Snap-On Incorporated

Good morning and welcome to the Snap-on Incorporated 2024 Third Quarter Results 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, 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, Gary, 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 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, 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 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. Morning, everyone. As usual, I'll start with the highlights of our third quarter. 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. My perspective? I am encouraged. And we believe our third quarter was encouraging. Another period of broad profitability growth and significant forward progress. product and process success, and clear traction on our tools group pivot to quick paybacks. Of course, the quarter again had its challenges, ongoing macro pressures creating obstacles of uncertainty, just like we've encountered before. But in the end, we adjusted, withstood the turbulence, took advantage of the opportunities, and drove another strong earnings performance. And all of that is written clearly across the results. Here they are. Third quarter sales of $1,147,000,000 were slightly down from the $1,159,000,000 recorded last year. On our organic basis, excluding $200,000 in unfavorable foreign currency translation and $7.2 million from acquisitions, our organic sales were lowered by 1.7%. But the OPCO operating income was up, and the OI margin was 22%, up 80 basis points, setting a new benchmark for our third quarters. For financial services, The OI grew to 71.7 million. That's up from the 69.4 million of 2023, a number that, when combined with our OPCO result, raised our consolidated OI margin to 26%, up 90 basis points from last year's 25.1. And EPS, it was $4.70, a nice gain from last year's $4.51. So those are the overall results. marked by operating capability, structural balance, and consistent resilience prevailing against significant headwinds. Now let's take a view of the market. During the third quarter, automotive repair remained robust. It continued to expand in complexity. New models entered the market, unveiling a rollout of new drivetrains, motor configurations, and high-tech electrical systems that control a neural network of sensors woven together that enable driver-assisted vehicle autonomy. all of it housed in modern chassis, fashioned out of space-age materials. And this cavalcade of sophisticated advancements combines it with an aging car park. You know what, now we have just 12.6 years to make fixing vehicles even more challenging. If you're from Snap-on, this is music to your ears, and the hits just keep on coming, creating opportunities for years to come. Let's talk about organizations. The OEMs, the dealerships, the independent garages, The segment that primarily focuses on infrastructure-type investments, things like renovating bays and upgrading repair equipment, meeting the challenges of new vehicle models and expanding shop capacities to match the rise in repair work driven by the ongoing increase in vehicle complexity. New lifts to support the extra weight of battery systems. Sophisticated undercar equipment to calibrate the driver assist systems that enable vehicle automation. and more powerful software suites for managing parts from service page and customer interfaces, enhanced vehicle communication devices to interact with the more complex designs, and more powerful repair information databases to read, to diagnose, and to fix the vehicles of the now and of the future. Our repair information group, or ours tonight, thrives in this world of complexity. serving repair shop owners and managers, delivering solutions that make the full repair path much easier, paving the way forward with innovative dealership management systems, proprietary one-of-a-kind intelligent diagnostics platforms, and a full array of capable shop equipment. Now, the opportunities for the garages are strong, but uncertain interest rates, rumors of tax changes, and worries over the elections are all weighing on investment decisions. creating a mixed landscape across the market. But the overall outlook still remains quite positive, and we believe that Snap-on and RS&I are poised to participate fully in the abundant opportunities. Now let's shift to the technician market. These are the folks who decipher the data, touch the screen, diagnose the problems, twirl the wrenches, and wield their extraordinary skills to execute the repair. It's where our manned network plies its trades. In that regard, the third quarter is always a great time for me because it's when we hold our annual Snap-on Franchisee Conference, or SFC. It's a gathering of men and women who drive the vans and call on hundreds of thousands of techs every week. It's an unmatched connection to the world of vehicle repair. Again, this year I had extended conversations with dozens and dozens of our franchisees, and each encounter Each encounter resonated with enthusiasm. We say, snap-on prevails in turbulence and proceeds with confidence, and the franchisees know it's true. Now, with that said, the microenvironment is still weighing on technician customers with considerable uncertainty driven by the election and its perceived impact, the fears of ongoing inflation by border pressure, and by the specter of prolonged wars. The shops are full, tech wages are up, the hours are expanding, and the demand for techs continues. They have cash, but they're still confidence poor. The bad news they get every day for breakfast is weighing on them. Right now, they're hesitant on the future, and as such, they're reluctant on big-ticket items with longer paybacks. So to accommodate, the tools group continues to pivot, focusing on shorter payback items to match the technicians' current preferences. And the third quarter results confirm that it's working. So we believe the automotive repair market is robust, current uncertainty notwithstanding. It's a great place to operate. Now let's turn to the critical industries, where the penalty for failure is high. This is where our commercial industrial group, or CNI, makes its living. It's challenging. rugged environments like oil and gas platforms, mining sites, and battlefields, but it also includes sensitive and sophisticated