Snap-on Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2024

There are 8 speakers on the call.

Operator

Good morning, and welcome to the Snap on Incorporated 4th Quarter and Full Year 2023 Results Conference Call. All participants will be in listen only mode. 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.

Speaker 1

Thank you, Gary, and good morning, everyone. We appreciate you joining us today as we review Snap on's 4th 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 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 dotcom under the Investors section. These slides will be archived on our website along with the transcript of today's call. 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.

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 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?

Speaker 2

Thanks, Sarah. Good morning, everybody. As usual, I'll start with the highlights of our quarter and our full year. I'll provide my perspective on results, our markets and our path ahead. After that, Aldo will then give you a detailed review of the financials.

Speaker 2

The results for our Q4 represented, we believe, another period of forward progress. Again, we had opportunities, encountered headwinds and the shape of the variegated landscape changed as it regularly does. But in the end, we once again took advantage of and overcame the turbulence. Sales in the quarter were $1,196,600,000 or $1,200,000,000 better that way, up 3.5% as reported from last year, excluding $9,100,000 of favorable foreign currency and $5,500,000 from the recent mouse acquisition. Organic sales increased 2.2%.

Speaker 2

The results represent a positive trends of some significance demonstrating Snap on's ability to adapt and to overcome market disruptions. From an earnings perspective, our OpCo operating income for the quarter was $257,900,000 and the OI margin for the quarter was $21,600,000 up 10 basis points compared to last year. For financial services, operating earnings were 67,900,000 rising from the $63,900,000 recorded last year. And the combination of the results from OpCo and from Financial Services offered an overall consolidated margin of 25.2%, also up 10 basis points and the overall EPS was $4.75 a rise of 7.5% from the 442 that was registered a year ago. Now I talked about markets.

Speaker 2

Let's turn to those markets and the trends we're seeing based on our customer connections, we're with customers all the time. We believe automotive repair continues to be clearly favorable. Vehicle OEMs continue to see the need for upgrading dealer repair shops and enabling the shops and servicing the blizzard of new models and technologies making their way to the market and preparing for that futures. OEM continue requiring dealership investments in new undercar equipment and essential tools to meet challenge, it's a considerable opportunity of which Snap on is clearly taking advantage. Activity in independent shops It's also robust.

Speaker 2

You can see it in the vehicle and repair macros. Car parks, the car parks growing and getting older, now over 12 years old on average. Cars are getting more complex and more difficult to fix. And reflecting all of that, Service hours are up. Household spending on repair is growing.

Speaker 2

Wages are rising. The number of technicians is moving upward fast And shop owners keep shouting, they want more technicians even louder than they have over the past years. So the underlying repair business is strong. It's prospering. It was a reality that kept the text positive.

Speaker 2

Even as the financial world was chanting Over the past years months, the recession is coming, the recession is coming. But cash isn't everything. Cash isn't everything for the people of work. Personal confidence is a balance between your current environment, the garage we see and the way you the world evolving and sometime in the mid fall of last year, our franchisees sense that balance shifting negative. In recent weeks, I've been around, I've visited franchisees all over the country in Nevada, South Carolina and Wisconsin.

Speaker 2

And they all said about the same thing. The techs are cash rich, but because of the external bad news they're getting for breakfast almost every The impasse in the Ukraine, the war in the Middle East, its function at the border and the uncertainty of the upcoming election, the weight of it all appears to be turning the techs Confidence is poor. And when this happens based on what we've seen in other times, we've seen it happen before. Our customers keep purchasing, but they gravitate towards shorter payback items. And so it appeared to be as the quarter progressed.

Speaker 2

We saw that from mid to the end of the quarter. And so repair is strong, but the techs are worrying about the way forward. Still cash rich, But they appear to be wavering in their confidence. This is a big change. Now let's move forward to Critical Industries.

Speaker 2

That's a horse of a different color. Confidence seems to be abundance across that business. This is where our commercial and industrial group or C and I plays. We continue to see progress And the results in the quarter reflect that trend. It's a complex segment.

