Snap-on Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Snap on Inc. 2023 Second Quarter Results Conference Call. After today's presentation, there will be an opportunity to ask questions. Please also note that this event is being recorded today. I I would now like to turn the conference over to Sarah Verbsky, Vice President of Investor Relations.

Operator

Please go ahead, ma'am.

Speaker 1

Thank you, Joe, and good morning, everyone. We appreciate you joining us today as we review Snap on's 2nd 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.

Speaker 1

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 snapon.com under the Investors section. These slides will be archived on our website along with the transcript of today's call. Any statements made during this call relative to management's expectations, estimates or beliefs Or that otherwise discussed, 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.

Speaker 1

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 Stinchuk. Nick?

Speaker 2

Thanks, Sarah. Good morning, everybody. Today, I'll start the call by, As usual, by covering the highlights of the Q2, and I'll give you my perspective on the environment and the trends we're seeing. Along the way, we'll cover the markets. They're encouraging actually.

Speaker 2

And I'll take you through the segments and the advancements we've made. Then Aldo will provide a detailed review of the financials. We see the Q2 as a period of significance. Sometimes you see a performance where you break through to new heights and this is one of those times. I'm going to tell you why we believe that to be true.

Speaker 2

In some ways though, it was similar this period was similar to many periods we've seen over time. We continue to have significant headwinds and there's always turbulence, variation from market to market, but we believe it's our job confront and overcome these obstacles and we did just that in the Q2 by wielding the strength of our advantages, Executing our strategic runways for growth, making the most of our runways for improvement and by relying on the skills and dedication of our people. And once again, it As reported, 2nd quarter sales of $1,191,300,000 were up 4.8 percent from 20 participants are in the range of $2,000,000 of unfavorable foreign currency translation. Organic activity was up 5 point percent, the 12th straight quarter of year over year expansion beyond pre pandemic levels, that's a trend that demonstrates what we believe is a solid consistency OpCo operating income for the quarter, including the effects of unfavorable foreign currency was 277 It was 23.3%, up 160 basis points from last year, BOFFO. When I said new levels, For Financial Services, the OI of $66,900,000 represented an increase of 1,600,000 And it all combined to author an overall consolidated operating margin of 26.8%, up 130 basis points from last year.

Speaker 2

And the 2nd quarter EPS, it was $4.89 up $0.62 or 14.5 percent from last year's $4.27 I think I'll say it again, dollars 4.89 up 14.5%, the productivity and profitability of Snap on operations shining through as the supply chain viscosity diminished. We believe Snap on is Stronger now than ever before and the quarter's profitability makes that crystal clear. Well, those are the overall numbers. Now let's speak to the market, Auto repair, again this quarter it's favorable. Miles driven are up.

Speaker 2

Spending on vehicle maintenance up, Technician count up, technician wage is up, consistently positive Year over year trajectory across all essential categories. Drivers and vehicle repair are fairly understood. Car parks growing, getting older every year and every year the tasks involved in maintaining repair of the vehicle park get increasingly complex, Requiring more hours, greater skill, increased wages and more sophisticated tools, hands or power or data driven tools. There's a significant need for more technicians and greater capabilities. The competition for that talent is growing and it's being reflected in the rising wages At an everyday level, I think you can see this demand when you're trying to schedule a maintenance appointment or just by Visually seeing the abundance of cars and trucks in the repair base were parked outside, crowded around the shops waiting for their turn to get in.

Speaker 2

And in fact, just this month, I was with a group of franchisees and customers in Bristol, Tennessee at the NHRA, Thunder Nationals, the drag races, And they energetically express their enthusiasm during our conversations. You can feel their optimism resonating with an appreciation for our products, our solutions And how we make work easier. So we expect that the trajectory of vehicle repair is solid And we'll continue through the quarters and on into the years ahead. We expect that vehicle repair is we believe that vehicle repair is a great place to operate participants are well positioned to take advantage of that. Now on to the critical industries, where our commercial industry goober, C and I, takes our business out of the garage and solves tasks of consequence participants with a penalty for failure is high in a wide range of sectors where custom tools are often required to get the job done.

Speaker 2

This is also the segment where we have a most significant international presence and the attendant variations from country to country with many versions Economic and social headwinds. In the U. S, the landscape actually is pretty positive. We see progress across a number of sectors. Aerospace is strong, Increased demand in commercial aviation and momentum within space exploration.

Speaker 2

The military business was another strong quarter of growth, Now better matching the actual need. Natural Resources continued to advance in oil and gas and wind after the uncertainty of last fall. Energy repair I think has raised the attention on rail and heavy duty fleets. Society now more than ever sees the essential need to keep commercial supply moving And it's accruing positively for us. Now there are tepid spots across the globe, places traumatized by the Ukraine war, we see that.