atmospheres needed to manufacture computer chips, to build airplanes, and to launch rockets. The customers in this segment are organizations big and small, and they're more influenced by the data than the text, interest rates, GDP, and industry demands. And as such, these segments are pretty positive. And we see it in the results, both in aviation, in defense, in general industries, and sectors that need our precision torque devices to execute and document accuracy, and the areas enabled by our custom kits, packages that meet the specific needs of the task, that improve quality, productivity, and safety. In other words, solutions that are right up our alley. This is also the segment where our largest international presence is, and consequently, It's the segment with the headwinds of geopolitical turbulence. And I regard Europe continues to vary region by region. The South remains positive, but several countries, particularly in the North, are dealing with difficulty, in some cases, technical recessions. And in Asia, it's also mixed. China's still recovering from the pandemic and the effects of the extended lockdowns. At the same time, Korea and Japan are resilient. So there are geographic challenges in the critical industries, but overall... This market is positive. The potential is considerable, and we believe we are well positioned to capitalize on these possibilities. Those are the markets. Those are the markets. In summary, the automotive repair is mixed in the now, but broad potential for the future, and the critical industries are still robust and rich with opportunities. Now let's talk about the operating groups. sales at $365.7 million compared to $366.4 million registered last year, sales excluding $7.2 million of acquisition-related volume, the organic sales were down by 2.1%. From an earnings perspective, however, CNI OI of $61 million, approved by $2.9 million, or 5% over last year. And the OI margin was 16.7%, up 80 basis points, equaling the record high established in the last quarter. The major contributor was our industrial division, continuing its upward trajectory and strong profitability, wielding the capacity provided by its new Kitting Center in Kenosha and meeting the rising demand for customized solutions along the way. In addition to our investments in the Kitting Center, our acquisition of mounts last year is rolling into its 12th month, and it's been a valuable contributor in meeting the needs of our customers for small precision torque. Torque continues to rise in significance with critical industry customers. And to meet this need, we packaged our existing medium and heavy-duty torque products with mounts' lighter offerings. giving us a wide spectrum of clamping forces, the wide spectrum of clamping forces that are essential to the critical industry, from oil and gas to aviation to defense. We're capitalizing on that opportunity, and the quarter showed it. Our specialty torque business rose significantly, both in volume and in profitability. We also continued adding to our portfolio of professional cordless tools, engineered products aligned with the work performed and the expectations of techs doing repairs. You know, for the serious people of work, new products can add great value, and our quarter was marked by that effect. For working on large equipment and over-the-road trucks, we unveiled our CT9175 3-quarter-inch 18-volt impact, not for the faint of heart. This unit delivers 1,550 foot-pounds of bolt breakaway torque. It's ideal for the most challenging jobs. The rugged lightweight housing shakes off harsh environments. The ergonomic design reduces stress and fatigue. Pretty important when you're wielding 1,550 foot pounds. And this 9175 Monster has a great feature set to boot, like LED spotlights, multiple power settings, and a variable speed trigger to just apply the right torque to the job. It's a great tool. Just what you'd expect from Snap-on. Powerful in application, easy to use, and very efficient. It's a tool that techs increasingly want in their arsenal when they're fighting the toughest jobs. The 9175, it's a great productivity enhancer, and the technicians have noticed. One last thought about the results. CNI kept investing in the quarter, maintaining and expanding our advantage in product, brands, and in people. Operating expenses were 140 basis points of sales higher than last year, but with the benefits of rapid continuous improvement, or RCI, and the value of new products, gross margins rose by 220 basis points, and the OI margin, despite the spending, was up 80 basis points. Higher spending and higher profits without additional scale. Boom, shakalaka. That's CNI, innovative products, custom solutions, precision instruments, all combined to reach customers in critical industries and extend the Snap-on brand out of the garage with momentum and profitability. Now for the tools group. Sales in the third quarter of $500.5 million included an organic decrease of 3.1%, with a U.S. decrease that was not much different. The OI margin in the period was 21.6%, down 40 basis points from last year due to the lower volume. With that said, gross margins remained strong, improving 100 basis points, driven by new product, RCI, and manufacturing efficiency. That was quite a feat, actually. And during the period, our team maintained its focus on product development, designing solutions that make work easier and provide customers with quick paybacks. And that pivot is taking hold, closing the deficit, both overall in the U.S., to less than half it was in the second quarter. And that trend is reinforcing their peers by sales being $18.5 million, higher than the second quarter. With summer vacation and SFC breaks, we haven't seen the tools group up sequentially in a third quarter for some time. We believe it's a sign of considerable momentum. The tools group's coming back. Beyond the numbers. We held our annual SFC in August, this year in Orlando, with attendance reaching 9,000, franchisees, guests, and Snap-on associates. This tool show spanned over three football fields, showcasing the latest in product innovation, more than 4,500 SKUs strong. The weekend also was packed with training sessions, purposely designed to grow each fan's business and expand the franchisee's already substantial product