Speaker 2

A lot of you know this already, but I'm going to say it to set the context. It's complex segment Embedded with essential tasks where the penalty for failure is high. It's an arena that demands precision, functionality and repeatability, all under the most grueling environments covering a vast range of applications from the sensitive micro world of chip manufacturing to giant and rugged earthmoving equipment to performance critical aviation and even up to spaceships. The underlying need for customization But in that segment, the underlying need for customization and precision, both Snap on strength is clearly growing all across those sectors. C and I is also the most geographically dispersed operations and there are significant variations from country to country created by the uncertainties in the economic political policies.

Speaker 2

As such, we see mixed results in Europe and a continuing but slow recovery in Asia. We also see differences from sector to sector with education, aviation and the military, the military and general industries all showing Nice improvements where natural resources and heavy duty are off. But shining through all that variability is our expanding strength in those critical industries. The advantage Snap on holds in product and brand and in people and in the quarter, those drivers were on display. So across our corporation, I would characterize our markets as mixed, turbulent from period to period and from sector to sector, but filled with ongoing opportunity.

Speaker 2

And we believe we're well positioned to face the challenges of today, those in end of today and those that may arise in the future. We remain confident that we have the continuing potential along our run rates for growth And we see significant power overcome rooted in our Snap on value creation processes of safety, quality, customer connection innovation and rapid continuous improvement, especially customer connection. 1 of our substantial competitive advantages is being right where the actual tasks are being pursued and in engineering the products to make the work easier by matching those insights the insights gained with technology applied. We've seen that over time, we've seen that innovative offerings creates a path to advance and to overcome any turbulence. And in the quarter and in the year, our product line continued to advance, just kept getting stronger.

Speaker 2

We continue to invest in Snap on Valley Acresia to make that possible. We believe in fact that our product line has never been stronger. And despite the turbulence, we had more $1,000,000 hit products in 2023 than ever before and we believe we'll move higher again in 2023 than ever and we believe we'll move higher again in 2024. Now Let's talk about the full year, the 2023 performance. Sales of $4,730,200,000 represented an increase of 5 point percent as reported and a rise of 5.6 percent organically.

Speaker 2

OpCo OI exceeded $1,000,000,000 I got to say that again. Dollars 1,000,000,000 for the first time reaching $1,000,000,000,39,900,000 And our OpCo OI margin of 22 percent, 22% represented an average increase an increase of 110 basis points. That's gangbusters. We've never been at 22 and 110 is a great increase. And when we include financial services earnings of 270,500,000 consolidated operating margin for the corporation this year was 25.7 percent, up 80 basis points.

Speaker 2

Earnings per share for the year were 18.76 dollars rising $1.94 or 11.5 percent. We believe these are good numbers. Now for the individual operating group. So let's start with and I. Reported sales for the C and I group in the quarter were $363,900,000 up $20,700,000 or 6%.

Speaker 2

That includes $5,500,000 from the Breadth of Mounds acquisition, dollars 3,600,000 in favorable foreign currency and our organic sales increase of $11,600,000 or 3.3%, all reflecting the strength in critical industries partially offset by a slide in automotive power tools. C and I's operating income for the period was $54,100,000 It was up 12.9% and the OI margin was 14.9%, rising 90 basis points and overcoming 50 basis points of headwind of net associated with negative currency. Again, in this case, the advance was driven by strong expansion in critical industries. And our increased orders continue to play a large role in that progress, but significant advances also spurred as it regularly is by new product. Innovations like our recently launched automated tool control or ATC portal.

Speaker 2

It's the latest addition to our unique Snap on ATC tool control product lineup. It's manufactured at our auto crib operation acquisition operation that was recently acquired in California and the portal significantly extends the reach of our ATC systems. It enables efficient control over a much wider range of device shapes and sizes. In effect, this portal is a doorway lined with radio frequency identification or RFID antennas and it's typically placed at the entrance to a tool, significant assets like Hydraulic pumps, portable generators and valuable diagnostic equipment are often stored in common areas in factories or other places and enter our catalog by fixing an RFID tag. As technicians scan the badges to enter and exit the portal, the system documents the devices moving In and out of the secured storage, keeping close track of these critical items.