Speaker 2

Weaknesses in some of the Asia Pacific operations, but one of the clear and large positives participants in the period is the general rise of critical industries and our industrial division is well positioned It's taking advantage with its capability to customize products to a large number of applications and it's working. Our critical industry teams participants are on an upward trajectory, utilizing their capability and the enhanced capacity to capture their enhanced capacity To capture significant gains. Overall, the story of Snap on outside the garage looks quite promising. And as we move forward, we'll continue to capitalize on an abundant potential and as part of that, we'll keep engaging Snap on value creation, customer connection and innovation, participants are developing profitable new products and solutions delivered by the insights and knowledge gained standing next to the customers right in the workplace It will drive RCI all over the enterprise, including in the Tools Group. We'll keep working to increase our franchisee selling capacity with efficient processes, With advanced training programs, with social media and digital content and expanded manufacturing capacity to meet the rising Demand, all combining to take full advantage of the opportunities and continue the positive trends we've seen into the future.

Speaker 2

Well, that's a market overview. Now let's move to the segments. For the C and I Group, As reported sales rose 1.4 percent, including $5,600,000 of unfavorable foreign currency. Organic volume was up by 3%. A quite strong performance in the Industrial division was attenuated By shortfalls in some of our more challenged areas, power tools had smaller volumes as customers anticipated the arrival of new products in the 3rd quarter.

Speaker 2

Our European based hand tool business, S and A Europe and our Asia Pacific operations demonstrated growth in several markets, but softness in Eastern Europe and currency pressure in Japan, the yen was weak, was some offset. But our industrial vision isn't just growing in volume. The margins are strong and rising. Customized products is a wonderful thing. So C and I OI was 58,100,000 A 12.4% increase over last year and the operating margin was 16%, one of the highest ever for the group, Representing a gain of 160 basis points over the Q2 of last year, the Industrial division, wielding the capacity provided by our new building in Kenosha, Registered significant sales progress.

Speaker 2

In April, we discussed the recovery of the military business in the military segment. In this quarter, we continued that momentum, Capturing significant long term contracts, our product line wide and effective produced in the U. S. Made the difference. So we believe things look promising for the military business and for all our industrial segments.

Speaker 2

Beyond the Industrial Division and C and I, our specialty tools operation continued to advance, meeting the need for precision with new torque products, Covering a vast spectrum of clamping forces for challenging applications, torque accuracy is rising in importance And Snap on is ready to capitalize. We are confident and committed to extending in critical industries. And that conviction is anchored by the ongoing expansion of our lineup of innovative products, exclusively designed for particular tasks, Offerings like our automated tool control or ATC enabled by proprietary digital imaging technology that scans toolbox Recording in real time which tools are required or removed or replaced. It's an increasingly crucial feature for aerospace, For industrial manufacturing and for commercial transportation operations, imagine working on a planer or locomotive engine and unknowingly leaving a tool behind in the workplace. Not good.

Speaker 2

Not good. This is a mistake that could result in a failure in any tight tolerance mechanism. One small item can be a huge problem. Well, ATC has an answer, keeping track of the tools, identifying missing items, tracing who signed them out and where they're to be used And giving the all clear when everything's returned, so the planes can take off. Snap on Critical Industries are on the rise and ATC is part of the reason.

Speaker 2

And in the quarter, we released our next generation of ATC, A larger touchscreen to improve the shop productivity and upgraded processes with the latest technology for seamless integration with any central IT system. As you might expect, our customers were enthusiastic, sophisticated products for complex products. It's a winning combination for C and I And you can see it in the quarter's results. Now on to the Tools Group. Organic sales grew 1.1%, Which includes 60 basis points of unfavorable foreign currency, growth in the international markets and slight improvement in the U.

Speaker 2

S. Network. Based on our franchisees and customer feedback, like I said already, vehicle repair is robust. But in the period, Our record demands met capacity constraints before our plant expansions were fully operational, limiting some of the potential possibilities And somewhat attenuating the volumes, but for operating earnings, they rose in the quarter by 13 point $3,000,000 or 10.7 percent reaching $137,700,000 that's almost double, Double the pre pandemic level. The operating margin was 26.3%, A rise of 2 40 basis points against 50 basis points of negative currency.

Speaker 2

Let me say that again. Tools Group OI margin was 26.3%. This is a eye popping number. So for the Tools Group so the Tools Group had another positive quarter With substantial profitability, we are confident in the strength of our Vanda network and that belief is borne out of quantitative evidence, franchisee health metrics. We monitor them regularly every quarter and again this quarter they remain strong.

Speaker 2

So what are you talking about talking to the franchisees at Thunder Valley or looking at the numbers, Vehicle repair does appear robust and continues to be so. Now when you think of the Tools Group profitability, which is Pretty important subject this time. You think about hand tools, that high margin lineup was That was up in the period and new products led the way. One example of successful innovation that came from another customer connection A number of franchisees observed that diesel technicians struggling to access sensors on Class 8 semi trucks, They were struggling to do that. So to change the part without risking damage, the path had to be cleared by removing several other blocking components.

Speaker 2

Believe me, that's a time consuming process. And so armed with customer connection insights, those customer connection insights, our engineers developed an innovative design, quickly produced a 3 d prototype and confirmed that it solved the problem and that new tool, the SWR 5 90 Degrees Special Crow Foot Wrench participants are being made right now at our Elizabethton, Tennessee plant and it's getting a lot of attention. It really does make truck repair easier. The techs love it And we kind of like the margins. Profitable customer connection is one of the drivers behind the Tools Group success.

