Snap-On Incorporated

Good day and welcome to the Snap-on Incorporated Q4 full year 2024 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 a touch tone phone. 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 of Investor Relations. Please go ahead.

Thank you, Alan, and good morning, everyone. We appreciate you joining us today as we review Snap-on's fourth quarter and full year 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 are forward-looking statements, and actual results may differ materially from those made in such statements. Additional information and the factors that could cause the 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. Good morning, everybody. I'll start with the highlights of our fourth quarter. I'll give you my perspective on the results, on the market environment, and on our progress. It was considerable. After that, and as usual, Aldo will move into a more detailed review of the financials. These are interesting times. Filled with uncertainty, but Snap-on is built to prevail even in turbulence. And you know, this ain't our first rodeo. It's our job to confront and to overcome and to proceed with confidence. Confidence in the resilience of our market. Confidence in the strength of our strategic and tactical advantages. And confidence in the insight and energy of our consistent and capable people. And all of that echoed in the numbers, so here they are. Overall sales in the quarter were 1,198.7 million, up 0.2%, both as reported and organically. Return to positive territory. Profitability was strong with gross margins of 49.7%, a gain of 140 basis points. And the OPCO OI margin was 22.1%, an increase of 50 basis points over 2023, an all-time high for the fourth quarter. Financial services earnings of $66.7 million in the quarter were lower by $1.2 million, leading to a consolidated margin, including both OPCO and financial services, of 25.5%, an improvement of 30 basis points. Our EPS for the quarter was $4.82, up 7 cents from the $4.75 recorded last year. The results show broad gains overcoming the uncertainties. another period of sequential progress, wrought by record performances by both the commercial and industrial CNI, by the commercial industrial CNI group, and by repair system information, or the RSNI group, combined with the tools group, successfully pivoting to match tech preferences and continuing to narrow the gap versus last year. It was an encouraging demonstration of advantage, of resilience, and of capability. But first, let's speak about the markets. We believe the vehicle repair market is robust, a continuing stream of new tools and data to confront the rising complexity of the modern vehicle. The repair shops today, dealerships or independents, must deal with an expanding array of challenges, multiple powertrains, EVs, plug-in hybrids, superhybrids, advanced combustion engines, sophisticated digital systems, and a wide range of autonomous operations, devices like adaptive cruise control, lane departure warnings, collision avoidance sensors, self-parking features. It goes on and on and on. And the list is getting longer. And technicians have to fix it all, addressing a dizzying array of procedures. It's daunting. But this is where Snap-on shines, scanning, diagnosing, guiding, and fixing, enabling the text, making the difficult tasks easier. And when combined with an aging car park that now averages 12.6 years and includes a multitude of technology generations, all needing to be fixed, driving even more complexity, and requiring even more tools and more data, it represents even more opportunity. We love it. Vehicle repair has several slices, so let's start by focusing on the shops, the dealerships and the independent shops. Adjusting to the complexity, often requiring things like new lifting equipment to handle the increased weight of EVs, tire changes that accommodate larger wheel sizes, software suites for managing the shops, for organizing parts data into streamlined catalogs, for scheduling repairs and customer interfaces, and for guiding the techs to the most sophisticated or complicated of repairs. This is where RS&I operates. It's a target-rich environment for our array of undercar and collision equipment, and it's a growing market for our software and data products. And Snap-on's well-positioned. With our innovative hardware, but especially with our proprietary comprehensive database, billions of insightful records, there are advantages that we believe make Snap-on the data king in vehicle repair. A position that I think you'll see was reinforced again by our quarter, by our rising gains in that arena. Now let's shift to the techs. The individuals working in the bays, under the hood, twirling the wrenches, hitting the touch screens, applying their skill and actually making the repairs. Again, this quarter I had the opportunity to meet with a number of franchisees and their customers. And they all expressed their enthusiasm for the strength of vehicle repair and external data Confirms that view. The car park, aging. Hospital spending on auto repairs higher. Hours of work increasing. And best of all, tech wages rising. I was recently in a garage and the service manager emphatically proclaimed to me that the work just keeps rolling in. We need more tech. Makes sense. Expanding complexity means more time spent on each repair and more trained professionals needed to meet the demand and keep the shops prospering. So it's clear the techs are in a good position, but that doesn't make them immune to the macro uncertainty around them. Ongoing wars, immigration disputes, lingering inflation. And although the election's in the rear mirror and the new team may be more focused on business expansion, There's a rapid fire of new initiatives, tariff bombs, on and off again actions, impending shakeups, and foreign ventures of many varieties. Up to now, it's hard not to be uncertain about what's up. So the franchisees, you know, they echo that uncertainty. And in the turbulence, the technicians continue to prefer quick payback items, ones that make work easier and cut labor times right away. Items like hand tools and mid-range diagnostics that can be paid off in shorter cycles. And they remain cool on big ticket, longer payback items like tool storage. So the tools group is continuing its pivot, focusing its engineering, its manufacturing, and its selling to match the shift in those customer preferences. So despite some challenges, automotive