Speaker 2

Just like the base ATC system, keeps track of hand and power tools moving in and out of a tool storage box, but over a much wider set of areas. We anticipate that the new portal will be a big boost And a great opportunity for C and I in the growing area of tool control, very important area for us. And in the Q4, we saw some of that potential come to bear. So C and I, Mixed progress challenged with headwinds, but clear and overall advancement, great momentum enabled by capacity expansion and by growing product power. Now for the Tools Group.

Speaker 2

The Tools Group quarter, not at our standard. But we do see a path forward adjusting to the changing environment. As you may remember, This is where we sell to the text. Those who twirl the ridges, punch the touchscreen and those who appear to be wavering in macro competence And those customers who under these conditions shift to lower payback or quicker payback items. While the Q4 reflects our franchisees and the tools we're pivoting to match that movement that customer movement.

Speaker 2

Sales in the quarter were $513,300,000 included and they included an organic decrease of 5.7% compared to last year. Now, Mortarware Standard Group OI Margins were 21.6 percent, up 20 basis points overcoming 10 basis points of negative currency and the gross margin for China rose 200 basis points, nice gains. As the quarter played out, the franchisees sense the change and redirected their ordering and selling focus to match the customer shift to lower to faster payback items and Snap on is doing the same, defining a way forward, redirecting factory capacity, adopting smaller ticket marketing focus and launching innovative new shorter quicker payback products that fit the environment. State of the art designs like our new ratchet forged manufactured at Elizabethton, Tennessee factory. The next this next evolution in our ratchet line is a 100 tooth design we've named the Synergy Series.

Speaker 2

We believe it's a game changer for technicians, A significant improvement that helps make repair work much easier. The synergy is a short payback item that will make a clear difference right away. A 15% thinner head, an inch longer handle, a 3.5 inches degree swing area, 20% more compact, All for easier access and quicker work in tight quarters that often come up like chassis areas in modern vehicles. Synergy's internal mechanisms were reengineered to engage the primary drive with 10 contact points versus the 7 in the previous design, greatly reducing the chance of slippage, improving the tools reliability and quality even while under maximum loads. Technicians may be uncertain about the way forward, but they're confident about the synergies.

Speaker 2

They know the synergy. They know it will provide a quick payback. It's thinner, longer, stronger. And going forward, we'll expand that new 100 technology the new 100 tooth technology throughout the Snap on lineup. We believe it will quickly become a must have all across the industry.

Speaker 2

Also in the quarter, Our Algona, Iowa manufacturing facility released the new quick payback KRSC-two thousand four hundred and thirty, a 36 inches deluxe shop cart With its smooth mobility and a substantial payload, it offers technicians an economical and attractive way to store their tools, But it also allows them to position their instruments adjacent to the workplace, increasing productivity, eliminating the time walking to and from the job. And as a particularly special feature, the Versal lid on this cart serves as a durable workbench that when open separates into 2 sections showing full and easy allowing full and easy access to the deep 8 inches top compartment that's underneath. The unit also includes a complete power strip where techs can charged to cordless tools, diagnostic platforms, lights and other electronic devices. The innovative cards also configured with 2 additional drawers, this is kind of interesting, 2 additional drawers underneath the sliding top providing quick accessibility for essential and small items, preventing lost times from treasure hunting in large drawers for small scale items. It's a common problem with other units.

Speaker 2

And so this will really save time for the ticks. And like our top of the line tool storage boxes, technicians can customize their cart, selecting from an array of colors and trims and so they can project their own personal identity throughout the shop. The KRC 2430 economical storage, attractive features, convenient mobility, we expect it will have strong and continuing appeal in this uncertain environment. And shifting the product focus also requires some repositioning in the factory, expanding the capacity to match customer preference. We're doing just that.

Speaker 2

Moving to currently popular items, more dedication to short paybacks The products like our Flex and Swivel Sockets and the new long nose pliers in Milwaukee, additional cart welding, breaking bottlenecks for our economical storage card options in Algona and doubling down on synergy production in Elizabeth and Tennessee. Finally, our sales teams are being deployed to help franchisees giving them added energy and more time and selling shorter payback items off their truck. Well, that's the Tools Group. Shifting tech preferences, Pivoting operations to ensure the way forward, adapting products, capacity and sales focus, making the most of our strengths in the turbulence. Now for RS and I.