Speaker 2

And another example authored this quarter is our 2 piece horizontal bushing adapter set, the BGP-1, BKS-two, These names are something. Techs at a Subaru dealership where they were taking a lot of time to remove and install control arm bushings from suspension setups On the newer models, our team assessed the procedure and designed 2 new adapters to integrate with our existing ball joint press And that enables a fit for the new a good fit for the new Subaru suspension and save 2 hours in repair time per procedure. That's a big savings in the garage generated by customer connection and innovation. SNL A while ago, SNL's Roseanne, Roseanne Adana said it's always something. And it's true, there are always new repair challenges, Whether it's a powertrain, it's internal combustion, plug in hybrids or EV platforms, vehicle architecture is getting tighter, packed with more devices, Creating additional accessibility constraints, it's all music to our ears.

Speaker 2

Our franchisees and engineers observe the work, identify complications And the attendant value is considerable. You can see that in the Tools Group profits. Now one of the highlights of the quarter Driving some of that trend was our latest full storage unit, the KMP1023ZLT7, a 72 inches Master Series Roll Cab stands out and makes a statement in any repair shop, but beyond the eye popping optics, the box is also a productivity enhancing powerhouse equipped with 14 drawers, Including 3 spanning the full width of the unit, putting the most important tools of any size right at hand. It also offers our popular power drawer, A dedicated space equipped with, I guess, 5 power outlets and 2 USB ports for charging a full array And for the hard to manage small parts, our 2 inches speed drawer makes for easy organization with green Envy color coordinated Custom Slots for Components of Various Sizes. The Box is already one of our hit products.

Speaker 2

It really energized franchisees and was well received by our customers. And as I said, it helped keep the big ticket train moving. Well, that's the Tools Group strong profitability built on solid foundations of innovative products and franchisees success mixed with a considerable portion Now visible as supply that RCI gain is now clearly visible as a supply chain turbulence recedes. Now let's go on to RS and I. Sales as reported reached $452,000,000 that represented a $35,200,000 or 8 point 4% increase.

Speaker 2

Gains in the equipment and OEM essential programs paired with gains in equipment and OEM, Paired with our successful rollout of our new handheld diagnostic platform, the OI in the period was $110,400,000 up 14.7% Or 15.4 percent up 14,700,000 or 15.4 percent and the operating margin was 24.4%, A rise of 140 basis points. Nice, nice. As we said, the vehicle repair environment is strong, Offering significant opportunity in the 2nd quarter results for C and I says it's so. And The recent launch of our new SOLUS Plus diagnostic platform was a big key to that success. Great new features, including a 2 second boot up, the fastest in the industry and an 8 inches colored touch screen with 60% higher resolution, making it much It supports the latest in vehicle communication protocols and it offers access to SureTrack.

Speaker 2

That's our library of vehicle specific real fixes and repair kits and commonly replaced parts that Wheels, our proprietary database of 2,500,000,000 repair records and 325,000,000,000 vehicle events New powertrains are driving the need for expanding product lines, including vehicle lifts, enabling independent shops and dealerships to accommodate the new models. So and in meeting this opportunity with Advantage, part of RS and I success has been our undercar equipment division. It's one of the drivers behind RS and I's strong growth. Take our Challenger Lift operation In Louisville, the plant offers thousands of SKUs matched to separate lifting test and the numbers have been growing to meet the specific challenge of EV lifting. And in the quarter, that facility hosted Chief Executive of Magazines' Smart Manufacturing Summit and the event underlines The power of product customization and driving expansion and the extraordinary ability of RCI to render that low volume production quite profitable.

Speaker 2

It's that approach that drove RCI's gains, OI up 140 basis points in the quarter and we expect that it will keep doing just that as we go forward throughout the group and all across Snap on. RS and I, improving position with repair shop owners and managers, Growing OEM relationships, expanding the product offerings, wielding RCI everywhere and it all combined to deliver substantial growth Progress along our runways for coherent growth and advancements down our runways for improvement. Overall sales increasing organically 5 point percent margin strong in every segment. OpCo OI margin 23.3%, Up 160 basis points overcoming unfavorable currency and EPS $4.89 Now I'll turn the call over to Aldo. Aldo?

Speaker 3

Thanks, Nick. Our consolidated operating results are summarized on slide 6. Net sales of $1,194,100,000 in the quarter represented an increase of 4.8% from 2022 levels, reflecting a 5.6% organic sales gain, partially offset by $8,300,000 or 80 basis points of unfavorable foreign currency translation. From a geographic perspective, We experienced year over year organic sales growth in North and South America as well as Europe, while sales in Asia Pacific were down low single digits, participants were up 50.7% from 48.7% last year as gross margins expanded across all of our operating segments. Contributions from increased sales volumes and pricing actions, lower material and other costs and benefits from the company's TI initiatives were partially offset by 30 basis points of unfavorable foreign currency effects.