repair does remain strong. And we believe we're pivoting successfully to take greater advantage. Now let's talk about critical industries, where CNI takes Snap-on out of the garage, solving tasks of consequence that require precision, durability, reliability, and repeatability, all performed in some of the most demanding and grueling environments, from clean rooms to mine pits to assembly lines to building spacecrafts. And this market, I can tell you, is very promising. Our activity in critical industries continued rising across multiple sectors. Aviation, natural resources, and general industry were all up nicely. The arena also represents our most significant international presence, and those markets were mixed. In Europe, UK and Southern Europe, up. Germany, down. In Asia Pacific, China weaker, but gains in Japan and Southeast Asia, despite unfavorable currency. And gains in South Korea as well. I'll add that to that situation, despite the unfavorable currency. So CNI does have its challenges across the geographies and the segments, but we have made significant advantages, advancements, and do see substantial opportunities for tomorrow, leveraging our advantages in product, in our brand, in our people. And, you know, I think when you see the results, you realize it's working. So both the auto repair and critical industries market remain positive, and we're ready and well-positioned to advance on those very wide runways. At the same time, it's clear to us, and I hope it's clear to you, that we have more potential along our runways for improvement. And as we proceed, we're fortified by our step-on value creation processes, safety, quality, customer protection, innovation, rapid continuous improvement, and rapid continuous improvement, or RCI. They've never been more important, helping overcome the turbulence and and authoring our resilience. Especially important is customer connection and innovation. That's our unique advantage, standing next to working men and women, observing each task, matching the insights gained with technology mastered, developing new and innovative products that makes work easier. And it's a considerable strength, and our team is committed to continue to wield it with determination. Now let's talk about the operating groups. We'll start with C&I. Fourth quarter sales of $379.2 million was an all-time high, represented an increase of $15.3 million versus last year, and included $2.1 million in acquisition-related sales, a million in unfavorable foreign currency, and an organic rise of 3.9%, driven by gains with customers in critical industries. Strong sales of our customized kits led the way, meeting the rising demand for solutions that match specific tasks. Our specialty torque division was also a clear positive. Precision is becoming more essential every day, and our broad torque offering puts CNI right on target, and you can see it clearly in the numbers. OI for CNI was 63.5 million in the quarter, up 9.4 million or 17.4% from 2023. And the group gross margin, it was up 180 basis points, and the operating margin was 16.7%. That was also up 180 basis points. Wowza! CNI just keeps getting better. It's a great indication of our ability to roll out of the garage. The specialty torque business at CNI is really making strides. Torque is hot now, you know, and Snap-on is at the party with a growing array of new products, like our heavy-duty cordless torque multiplier. We call it the CTM800, delivering torque from 160 foot-pounds all the way up to 800 foot-pounds, just what's needed to meet the broad challenge across mining and oil and gas and rail and heavy-duty. It's a tool that was made possible. by our expansion in torque. Combining the efficiencies of a Norbar gear design with the compact operation of a Snap-on power tool, authoring the wide range, making the delivery of high torque levels easy and safe, enabling easy access to tight spots, The new unit is also equipped with a specially designed transducer control for applying just the precise force, a breakthrough. And it benefits from our advanced power tool cooling system that makes it much more durable. The CTM800 torque packs a lot into one compact tool. Improvement in versatility, safety, access, durability, and precision. It has it all. And where the tasks are critical, it's already a big hit. B&I, sales up, customized kits and precision torque, rising to new levels, all with record profitability, a high point profitability, with much more room to grow and improve. Now onto the tools group. Quarterly sales of $506.6 million, down, but representing progress on narrowing the gap versus 2023. The progress is evident, but uncertainty still lingers. And ONI for the tools group was $106.9 million, $4.1 million below 2023, with an operating margin of 21.1%. But despite the turbulence, we remain steadfast in supporting our VAN network, keeping it strong, spending on it. And that profitability was reasonably acknowledged by multiple publications. The Franchise Business Review recognized us in its latest rankings for franchise satisfaction, listing Snap-on as a top 50 franchise for the 18th consecutive year. We're named number one among all franchisees in Entrepreneur Magazine's 2024 list of top franchises for veterans. And Snap-on was ranked by the UK Elite Franchise Magazine as the number one franchise in that country. a distinction we've held for three consecutive years. Now, these types of rankings confirm the fundamental strengths of our franchisees individually and of our van business in general. And I can tell you that this would not have been achieved without a continuous stream of new products developed through our strong customer connections, insight and experience transferred transformed into innovation for a significant advantage in the rapidly changing world that's vehicle repair. One of the latest of those additions is our Milwaukee manufactured special hex driver, specifically designed for modern vehicles equipped with advanced driver assist systems like adaptive cruise control. In the base, standing side by side with the techs making the actual repairs, we saw the difficulty in aligning the radar sensors that enable that autonomous control. enable the adaptive cruise control. And the work was difficult. Texel removing the bumpers and the grills, dismantling the front end of the car just to reach the workplace, a very time-consuming and non-value-added exercise that also risked damage to nearby