Speaker 2

Group results confirm the group results confirm what we've been saying all along. Snap on is well positioned to support repair shops, dealers add independents and keeping pace with the growing complexity of the car park. RS and I sales in the quarter were 400 $50,800,000 up $12,900,000 versus last year including an organic sales rise of $8,800,000 that was altered by volume with vehicle OEM programs for new models and platforms and by strong progress in undercar for both dealership and independent shops, gains that served offset the decrease in the big ticket diagnostic items. RS and I operating earnings for the quarter were $113,300,000 and the operating margin was a still strong 25.1 percent, but down 20 basis points, reflecting the mix shift to lower margin on the car and OEM facing and the OEM facing activities. But just like other segments, RS and I Advances are driven by new products.

Speaker 2

And even the aging car park is filled with diverse and ever changing models. Light duty trucks and full size QVs are bigger than ever, requiring a range of wheel configurations and sizes, some weighing over £100. And at the recent repair industry SEMA show in Las Vegas, We have one of our answers to that challenge on prominent display. Our new automated armored series wheel balancers Specifically designed for high volume shots that require precision and reliability made from robust steel For enhanced and rugged durability even a small compact footprint, the balancer's intelligent operating system uses sonar technologies to automatically measure both the wheel and rim eliminating the need for manual intervention, a great time saver in the shop. And for improved safety, the unit also includes a heavy duty pneumatic list that positions cumbersome tires on the spindle, making it unnecessary for techs to physically lift or manipulate the heavy assembly, substantially avoiding the risk of strain.

Speaker 2

The balancer also includes a high resolution touchscreen, an intuitive interface and an effective ergonomic design. It's a powerful combination of accuracy, speed, durability and safety and the SEMA crowd clearly noticed. So that's RS and I. Shop repair remains robust. Vehicle complexity continues to advance.

Speaker 2

Abundant opportunities for a great future. The group has abundant opportunities for a great future and our RS and I team has the products to take advantage. Well, that's our quarter and our year. For the quarter sales up 3.5% as reported, 2.2% organically. OI margin reached 21.6%, up 10 basis points and the EPS was $4.75 rising 7.5% against the turbulence.

Speaker 2

The period was marked by extraordinary positives in the critical industry in the critical industries that RC and I, the tools group not reaching our standard, but displaying margin gains and pivoting to match the technician shifting focus and RS and I enabling both dealerships and independent shops to meet the challenges of higher complexity and new technologies and the full year 2023 sales of $4,730,200,000 up 5.6 percent organically, an OI of over $1,000,000,000 rising 10.5 percent, an OI margin of 22%, an increase of 110 basis points, 110 basis points, we like that. And EPS, dollars 18.76 Up $1.94 or 11.5 percent, it was another encouraging year. 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 $1,196,600,000 in the quarter represented an increase of 3.5% from 2022 levels, reflecting a 2.2% organic sales gain, dollars 9,100,000 of favorable foreign currency translation and $5,500,000 of acquisition related sales. Sales were strong in our businesses serving critical industries this quarter, while activity in our automotive repair markets was mixed. Consolidated gross margin of 48.3 percent including 20 basis points of unfavorable foreign currency effects compared to 48.5% last year.

Speaker 3

Benefits from lower material and other costs and savings from the company's RCI initiatives were offset by the effects of a higher mix of sales and lower gross margin businesses. Operating expenses as a percentage of net sales improved 30 basis points 26.7% from 27% last year, primarily due to lower corporate expenses and benefits from higher sales volumes, partially offset by increased investment in personnel and other costs. Operating earnings before financial services of $257,900,000 in the quarter compared to $248,000,000 in 2022. As a percentage of net sales, operating margin before financial services of 21.6 percent, including 20 basis points of unfavorable foreign currency effects compared to 21.5 percent last year. Financial services revenue of $97,200,000 in the Q4 of 2023 compared to $88,300,000 last year, while operating earnings of $67,900,000 compared to $63,900,000 in 2022.

