Snap-On Incorporated

Good day and welcome to the Snap-on Incorporated 2025 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 presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And 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 Ms. Sarah Verbsky, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Chuck, 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 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'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.

Good morning, everybody. As usual, I'll start the call by covering the highlights from our second quarter, and I'll tell you right now. encouraged by the results resilience and balance against an environment that's been quite turbulent it's like it's like one long mad minute where the commercial ground keeps shifting but with the resilience of our markets the balance of our portfolio our advantages and products and brand and people we navigated the roller coaster and exits of the quarter stronger than when we entered so that's my view And as we proceed today, I'll fill you in with more color on our financial results, on our markets, the current environment, the progress we made, and I'll give you another take on what I think it all means. And now, though, we'll move to a more detailed review of the financials. Let's talk about the results. Our sales of $1,179,400,000, as reported, were flat to last year, including $8.6 million in favorable foreign currency translation, or... Organic sales were down 7 tenths of a percent, and they were mixed, but overall balanced. OPCO operating income for the quarter was $259.1 million, 7.6% below last year, which included $11.2 million from the non-recurring 2024 legal win. OI margin was 22.0%, lower by 180 basis points versus last year, which included 100 basis points from that legal matter. Notably, the gross margin was 50.5%, 10 basis points behind last year, reflecting continued resilience. Rapid continuous improvement balanced 50 basis points of unfavorable currency transactions. In effect, our OPCO OI gap primarily represented our ongoing investment in maintaining and strengthening our advantages of product and brand and people, believing, as we did in the pandemic, that it's best to emerge from the disruption at full strength, and we believe we're on course to do just that. For financial services, operating earnings of 68.2 million were down 2.8% from last year's 70.2 million, and combined with the OPCO results, the overall OI margin for the quarter was 25.5%, which compared to the 27.4% recorded last year, which included the legal benefit, this time with 90 basis points. EPS for the quarter was $4.72, 35 cents below last year. 16 cents from last year's legal payment was included in the 24 number, and this year's level included 9 cents impact from higher pension amortization costs. In other words, there were 25 cents of headwinds in the year-over-year comparison of EPS. So now let's speak about the market. So those are results, but now let's speak about the market. We believe... the automotive repair environment continues to be favorable. We did see mixed but improved results with the technician. The tools group was up low single digits in the U.S. network, while the international vans were flat. And from what we're hearing directly from the franchisees and the techs, from the grassroots, I believe vehicle repair emphatically remains a very favorable place to operate, and the industry metrics continue to confirm that view. Miles Drivenen. Average vehicle age, household spend on repairs, tech talent and tech wages, they're all up. Now, the macro environment is still turbulent. But the tech uncertainty has stabilized. And having said that, it remains significant. In all that, however, the tools group pivot does appear to be gaining traction and overcoming the angst. You can see it in our second quarter results. We like the way the numbers are moving. It's a positive sign. On the other side of auto repair, where repair systems and information, the RS&I group is displaying encouraging progress, expanding Snap-on's presence with repair shop owners and managers with particular strength in OEM dealerships. Things are looking okay. Upgrading facilities and equipment, you know, the OEM dealerships upgraded facilities and equipment to match the growing complexity of the new models. Now, there are pockets of hesitation on garage projects. With some independent shops thinking that delay in the turbulence is the right move. But in general, the shops know that deeper complexity is rolling, and the challenges are coming, and they must be ready. So in general, the segment remains strong, and you can see it all over the RS&I results. And for critical industries, now here, we saw uncertainty and hesitation early in the period. Liberation Day and the weeks that followed created a lot of windage in project planning and execution. Many businesses adopted a wait-and-see approach, waiting to let the trade program develop before pulling the trigger. And we did see postponements. As the quarter progressed, however, the initial shock gave way to what I would call accommodation. Project flow came back, and our order book has grown again. So the critical industries built momentum through the quarter, and they remain a very attractive place to operate, despite what we believe may have been a shock blip in the quarter. So overall, I describe our markets as continuing to offer opportunities that we believe display momentum. Challenges do exist. There are headwinds. But we're confident with our advantages in strengthening product lines that solve critical tasks. In our extraordinary brand that marks the serious, the critical, and the professional, in our very experienced team that's capable, committed, and battle-tested, we'll prevail against the difficulties and continue moving positively. So now let's move to the segment. The commercial and industrial group was the place most impacted by the shock early in the quarter. You know, it has the largest international presence, and its critical industry division has a substantial slice of project businesses. So the group's second quarter as reported volume decreased 6.5%, including $4.5 million in favorable foreign currency translation and an organic sales decline of 7.6%. CNI's operating income was $46.9 million, below 2024 levels by $15.3 million. Operating margin was 13.5%, down 320 basis points. But we did see upward motion as the quarter progressed. as the customers accommodated to the environment. So we're confident in and committed to extending in the critical industries, and we'll keep strengthening our position with CNI as we move forward, observing the tasks, using the insights to create products that make work easier. A great example is the next generation, our next generation of, the next generation, quarter-inch drive, 14.4 volts cordless ratchets, increased power and speed, 40 foot-pounds of torque for break-and-loose stubborn fasteners, And once freed, the tool's 400 RPFs kick in and the fasteners fly off. It's a real time saver. Our emerging North Carolina plant just released two models with CTRA25 offering a compact frame and a CTRA27 with an extended neck. Two tools to maximize efficiency when techs are working at hard-to-reach, out-of-the-way applications. And there are other great features of the tools. The brushless motors provide improved durability and longer run time. The variable speed trigger gives the tech more control. preventing, you know, in this situation, that over-tightening that can damage components. And a ring of fire creates 360 degrees of daylight, beaming from six LEDs generating 27 lumens, illuminating even a cavernous workplace. All of this is serving to make work much easier. The CTRA25 and 827 compact frame and long neck designs, techs love them. They know they need both of them. And based on a strong recession, it's now clear they're destined for our million-dollar hit product list. Now, the specialty torque business remains a red hot. It actually had a strong quarter. Part of the reason is that our lineup continues to expand, moving to meet the increasing and complex challenges of essential bolting and tensioning. And recently... We introduced the new CTM 550 unit. It joined our growing array of cordless torque multipliers. This tool is 66% lighter and 20% smaller than its big brother, the 1-inch CTM 800. And it effortlessly delivers torque all the way from 160 foot-pounds to 550 foot-pounds. It's ideal for tackling a range of tasks and a growing number of heavy-duty applications that require precise torque. The new tool enables much greater efficiency and comfort, and it replaces the commonly used impact gun and torque wrench combinations with a single tool. eliminating several, you know, cumbersome steps, providing a much safer and more ergonomic path to repair. It's a design that combines the efficiency of our extraordinary Norbar gear designs with the brushless motors of our power tools operation to make problem torque, to make precision torque at high outputs a breeze. And, you know, the unique Snap-on Advanced Cooling System, no pun intended, means extended use and increased durability. The CTM also has... multiple connection options, enabling the accuracy of the procedure to be documented and reviewed, ensuring that the job was done correctly and that the bus or semi-truck or bulldozer will operate as designed and safely and without failure. Our CTM 550, sophisticated, powerful, versatile, with the durability to tackle the harshest environments, servicing the needs of the critical, and as you might imagine, it's been well-received. Well, that's CNI absorbing the shock, moving forward, delivering solutions that make critical work easier, safer, and more productive. Now on to the tools group. Organic sales were up 1.6% with a low single-digit improvement in the U.S. and the international network flat to last year. The operating income was $116.7 million and that compares with $114.8 million in 2024, with an operating margin of 23.8%, flat to last year, but still one of the group's top margin levels ever achieved against the wind. As I said, technicians are still cash rich but confidence poor, and they're still hesitant to... to tie themselves to long-term obligations. Originations were down 4.9%. Sales of items like large storage boxes decreased in the quarter, but our connection with grassroots customers indicate that the uncertainty has stabilized. And over the period, the tools group pivot to faster payback items gained traction against the continuing wars, the rapid-fire announcements in the capital, and the threats of inflation. All through the quarter, we kept working. shift in production, refocusing marketing and promotional campaigns, and most important of all, introducing innovative new products that make an immediate impact, offerings that created a short-term payback. So for tech servicing vehicles of growing complexity, access is big. They need help reaching, squeezing, contorting the way into compact areas, trying to make repairs without dismantling things like parts, like components like fenders or grills or dashboards. Every day we're there in the garage observing these tasks, developing the solutions that make the work easier and more profitable. It's Snap-on's principal value-creating mechanism. During the quarter, the tools group launched a number of new products, each delivering unparalleled access and matching the customer's preference for faster paybacks. One is the SGA S-102, a two-piece radiator pick set. Each unit is seven inches from handle to the tip and offers a unique design. One is hook-shaped, ideal for pulling hoses away, and the other is straight, perfect for pushing the coolant lines free. The complete set is built in our Oakmont, Alabama facility, and, you know, it might seem trivial, but I assure you, modern vehicle engine bays are jam-packed. Hoses are no longer out in the open. And now, even basic repairs, more often than not, require removing fan shrouds or a range of other parts. But with these tools, a tech can extract the hose with ease. Conventional setups have similar geometries, but they require much more space to function. Our new picks get great access, and they do save a lot of time, and the techs have noticed. Another quick payback is our FKC72, a 3-inch H-drive, stubby length, hand