The previous choice for heavy-duty brake repair work was to disassemble the brake assembly and either order new parts or smooth the rotor on a standalone bench lathe. In either case, a laborious process. The new ProCut design avoids both the time and the effort to lift the heavy components off the vehicle, and it eliminates the cost of new parts. We believe it's another game changer. Garage owners have seen the value, and we project that the pro-cut design will become the industry standard. Also on RS&I, car aligner serves the vehicle collision market with a number of heavy-duty items. A good example during the quarter is the release of our low profile frame bench. Innovatively designed for holding the work piece at an optimal height, making it easier for technicians to interact with the damaged vehicle. The bench is rugged for heavy collision work and integrates with our existing pulley solutions that stretch and contort the chassis back into position. The ability to raise and lower the bench in multiple positions while still engaging with the vehicle reduces fatigue with the user and makes the process much easier. The collision space. is quite robust, driven by the changing vehicles. And as such, Carolina has been on a continuing positive trajectory. And the new bench makes our advantage in that market even stronger. RS&I, expanding its reach with shop owners and managers, confronting the increased complexity, focusing on developing innovations that simplify the difficult and help shops prosper along the way. Well, those prosper along the way. Well, those, the RS&I quarter was quite strong. Well, those are the second quarter results. Tools group, down, impacted by uncertainty, pivoting to customer preference, launching new products, holding the gross margins, and maintaining the network. CNI and RS&I, providing the multi-sector power of customer connection and new product, recording strong profitability, balancing the headwinds of technician uncertainty. And the overall corporation, launching a broad range of products from tapered sockets to industrial power tools to collision benches. Sales about flat. OI margin, 23.8%. 22.8% excluding the legal benefits, one of our highest. And EPS, $5.07. 491 excluding the legal item, setting a new high. Performance achieved against the wind. It was an encouraging quarter. Now I'll turn the call over to Aldo. Aldo.