parts and components, all just to clear the pathway for the eventual repair. That observation drove the design of our new NDDM35, a 3.5 millimeter hex driver featuring an extra long 5 3⁄4 inch shaft and an enhanced reach that bypasses the obstructions with ease, allowing the necessary adjustments without dismantling anything. That newly launched tool also includes our Snap-on Instinct ergonomic handle design, providing superior control, making it easier to execute the work with the precision required for the very sensitive radar brackets. Our new M35 makes repairs faster, easier, and more profitable, and the techs have noticed it. Also in the quarter, we launched a new lineup of hand tools based on another customer connection. Witnessing the difficulty of applying leverage to the open end of a standard combination wrench, the box end of the tool was great for engaging a fastener in a crowded engine bay, just slide it right in there. But when extreme force was needed and a grip at the opposite far end was necessary, the task was extremely uncomfortable because the open end of the wrench digs into your hand. To solve the problem, our engineers designed our new XD-SGM, a series that combines a box-end, low-profile head with a soft-grip ratchet handle, providing the access technicians need, but enabling the maximum force to be applied comfortably with the ergonomically and contoured cushioned grip handle, breaking bolts free without wincing in pain or slipping off under load. The new XD-SGM... I talk about it here because it's a prime example of a fast payback item, a simple but powerful innovation that makes work safer, faster, and easier, and the techs have loved it, making the wrench one of our million-dollar hit products just since it launched a few months ago. Well, that's the tools group. Customer connection, producing innovative products, operations continuing to pivot, meeting the customer's precedence for fast payback items, and making progress and narrowing of the gap, all while keeping the network strong in the turbulence. Now, for ours and ours. Volume in the fourth quarter was $456.6 million, up organically 1.6%. Gains with both OEM dealerships and with independent shop owners for diagnostic platforms and repair information products, partially offset by lower activity and undercar equipment. RSI operating earnings in the quarter of 121.4 million represented an increase of 8.1 million or 7.1%. Gross margins were up 200 basis points. And the operating margin, the operating margin, the operating margin was a strong 26.6%. Up 150 basis points from last year, from the prior year, the highest ever. A record, and the record reflects a rise in software. But it's also evidence of strong and broad RCI with the great majority of RCI businesses, software and hardware, increasing margins by well over 100 basis points. Boom, shakalaka. We really love that kind of thing because it makes our profitability soar. Speaking of profitability, our Mitchell One Specialty Software Division is provides software to independent shops, continues its incandescent success, expanding its database, big data, reaching 3 billion repair records and 500 billion data points, a powerful and proprietary advantage that fuels our intelligent diagnostic platform, communicating directly with vehicles, translating the trouble codes, supplying complex inductive You know, wielding complex inductive models, identifying the problem, and guiding technicians through the repair process, all with unprecedented speed, productivity, and profitability. Now, we can't talk about that without talking about the Apollo Plus, the newest member of the intelligent diagnostic lineup, released in the late third quarter, and it continues to shine, surpassing previous generations and growing. Very importantly, expanding the number of software subscriptions. It's easy, fast, and smart. And for this day and age, at this time, it represents a tech's quickest payback access to the power of Snap-on Intelligent Diagnostics. We expected it to be a winner, and it is. Also in the quarter, Undercar Equipment Division released the new V4400 Commander Wheel Alignment Machines. It's a game changer for shops because of its unique flexibility. You know, a lot of shops don't have space and they don't do alignments at all. They send them out. Garages today need new equipment for matching the equipment of that time, for matching the rising vehicle complexity. For example, alignment has never been more important. But where do you fit the new units without a costly expansion? And in many cases, the buildings are already landlocked. And shop owners can't sacrifice an everyday repair bay for periodic but necessary profitable alignment procedures. So the answer is the V4400, a versatile, smart, and modular system. It's got an innovative design with a control center housed in a small toolbox. that wirelessly connects with the two twin independent mobile towers that hold a sophisticated force camera setup. Those sections can easily be stored out of the way while not in action and can be assembled anywhere in the shop quickly, delivering an alignment capability as needed and on command, regardless of the layout, whether your shop is short or wide or deep or narrow. It doesn't matter. And our proprietary software, based on our four-camera systems, enables a very quick setup. So, therefore, setting it up is pretty easy and quick. And no shop is perfect, so our system also automatically eliminates imperfections, like unlevel lifts or uneven floors, ensuring an accurate, straight-as-an-arrow alignment. The V4400 aligner is nimble, versatile, quick, and smart. and it makes profitable alignment possible in many more shops. It's a great product. We keep driving to expand RS&I's position with pair shop owners and managers, offering more new products, all developed by our value creation processes, and we're confident it's a winning formula. And the Q4 results say it's so. Well, that's the quarter. Sales up. 0.2% back to level. Opco operating margin at 22.1%, up 50 basis points, a new all-time high for the fourth quarter. The tools group down, but narrowing the gap. The pivot is working. RS&I operating margin, 26.6%, up 150 basis points, another profit high for an already high margin group. CNI operating margins, operating earnings, up 17.4%. Operating margins, 16.7%, up 180 basis points, also at a high. Resilience, balance, advantage, and results. It was an encouraging quarter.