Speaker 3

Consolidated operating earnings of $325,800,000 in the quarter compared to $311,900,000 last year. As a percentage of revenues, The operating earnings margin of 25.2 percent compared to 25.1 percent in 2022. Our 4th quarter effective income tax rate of 21 point 4% compared to 22% last year, while our full year 2023 tax rate of 22.5% compared to 22.8% last year. Net earnings of $255,300,000 or $4.75 per diluted share reflected an increase of $16,400,000 or $0.33 per share from 22 levels and represented a 7.5% year over year improvement in diluted earnings per share. Now let's turn to our segment results for the quarter.

Speaker 3

Starting with the C and I Group on Slide 7. Sales of $363,900,000 increased from $343,200,000 last year, reflecting an $11,600,000 or 3.3% organic sales gain, dollars 5,500,000 of acquisition related sales and $3,600,000 of favorable foreign currency translation. Organic growth includes a double digit gain in sales to customers in critical industries, partially offset by a double digit decline in sales of power tools. With respect to Critical Industries, sales to the military were robust as was activity in the aviation sector. As previously announced, during the quarter Snap on acquired Mounts Inc, a leading developer, manufacturer and marketer of high precision torque tools.

Speaker 3

The acquisition complements and expands Snap on's torque offering for a variety of critical industry applications. The operating results of mounts are reported within the C and I group. Gross margin improved 150 basis points to 39.2 percent in the 4th quarter from 37.7% in 2022. This was largely due to increased sales volumes at the higher gross margin critical industry sector, pricing actions, savings from RCI initiatives and 30 basis points of benefits from acquisitions. These improvements were partially offset by 60 basis points of unfavorable foreign currency effects.

Speaker 3

Operating expenses as a percentage of sales rose 60 basis points to 24.3 percent in the quarter from 23.7% in 2022, primarily due to a 30 basis point impact from acquisitions as well as from investments in personnel and other costs. Operating earnings for the C and I segment of $54,100,000 including $1,400,000 of unfavorable foreign currency effects compared to $47,900,000 last year. The operating margin of 14.9 basis points of unfavorable currency effects compared to 14% in 2022, reflecting an improvement of 90 basis points. Turning now to Slide 8. Sales in the Snap on Tools Group of $513,300,000 compared to 540 $700,000 a year ago, reflecting a 5.7 percent organic sales decline, partially offset by $1,600,000 of favorable foreign currency translation.

Speaker 3

The organic decrease reflects a high single digit decline in the U. S. Business, partially offset by a mid single digit gain in our international operations. Gross margin improved 200 basis points to 45.2% in the quarter from 43.2% last year. This improvement primarily reflects decreased sales of lower gross margin products, which includes lower sales of items where the Snap on Tools Group serves as a distributor for products made by our C and I and RS and I groups.

Speaker 3

Operating expenses as a percentage of sales rose 180 basis points to 23.6 percent in the quarter from 21.8% in 2022, largely due to the lower sales volume. Operating earnings for the Snap on Tools Group of $111,000,000 compared to $116,100,000 last year, The operating margin of 21.6 percent compared to 21.4 percent in 2022. Turning to the RS and I group shown on Slide 9. Sales of $450,800,000 compared to $437,900,000 in 2022, reflecting a 2% organic sales gain and $4,100,000 of favorable foreign currency translation. The organic increase includes a high single digit increase and activity with OEM dealerships and a mid single digit gain in sales of undercar equipment.

Speaker 3

These gains were partially offset by a high single digit decline in sales of diagnostic and repair information products to independent shop owners and managers. Gross margin was unchanged from last year with benefits from lower material and other costs and savings from RCI initiatives offset by increased sales in lower gross margin businesses. Operating expenses as a percentage of sales rose 20 basis 0.9% from 19.7% last year, primarily reflecting increased personnel and other costs. Operating earnings for the RSNI group of $113,300,000 compared to $110,600,000 last year. The operating margin of 25.1% compared to 25.3% reported last year.

Speaker 3

Now turning to Slide 10. Revenue from Financial Services increased $8,900,000 to $97,200,000 from $88,300,000 last year, primarily reflecting the growth of the loan portfolio. Financial Services operating earnings of $67,900,000 compared to $63,900,000 in 2022. Financial Services expenses were up $4,900,000 from 20 22 levels, including $3,900,000 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.