Speaker 3

Operating expenses as a percentage of net sales of 27.4% Operating earnings before financial services of $277,000,000 in the quarter compared to $246,600,000 in 2022. As a percentage of net sales, operating margin before Financial Services of 23.3%, including 30 basis points of unfavorable foreign currency effects, reflects an expansion of 160 basis points over last year. Financial Services revenue of $93,400,000 in Q2 of 2023 compared to $86,400,000 last year, while operating earnings of $66,900,000 compared to participants are in 20.22. Consolidated operating earnings of $343,900,000 in the quarter compared to $311,900,000 last year. As a percentage of revenues, the operating earnings margin of 26.8 percent reflects an improvement of 130 basis points from 2022.

Speaker 3

Our 2nd quarter effective income tax rate of 22.9% compared to 23.8% last year. Net earnings of $264,000,000 or $4.89 per diluted share, including $0.09 share impact from unfavorable foreign currency reflected an increase of $32,500,000 or $0.62 per share from 20 22 levels and represented A 14.5% year over year increase in diluted earnings per share. Now let's turn to our segment results for the quarter. Starting with the C and I Group on Slide 7, Sales of $364,200,000 increased from $359,100,000 last year, reflecting a $10,700,000 or 3 percent organic sales gain, which was partially offset by $5,600,000 of unfavorable foreign currency translation. The organic growth primarily reflects a double digit gain in sales to customers in Critical Industries, partially offset by declines in power tool volumes.

Speaker 3

With respect to Critical Industries, sales to the military were robust as was activity in the aviation and heavy duty sectors. Gross margin improved 220 basis points to 39.5 percent in the 2nd quarter from 37.3% in 2022. This is largely due to increased volumes in the higher gross margin critical industry sector, pricing actions, lower material and other costs and benefits from RCI initiatives. These improvements were partially offset by 40 basis points of unfavorable foreign currency effects. Operating expenses as a percentage of sales increased 60 basis points to 23.5 percent in the quarter from 22.9% in 2022,

Speaker 4

participants are in the range of $50,000,000 mostly due

Speaker 3

to increased sales and higher expense businesses. Operating earnings for the C and I segment of $58,100,000 Compared to $51,700,000 last year, the operating margin improved 160 basis points to 16% proceeds from 14.4 percent last year. Turning now to Slide 8. Sales in the Snap on Tools Group of 5 And slightly higher sales in our U. S.

Speaker 3

Business. Higher sales of hand tools and big ticket items in the quarter were partially offset by lower sales of power tools. Gross margin improved 300 basis points to 49% in the quarter from 46% last year. This increase is primarily due to higher sales volumes and pricing actions, lower material and other costs and benefits from RCI initiatives, from reduced expenses for various steel types used in our product offering. Operating expenses as a percentage of sales went up by 60 basis points proceeds to 22.7 percent from 22.1 percent last year, primarily due to increased investment in personnel and other costs.

Speaker 3

Operating earnings for Snap on Tools Group of $137,700,000 including $3,600,000 of unfavorable foreign currency effects participants compared to $124,400,000 last year. The operating margin of 26.3 percent including 50 basis points of unfavorable foreign currency effects compared to 23.9% in 2022, reflecting an improvement proceeds from the Q2 of fiscal 2019, we expect to be approximately $100,000 in 2022, reflecting an 8.5 percent organic sales gain, partially offset by $300,000 of unfavorable foreign currency translation. The organic increase is comprised of a double digit gain in sales of undercar and collision repair equipment, A high single digit increase in activity with OEM dealerships and a mid single digit gain in sales of diagnostic and repair information products

Speaker 4

participants are in the range of $1,000,000,000 to independent shop owners and managers.

Speaker 3

Gross margin improved 180 basis points to 45% from 43.2% last year, proceeds primarily due to increased sales volumes and pricing actions, lower material and other costs and savings from RCI initiatives. Operating expenses as a percentage of sales went up by 40 basis points to 20.6% from 20.2% last year, primarily due to increased personnel and other costs. Operating earnings for the RS and I group of $110,400,000 Compared to $95,700,000 last year, the operating margin improved 140 basis points to 24.4% from 23% reported last year. Now turning to Slide 10. Revenue from Financial Services increased $7,000,000 to $93,400,000 from 80 $400,000 last year reflecting the growth of the loan portfolio.

Speaker 3

Financial Services operating earnings of $66,900,000 participants are in the range of $200,000 of unfavorable foreign currency effects compared to $65,300,000 in 2022. Financial services expenses were up $5,400,000 from 2022 levels, including $4,900,000 of higher provisions for credit losses. The year over year increase in provisions reflects both the growth of the portfolio as well as a return to what we believe to be a more normal pre pandemic rate of provision. Sequentially, the provision for credit losses decreased by about $500,000 For reference, provisions for finance receivable losses in the current quarter were $13,700,000 as compared to $9,100,000 in the Q2 last year. In the 2nd quarters of 2019 2018, provisions for losses were $11,900,000 $13,600,000 respectively.