ratchet, produced in our Elizabethan, Tennessee plant. It's our smallest 3-inch ratchet ever. I mean, it's tiny. It's about the length of your pinky. And, you know, there are a lot of narrow passages in a car. Well, this stuff, you can go wherever your fingers can reach. But even though it's small, it offers great strength, courtesy of Snap-Line's unique dual-pull system. And the 72-tooth design enables 5 degrees compressibility. a 5-degree swing arc, another access enabler, and a sealed head increases reliability, keeping the debris that can muck up the works from entering the gear mechanism. It's another snap-on must-have for serious tech, and it helped drive the pivot in the quarter. Perhaps best of all, just released, the redesigned 15-inch extra-long needle-nose plier set. Cold-forged at our Milwaukee plant. Now, that's a process that's difficult to master. But if you get it right, and Milwaukee's one of the few who can, it results in greater strength and delivers tighter tolerances without additional and more costly machining. The long plier neck reaches through restricted openings, creating access, and the cold forking process and the associated shaft strength enable... 85% more gripping power than other models. And that makes this tool a real time saver. I mean, if you drop a part in a recessed area, no need to disassemble the workpiece. These units will navigate through the confined space and they'll grab the lost component without letting go, making sure of a quick, making sure and quick retrieval. That's a great and significant advantage. Each of these new products make work easier and repairs faster. And all three have already achieved what we call our $1 million hit product status. And meeting the tech in the last quarter, we talked about this, about the bottom end of the bigger ticket items. After meeting the tech's preference for faster payback tool storage, our plant in Algona, Iowa, released a special offering of entry-level KRA 2422 Classic Series Roll Tap. The box is 55 inches wide, built from a one-piece welded body with reinforced corners and a 14-gauge steel bottom panel that supports a payload of 2,400 pounds. Over a ton of tools. It's ideal for organizing a tech investment with two drawers spanning 50 inches wide, one 5-inch deep for deep sockets, and a 3-inch drawer for storing long pry bars and extensions. The box is functional, rugged, and it's relatively economical. But what gets your attention in this array is the array of eye-popping two-tone paint schemes. One, a black case with extreme green doors, and black trim is my personal favorite. I can tell you, it is bright. Any tech would stand out with this beaming box in this space. The series just came out, and it's already had significant demand. So that's a tools group. Gaining on uncertainty. Back to growth. Exiting the quarter with momentum, and great American-made products were the big drivers. Now, RS&I. Sales in the second quarter were $468.6 million, with an organic gain of 2.3%, a high single-digit advancement in diagnostic information, and strong double-digit improvements in our OEM businesses. Operating earnings... for RS&I were 119.8 million, up 6.2 million, or 5.5%, and the operating margin of 25.6% was 60 basis points better than 2024. Now, just a little fun fact. The OI margin for RS&I has increased year over year for 12 of the last 13 quarters, six straight. That's the rise of software and the power of RCI. Boom, shakalaka. RS&I shines through the turbulence, leveraging our customer connection and launching innovative products. One example is Triton. Born in our San Jose facility, positioned in the middle of our intelligent diagnostics offering, Triton provides a wireless connection between the car and the handheld. Techs can move freely around the bay, under the car, inspecting, troubleshooting, and testing without restraint. And... This is important. It does that without losing the lightning speed that's the hallmark of our wired units. And Triton's two-channel lab scope now provides zoom capability, and this is crucial. When waveform glitches happen in a blink of an eye, as they often do, they're hard to catch on a standard unit. So Triton customers can now record, play back the test, magnify the pattern, zero in on the abnormality, and identify intermittent problems. That's Triton. It's flexibility, speed, zoom capability, eight-hour battery life for extended use, and four times the memory, handling more procedures and data than ever. The launch easily exceeded prior releases. As you might expect, this gangbusters platform is powerful in tech's hands, and it's a clear winner in the shops. Arseneye is on a roll. Great diagnostic units, powerful databases, Mitchell Pro-Demand repair information, the proprietary power of intelligent diagnostics, effective shop management systems, continuing upward progress, driven by great hardware, significant advantage of the software, and a dedication to RCI. We're going to keep driving to expand RCI's position with repair shop owners and managers, offering more new products developed by our value creation process, and we're confident it's a winning formula. Well, that's our second quarter. Marked by both challenge and advancement. CNI down, impacted by the shock of Liberation Day and a bout of wait and see, but some recovery is underway as accommodation develops. The tools group. The pivot to quicker paybacks, gaining traction. Sales up 1.6% organically. OI margin, 23.8%, flat to last year, but representing the third highest in the group's history against the wins. And RS&I, sales up 2.2%, OI margin 25.6%, up 60 basis points, software rising, and RCI delivering again. It all came together for overall sales of $1,179,400,000. Flat gross margins, 50.5%, down 10 basis points, Unfavorable currency transaction and the impact of volatile trade policy balanced by RCI. And OI margins of 22% down 80 basis points adjusting for last year's legal benefit, primarily reflecting the conviction to keep investing in product and brand and people. Results demonstrating operational strength, all achieved in difficult conditions. It was an encouraging quarter. Now I'll turn the call over to Aldo. Aldo.