Speaker 3

For reference, our gross worldwide extended credit or finance portfolio has increased 8.5% year over year and we believe the delinquency and portfolio performance trends currently remain stable. In the 4th quarters of 2023 2022, the respective average yields on finance receivables were 17.8% 17.6%. In the 4th quarters of 2023 2022, the average yields on contract receivables were 8.9% and 8.6% respectively. Total loan originations of $303,100,000 in the 4th quarter represented an increase of $3,400,000 or 1.1 percent from 2022 levels. Moving to Slide 11.

Speaker 3

Our quarter end balance sheet includes $2,500,000,000 of gross financing receivables with $2,200,000,000 from our U. S. Operation. The 60 day plus delinquency rate of 1.8 percent for U. S.

Speaker 3

Extended credit was up from 1.6% in 2022, but was the same as in the pre pandemic period of 2019. On a sequential basis, the rate is up 30 basis points, reflecting the seasonal uptick we typically experience between the 3rd 4th quarters. As it relates to extended credit or finance receivables, trailing 12 month net losses of $50,400,000 represented 2.59% of outstandings at quarter end, which compares to 2.51% as reported at the end of last quarter. Now turning to Slide 12. Cash provided by operating activities of $296,900,000 in the quarter represented 114 percent of net earnings and compared to $210,600,000 last year.

Speaker 3

The improvement as compared to the Q4 of 2022 largely reflects lower year over year increases in working investment, which included reduction in inventory in 2023 as well as higher net earnings. Net cash used by investing activities of $104,600,000 included $42,600,000 for acquisitions, net additions to finance receivables of $42,200,000 and capital expenditures of 21,100,000 Net cash used by financing activities of $149,000,000 included cash dividends of $98,000,000 and the repurchase of 217,000 shares of stock for $60,900,000 under our existing share repurchase programs. As of year end, we had approximately $182,900,000 of common stock under our existing authorizations available for repurchase. Turning to Slide 13. Trade and other accounts receivable increased $29,600,000 from 20 22 year end.

Speaker 3

Day sales outstanding of 60 days compared to 61 days As of 2022 year end, inventories decreased $27,200,000 from 20 22 year end and on a trailing 12 month basis, inventory turns of 2.3 compared to 2.5 at year end 2022. Our year end cash position of $1,001,500,000 compared to $757,200,000 at year end 2022. Our net debt to capital ratio of 3.8% compared to 9% at year end 2022. In addition to cash and expected cash flow from operations, We have more than $900,000,000 available under our credit facilities. As of year end, there were no amounts outstanding under the credit facility There were no commercial paper borrowings outstanding.

Speaker 3

That concludes my remarks on our Q4 performance. I'll now briefly review a few outlook items for 2024. We expect that capital expenditures will be in the range of $100,000,000 to $110,000,000 In addition, we currently anticipate that our full year 2024 effective income tax rate will be in a range of 22% to 23%. I'll now turn the call back to Nick for his closing thoughts. Nick?

Speaker 2

Thanks, Alvaro. Snap on 4th quarter and full year. Geographic variation, shifting customer perspective, growing macro uncertainties, all overcome by Snap on's ability to wield disadvantages, making the most of opportunities, continuing its positive and upward trend now demonstrated over multiple quarters and a significant number of years. The quarter did see a change in technicians' perspectives. And in pivoting to adjust, the Tools Group volumes did not meet our standards.

Speaker 2

But the Tools team did blunt the difficulty with favorable mix and RCI driving improvement of OI margins up 20 basis points with the gross margin rising 200 basis points. The story with repair shop owners and managers was somewhat different. They recognize the need to upgrade and RS and I increased its rise in participation in OEM programs and extended its gains in undercar equipment, particularly in the expanding collision space. And finally, we saw RC and I register another quarter of increasing importance corporation with the critical industries rising double digits and achieving another leap in margin, reaching new and significant levels. And it all resulted in a 4th quarter advancement against some substantial headwinds.