Speaker 3

In addition, our gross worldwide extended credit of finance receivable portfolio has increased 9.1% year over year. We believe that delinquency and portfolio performance trends currently remain stable. In the 2nd quarters of 2023 2022, respective average yields on finance receivables were 17.6% 17.5%. In the 2nd quarters of 2023 2022, The average yields on contract receivables were 8.6% and 8.5% respectively. Total loan originations of 300 $6,300,000 in the 2nd quarter represented an increase of $18,700,000 or 6.1 percent from 2022 levels, gains and extended credit originations in the U.

Speaker 3

S. Were led by franchisee sales of diagnostic products, including our recently launched Solus and ZEUS platforms. Moving to Slide 11. Our quarter end balance sheet includes approximately $2,400,000,000 of gross financing receivables proceeds with $2,100,000,000 from our U. S.

Speaker 3

Operation. The 60 day plus delinquency rate of 1.3% for U. S. Extended credit compares to 1.4% in 2022. On a sequential basis, the rate is down 20 basis points, participants are in the range of $1,000,000 reflecting the seasonal trend we typically experience in the Q2.

Speaker 3

As it relates to extended credit or finance receivables, trailing 12 month net losses of $46,400,000 represented 2.45 percent of outstandings at quarter end, which is down slightly from the preceding activities of $270,300,000 in the quarter compared to $140,800,000 last year. The improvement as compared to the Q2 of 2022 primarily reflects lower year over year increases in working capital investment and higher net earnings. Net cash used by investing activities of 94 point $6,000,000 included net additions to finance receivables of $68,600,000 and capital expenditures of 25,800,000 net cash used by financing activities of $136,500,000 included cash dividends of 85 $900,000 and the repurchase of 359,000 shares of common stock for $94,800,000 under our existing share repurchase programs. As of quarter end, we had remaining availability to repurchase up to an additional $336,700,000 of common stock under our existing authorizations. Turning to Slide 13.

Speaker 3

Trade and other accounts receivable increased $25,100,000 in the range of 20 22 year end. Day sales outstanding of 61 days was the same as 20 22 year end. Inventories increased $13,000,000 from 20 to year end and on a trailing 12 month basis, inventory turns of 2.4% compared to 2.5% at year end 2022. Our quarter end cash position of $871,300,000 compared to $757,200,000 at year end 2022, our net debt to capital ratio of 6.5% compared to 9% at year end 2022. In addition to cash and expected cash flow from operations, we have more than $800,000,000 available under our credit facilities And as of quarter end, there were no amounts outstanding under the credit facility and there were no commercial paper borrowings outstanding.

Speaker 3

That concludes my remarks on our Q2 performance. I'll now briefly review a few outlook items for 2023. We anticipate that capital expenditures will approximate $100,000,000 In addition, we currently anticipate that our full year 2023 effective income tax rate will be in a range of 23% to 24%. I'll now turn the call back to Nick for his closing thoughts. Nick?

Speaker 2

Thanks, Allison. Well, that's the quarter. RCI Shining through as the supply skies clear to show the new levels of performance. Vehicle repair continuing its strength, critical industries accelerating, RS and I growth in both dealerships and independent shops advances in helping customize shops to new vehicles, OI margin 24.4%, up 140 basis points. Tools Group growth attenuated, participants are in the range of $137,700,000 almost double pre pandemic level And OI margins of 26.3 percent, up 2 40 basis points, overcoming 50 basis points of unfavorable currency.

Speaker 2

Points over last year also overcoming unfavorable currency. And Snap on Credit, profits up, originations rising, indicating broad confidence in vehicle repair and it came together for attention getting overall performance. Snap on organic sales rising 5.6 percent An OI margin of 23.3 percent, up 160 basis points and an EPS of $4.89 It was an encouraging quarter and we believe that these results Creates extraordinary value, solving the critical and most of all confirms the strength and reliability of our team, capable and battle tested, Reliability of that team to wield our Snap on value creation processes, safety, quality, customer protection, innovation and rapid continuous improvement, All to overcome challenges and drive the corporation higher. And we expect that our decisive advantages those decisive advantages and opportunities in approach and in people will author a continuing upward trajectory Even beyond these levels throughout the remainder of this year and on into 2024. Now before I turn the call over to the operator, I want to speak directly to our associates and franchisees, the Snap on team.

Speaker 2

I know many of you are listening. These results do represent new heights. But more than that, they are a ringing testimony Yes, my congratulations. For the capability you demonstrate every day, you have my admiration. And for the unshakable confidence you hold in our path forward, you have my thanks.

Operator

At this time, we will take our first question, which will come from Scott Stember with ROTH MKM. Please go ahead.

Speaker 3

Good morning and thanks for taking my questions.

Speaker 5

Nick, you talked about in Tools that there was, I guess, It sounds like your ability to meet demand in certain areas was not met because of production. Can you maybe talk about that and maybe tie that into the decline that you talked about in Power Tools?

Speaker 4

Sure.