knowledge. Among those seminars was an in-depth review of our intelligent diagnostic portfolio, with instructors connected directly to the vehicles, communicating with the cars in real time, and clearly demonstrating our industry-leading advantage. It attracted a lot of attention. And we celebrated Saturday night by transporting the entire crew in what could be described as an armada of buses to SeaWorld for a night of roller coasters, aquatic shows, and a lot of fun. You know, it was another memorable event, but principally it serves as a testament to the unique bond that our franchisees hold with the Snap-on team. I believe anyone attending would affirm that the franchisees left reassured on the power of our operation, enthusiastic about their way forward with our enterprise, and convinced that Snap-on really does prevail in difficulty and proceed with confidence. The product booths at this year's event were pretty busy. We're busy, I'd say, especially near the cartway to heaven. It was an eye-catching and colorful wall of mobile tool carts. The model that stole the show was our brand-new KRSC... 2460 flip-top roll cart, a unit that offers snap-on tool storage in a quick payback form. Just what techs want in today's world. That's why it was so popular. The 2460 can hold a significant breadth of sockets, wrenches, and power tools in a variety of drawers that range from 2-inch to 3-inch to 5-inch configurations. And the ultra-deep top compartment is designed with five AC outlets and two USB ports to ensure that electrical devices are charged and at the ready for any use at any time. The launch was a significant success, and it provides even more testimony that the tools group traction in pivoting to shorter payback items is working. Also on the shop floor were products highlighting Snap-on's customer connection. We stand next to mechanics observing work, experiencing the complexity of vehicle repair, and we use those insights gained and design innovations that make work easier. One such custom solution available at the SFC was our new F8400 quarter, half-inch drive axle spindle nut socket. That's a mouthful, huh? It's manufactured right here in the USA at our Elkmont, Alabama plant. You know, since 2022, GM 3500 heavy-duty pickups have used a unique fastener that's buried deep inside the axle hub. You know, it's a very difficult and time-consuming process. operation to extract it with standard tooling. Our new specially designed socket reaches in, links precisely with the embedded fastener, and it makes the removal or installation safe, quick, and effortless. Each vehicle is unique, and a range of different repairs are needed as they age. This is the mother load for a toolmaker, and Snap-on Customer Connection positions our team to have just the device to match the task. It's a great advantage that was on display at the SFC, and it was on display in our third quarter results. The tools group, pivoting to quick paybacks, launching, differentiating new products, and summoning resilience against the headwinds. Now for RS&I. Sales of 422%. in the third quarter represented an organic decline of 1.9%. Lower sales on undercar equipment and reduced activity with OEM dealerships were partially offset by higher sales in diagnostics and information products to independent shops, for independent shops. In effect, declines in hardware balanced by gains in software. OI for arts and I was 173,000. 107.3 million, up 2.3% compared to last year despite the lower sales. And the O.A. margin of 25.4%, one of the group's highest for some time, was up 110 basis points from 2023. Bop-o. All of it was authored by big product and RCI-driven gains in gross margins, partially offset by spending and operating expenses. Gross margins up. operating expenses, balancing some of it. But it was all an investment was there to maintain and extend our advantages. And so we did. During the quarter, RS&I launched its latest addition to our intelligent diagnostic lineup, the Apollo Plus. This is a new, ergonomically designed handheld that offers a two-second boot-up, the fastest in the industry, and a large 10-inch touchscreen for improved visibility and navigation. Most importantly, the platform is powered by our proprietary intelligent diagnostic software with almost 3 billion data records and over 400 billion unique diagnostic events, all organized to help technicians diagnose and fix vehicles much faster. It was introduced in mid-August. Toward the end of the quarter, And it represents a tech's most economical way to wield the power of intelligent diagnostics. And it already has the customer's attention. Our on-the-street feedback says the new sophisticated platform with a quick payback is a real hit. And we believe it has a great future. We're encouraged by the strength of our handheld diagnostics and the other unique solutions we provide. And that confidence is reinforced by outside experts. Our SOLUS handheld was eligible for the 2024 awards, and it was cited by Motor Magazines as one of the 2024 top 20 tools. And it was also recognized by Power Tools and Equipment News, or P10, as one of the 2024 People's Choice Awards. That's a distinction based on the endorsements from real technicians, actual users from all across the nation. RS&I also received P10 recognitions for its collision repair package, its on-truck brake lathe, its heavy-duty diagnostic software, and its M1, Mitchell 1, shop management system. Collectively this year, across all our operations, Snap-on won 20 such awards. Product is a Snap-on advantage, and everybody knows it. We're confident in the strength of RS&I. and will keep driving to expand its position with repair shop owners and managers, making work easier, the bays more productive, and providing the garages with the means to match the ever-growing challenges of modern vehicle repair. Well, those are the third quarter results. Tools group, demonstrating improvement sequentially, pivoting effectively to meet customer preferences, CNI and RSNI, innovative new products and operating efficiencies, managing the headwinds, producing benchmark OI margins. And for the overall corporations, sales organically down 1.7%, but OPCO OI up 2.9%, OPCO OI margin of 22% up 80 basis points, and EPS $4.70 up 4.2%, rising over every comparison, all achieved against the wind.