Speaker 2

Look, I think they're semi related, but here's the thing. I think we started I probably said 12 times in this pitch, we think The market is robust. So you're not seeing the market in those numbers. The situation simply here is rooted in hand tools and tool storage Primarily where generally the mix of products we got exceeded our capacity. We expected a certain mix.

Speaker 2

We got a different mix. And part of that was The people saying, well, Power Tools is going to launch in the future new products and therefore Power Tools is not so popular and Which are more difficult to build and more difficult to turn out. So that's pretty much what it was. I mean fundamentally, if you look at power tools, I mean tools in the quarter, hand tools, Biggest ever. And you look at Tool Storage, not only does the Tool Storage factory participants have to supply some and hand tools are some of this, but tool storage not only does the tool storage factory have to supply the tools group, but when you see the acceleration Associated with the critical industries, they have boxes as well and they were expanded.

Speaker 2

So put a lot of pressure on those factories. So we couldn't able we weren't able to follow the market, But we had anticipated expansions. Those expansions are starting to be ready now. So the Hanseils plant, Milwaukee, We have about 2 thirds of the expansion will be ready this month. And in the Q4, the rest of it will be ready.

Speaker 2

The Elizabethan Tool storage, not tool storage, but the hand tool plant in Elizabethton will have its expansion in the end of Q3 and Q4 expanding space. And the expansion in Algonquin, our tool storage business is starting to get in place sort of the end of this month. So we're expanding capacity to adjust that in this quarter, the mix of the products pretty much somewhat reflective of power tools being down and therefore filling that in with customer Customized products bumped up against demand.

Speaker 5

Got it. Okay. And as far as sell in to the van sell through, it sounds

Speaker 4

All participants, probably It

Speaker 2

was pretty good. It was above our numbers like it has been for a couple of periods. We like to say that over time that's all going to even out. But In this quarter, the sell through was sell off demand, we say, was better.

Speaker 5

Okay. And you would expect that to balance out as

Speaker 2

Yes, Albert, it always balances out. A quarter doesn't mean that much in that situation. But what I'm trying to say is that We still think the demand is pretty strong. You see that when you talk to franchisees and customers themselves. And And the whole idea, Scott, is big ticket items are an indication of confidence usually in this market.

Speaker 2

I mean, I suppose it isn't for sure, but Generally in our history, when we've seen big ticket items sell and they did originations were up and tool storage had I think it's one of its best quarters ever if you put industrial and close together that indicates that customers are willing to enter in And we also saw a nice range of diagnostics numbers this quarter. So those big ticket items Really looked good, positive sell through. And so that indicates the technicians are willing to enter into those longer payback items and that says they think at least that the market

Speaker 5

And just to be clear, sales off the van are stronger right now than into the channel. Got it.

Operator

Our next question will come from Christopher Glynn with Oppenheimer. Please go ahead with your question.

Speaker 6

Yes, thanks. Good morning. I had a question on the gross margin, which was very strong. You mentioned for Supply Chain Clearing, is that more or less recovered now or does supply chain But

Speaker 1

more or less,

Speaker 2

every time I have a review, somebody brings up something that says they got some spot buys still coming through. But in general, like I said, the skies have cleared. We're going to get a little more benefit, but most of it is out now. Our big problem was, of course, everybody saw commodity But the big problem for a company like us is we had to spot buy things in a lot of situations, which we're paying 2 or 3 times sometimes What the original price was. And so that ends up going in inventory.

Speaker 2

Chris, just think about it. If you're having trouble getting stuff, you tend to overbuy it sometimes because you want to have You want to have it in stock because you want to deliver as the first priority and so you get yourself in that situation and so you're seeing that clear. And so what happens in that situation, the advances in new value products and the And new value products and the RCI we've been doing all this time starts to shine through.

Speaker 6

Participants are ready. Great. Thanks for that. And given the expansion at SOT over the past few years and your bandwidth capacity to I'm wondering, does that reopen the gate to add franchisees And where franchisee was U. S.

Speaker 6

Franchisee count, is that pretty stable as I understand it to be?

Speaker 2

It's pretty stable. We're down a few franchisees this quarter, but not many. It's not a factor for government work, Chris. But we're not we're probably not going to add people. We believe that our franchisees sell more because we tell them you're our guys And if we do well, so will you.

Speaker 2

And so we believe that subdividing their opportunity probably isn't the best alternative. Now, We think we have the world covered. We have, what, 3,400 franchisees around the country. So we think we have most of the places covered. I suppose there's the odd place That we might find that we'd add 1 or 2, but really that's not going to be a program for us.

Speaker 2

We think our way up is to get the guys to And in this instance to be able to deliver better. We need to we're expanding our capacity. So that should relieve some of the problem. But it's a happy problem actually That people saying we're waiting for your tool storage products.

Speaker 6

Yes. And is our franchisee turnover still participants

Speaker 2

Yes, it's still about the same. It's about I think it's about 10% and you'd say, Chris, what, 5% of that is retirements. You'd say 5% is guys have pretty much every year you'll get that. And so 10% is pretty stable. It has been higher sometimes, but now last few last multiple quarters has been stable about that number.

Speaker 6

Great. Thanks.

Speaker 2

Sure.

Operator

And our next question will come from David MacGregor with Longbow Research. Please go ahead.

Speaker 7

Hello?

Speaker 4

I guess I wanted to maybe a question for Aldo, but obviously some huge incremental margins in both Snap on Tools present in C and I and you referenced the raw material benefit. So I mean we were expecting you to report good margins, these were certainly above what we were anticipating. How much of this price cost carries forward into 3Q and 4Q? And can you just talk about kind of the

Speaker 2

Look, I could let Al go okay. Al goes agreed. Okay. You can answer the question, No,

Speaker 3

I think, David, I think most of the pricing actions involve them a lot of them occurred in the rearview mirror. So what you have now as Mick has mentioned already, When you attenuate the incremental cost of spot buys, they're not gone completely, but they're greatly reduced. And steel, Different grades of steel at different prices, but in particularly cold rolled steel, which is used in our tool storage products approach to the market and the demand that Nick described that's out there, I expect that we'll be able to retain these types of margin performances as

Speaker 2

I was going

Speaker 4

to say,

Speaker 2

I was watching a show last night and Somebody said on the show, it was a movie and said, electronic prices only go down. Snap on prices only go up. We don't drop our Right. I mean, it's fuzzy because you've got all the promotions and everything. It's hard to your finger on it, but generally, I don't see us surrendering that too easily.

Speaker 4

Can I just ask how much of that margin benefit, that incremental margin was result of the capacity constraints forcing the mix towards more customized tools and because that sounds like that's

Speaker 2

a fairly simple assumption with the

Speaker 4

new capacity?

Speaker 2

There could be some of that in there. Certainly that the big factor though is there could be some of that. You're probably right, just some of that. But the big factor I think is the improvements in the face of The idea of no more spot buys, no more of those huge spot buys. So you're seeing that.

Speaker 2

Actually, we've been making improvements Material costs. And so what you see that is abating. So you're seeing a lot of that. So basically, I don't know where I put it on the foot of more customized product. We did sell a lot of customized products, so that works, but we don't necessarily want to back off of that.

Speaker 2

So When you do have capacity constraints, you do tend to go to that. But on the other hand, when you got capacity constraints, you spend A little more money, you're looking at the SG and A and stuff like that. SG and A is up a little bit, And it takes a little bit to manage through that. So you got some goes ins and goes out But there's a factor, but the big factor is RPI.

Speaker 4

So let me just ask you about the organic growth Snap on Tools because you report 1 percent organic growth. When you were talking about Snap on Tool gross margins, you cite both volume increases and price gains as drivers. So How do we reconcile the volume increases and price gains that you referenced in the gross margin story with 1% organic growth And essentially flat in the U. S. Do we just take away from that that the gross margins were essentially all cost reduction as opposed to revenue growth?

Speaker 2

Well, look, I mean, some of this can be plant to plant and production line to production line. I think you can say in aggregate that's probably true. That's probably true. You don't get much Wind in your sales from that kind of increase. It's not 0 though, it's not a 0 increase.

Speaker 2

And so you get some of that and you have some international businesses that came back in this situation. So you had some things happen in that situation. But that's got to be the case, right? You didn't get that much volume.

Speaker 4

Yes. Last question for me because we're getting to the top of the hour here. But what's the trend in the total number of active stops across the Snap on system in the U. S?

Speaker 2

Active stocks, meaning what?

Speaker 4

Stops, I mean, a number of actual customer locations. I know you track that. So I'm just wondering what's the trend there in terms of the total number of stops? It's

Speaker 2

I don't have that number right here, but my feeling is it's moving upwards. No, but we don't really count the staff so much as we count the technicians and the technicians are growing. So we're getting more technicians.

Speaker 4

Great. Thanks very much. I appreciate you taking the questions.

Speaker 2

Yes.

Operator

Our next question will come from Luke Junk with Baird.

Speaker 7

I'm just wondering the capacity constraints you ran into the Tools Group this quarter, how that might play out in the near term versus The mix of business that you'd expect in the Q3 and what would typically be a little bit of a seasonal decline sequentially. And if I Listen to the cadence in terms of things coming online either end of this month or into the early part of Q4, It sounds like you think you'll be in a better position in the Q4 overall from a supply chain standpoint? Am I hearing that right, Nick?

Speaker 2

Sure. We think that we think the 4th quarter as I've said probably on every one of these calls in the second quarter that the Q3 is always kind of squirrelly because you've got the franchisee And you got vacations, which if franchisees take long vacations that can affect it a little bit or they take short vacations also can affect it. So you have that in place. What the Snap on franchisee conference occurs, now we might be seeing some little bit of anticipation for that as we did in the power tools. Certainly, power tools are not I don't think.

Speaker 2

So that's not going to be those new launches shouldn't be affected by capacity. And the capacity is coming online and so we'll see how efficacious that is. We tend to be pretty good in putting these things in place. So I think you'd be right that the Q4 would be where we'll be hitting on more cylinders.

Speaker 7

And then for my Follow-up, just hoping you could comment on the trends that you saw in C and IS. You mentioned Europe briefly and Asia. You highlighted the weakness that you saw in Japan, hoping you could just expand on Europe more broadly and Asia Pacific excluding

Speaker 2

Yes. Actually, the European business was up In Aras and I and interestingly the U. K. And the Tools Group came off of probably off It was flat on its back last year, I think, so it came back some. But the C and I business was kind of A little bit up and down in Europe.

Speaker 2

And so you one of the things that was positive was critical industries. So the critical industries in C and I, boy, volumes and margins, new capacity in place, smoke, But the other business is up and down, European hand tool based business in a number of different environments like the Nordics and so on, Probably affected by concerns over the war and so on. That a little bit up and down and Not very robust. And I don't know where that's going, Steli. Your guess is as good as mine.

Speaker 2

I think we're well positioned, but I do think there are macros there that are hard to predict. In Asia Pacific, boy, it's hard to find too many areas that aren't maybe India, you would say, is doing well. But generally, a lot of areas seem to be Having trouble creating the recovery from the COVID for a number of reasons. China, I think it's well documented, everybody talks about China. We're holding our own in China, but Japan, the currencies make a little difference.

Speaker 2

The yen is pretty weak Versus the U. S. Dollar and has been for a while and it's weakened recently versus the RMB. So products into Japan are Not so competitive in some cases, so that weakens that and the market itself is down somewhat. So you're seeing those kinds of things play out.

Speaker 2

I think Asia will start to work its way out I don't think it has a long term problem like the war or like some concerns over a hydrocar, where they're going to get their fuel or energy. So I think that fixes itself more quickly than Europe. I think Europe, I'm not sure where it's going. Now the auto repair business in Europe in In terms of the repair shop owners and managers, pretty good, particularly collision. The industrial business, pretty good, the critical industries business.

Speaker 2

But the basic up and down the street business and our tools business kind of happened.

Speaker 7

Okay. I'll leave it there. Thanks, Nick.

Operator

And our next question will come from Gary Prestopino with Barrington Research.

Speaker 8

But I'm really I'm a little bit confused here about what's going on in the Tools Group. Could you maybe just talk about the product segments where you had these capacity constraints, I think you mentioned tool storage, but what other products were you having or segments were you having issues with

Speaker 2

Hand tools.

Speaker 4

Okay. So hand tools Hand

Speaker 2

tools is at an all time high And some particular products are at a It's over all time high, like certain versions of the sockets. And so when you got those sockets, sometimes Your promotion is ready to go on a particular array of sockets. It's kind of a new package that will address a certain promise and You just don't have the capacity for say half of the package. And so that's what happened to us in this situation. So it's basically those guys bumping up against it.

Speaker 2

And then over the top in tool storage, the industrial business starting to expand its capacity And being able to source more of other products from other people and so on and break basically the industrial business participants have been bound up in a kind of Gordian knot of shipments. I talked about it many times in the quarter. They cut that Gordian knot participants started to ship more and that created more demand on a tool storage and hand tool plant as well. Participants.

Speaker 8

Okay. And then as we work through the year, you're bringing on capacity and this should alleviate as

Speaker 4

we work through the year?

Speaker 2

Good. Yes. I mean, we've been seeing this for a long time. It's just the particular ordering this ordering pattern in this quarter Kind of bumped us up against it quicker than we thought. That's simply it.

Speaker 8

Were the hand tools typical run of the mill hand tools or were they more like you said customized? I'm just trying to understand.

Speaker 2

No, they were not so much the Standard, standard. But there's a lot of lower run. I mean, by that I mean shorter production run hand tools In these kinds of mixes. And when you get into them, they eat up a lot of capacity. You see what I mean?

Speaker 2

But you got to stop and start the machines So it's not a linear thing necessarily. If it was just standard products, we probably could have shipped out of inventory if we needed But these other products make it difficult. Okay. And then just But we thought it's coming. It was just this particular one with The idea that people weren't buying as many power tools because they're waiting for the new stuff kind of shifted the mix toward these even more toward And tools and power tools, I mean, full storage.

Speaker 8

Okay. Just want to understand what's going on there.

Speaker 6

And then

Speaker 8

over time as things have evolved

Speaker 2

could you maybe do you

Speaker 8

have any numbers or metrics you can circle around? What percentage of what you're doing in the tools or even across the whole company is going into collision repair versus mechanical repair?

Speaker 2

Well, let's put it this way. I would say Collision repair is about let me think about this. Equipment, the Undercar Equipment business is about 1 third of RS and I. And I would say about maybe 20% to a quarter of that It is collision repair, that kind of ballpark and growing though. The equipment has been growing double digits for some time.

Speaker 2

It was up double digits again and its margins were up nicely again.

Operator

This concludes our question and answer session. I'd like to turn the conference back over to Sarah Berbsky for any closing remarks.

Speaker 1

Thank you all for joining us today. A replay of this call will be available shortly at snapon.com. As always, we appreciate your interest in Snap on. Good day.

Operator

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your

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Snap-on Q2 2023
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