Speaker 2

Sales were up 3.5% as reported, 2.2% organically. OI margins of 21.6% increased 10 basis points and an EPS of $4.75 rising 7.5%, all representing progress in a time when It all was not where we'd like it to be. But I believe the bright line story of this period is the full year. Sales for the corporation increased 5.6 percent organically. OpCo IR margin rose 110 basis points, Another significant advance in a long line of gains reaching 22% for the first time and the EPS was $18.76 up versus all comparisons.

Speaker 2

And it was all authored by some noteworthy performances. The Tools Group Not encountering the smoothest sailing, but still achieving an OI margin of 23.6%, an increase of 150 basis points. RS and I sales up 6.7 percent organically and an OI margin of 24.3 percent up 70 basis points off a strong base. And C and I facing a landscape of challenges, but growing 4.2% as reported 5% organically with an OI margin of 15.5 percent, up 140 basis points against 50 basis points of negative currency. And perhaps the biggest story of all is the emergence of the critical industry business, growing strong double digits in all four quarters, demonstrating that we really can roll the Snap on brand out of the garage at considerable margins.

Speaker 2

We see the quarter and the year as demonstrating that Snap on does have multiple runways for progress. And if one of our segments is challenged, we can still move forward achieving clear and continuing advancement driven by the other parts of the enterprise. And as such, we're encouraged by our present and by our future. We believe that with our advantages in product, everyone recognizes we know work and we do make tasks easier In brand, everywhere you go among the people of work, the Snap on sign is displayed and spoken up with great pride and in our people, a team battle tested, who find the way forward and upward despite the challenges. The results of 2023 say it so and we believe enabled by those advantages Snap on will overcome, will achieve and will advance continuing the positive trend throughout 2024 and well beyond.

Speaker 2

Now before I turn the call over to the operator, I'll address our franchisees and associates. I know they're all listening. I've spoken today with belief and confidence on our current situation and our way forward. I do so principally, but I do so principally because I know the capability and the quality demonstrated over and over by all of you For your contributions in authoring our achievement, you have my congratulations. For the skills and energy you bring to our corporation every day, you have my admiration.

Speaker 2

And for the commitment you consistently display to the future of our mutual enterprise, You have my thanks. Now I'll turn the call over to the operator. Operator?

Operator

We will now begin the question and answer Our first question comes from Luke Yunck with Baird. Please go ahead.

Speaker 4

Good morning, everyone. Thanks for taking the question here. Nick, for starters, hoping you could just expand. I know you mentioned some of these things in the prepared remarks already, but if you could just expand on Snap on's most important growth drivers in the Tools Group as we go into 2024 here, really Irrespective of what the market is giving you and if you pivot aggressively enough, do you think that you can grow the tools business this year, Nick?

Speaker 2

Yes, I think we can. I mean, I think we've done it. We did it in the you did it in the Pandemic era coming out of pandemic when confidence was kind of Stilted in the tools. If you look at the 1st four quarters after the pandemic, it was mostly on shorter payback items. So we can make good business out of that.

Speaker 2

We made it at the tail end of the financial recession as well. So we think that's the capability. We were simply, as you might say, what we saw coming out of the FFC, See, everybody was sort of business as usual pumped up and they were ordering to a general mix of product. And then on mid Late October November things started to look a little different to our franchisees and they wanted to make a pivot because they had been through this rodeo before And so they wanted to redirect. That's what we're doing.

Speaker 2

We think we have great things in hand tools and in diagnostics and in tool storage carts and maybe Some of the lower lines of tool storage boxes themselves like in the classic series. So we're going to focus on that. That doesn't mean we're going to abandon the bigger ticket items, things like maybe Triton and so on in diagnostics or which we believe is very strong or our boxes. But We're going to shift our focus. And it's important to talk about the capacity, Luca.

Speaker 2

So remember, we were already kind of bumping up the capacity and we're fighting to expand it. And so what you want to do in this situation is try to use that expanded capacity in a redirected manner. So we actually have the volumes in the places we think are selling now. So we feel pretty good about that. Our product lineup is good.

Speaker 2

We got a good as I said, product leads the way. We got a great array of hand tools coming forward. Got new toolboxes, diagnostics, power tools, all those things are going to work for us, we believe. So the way forward is 1, continue to Drive the products, make sure we can actually deliver them. And then thirdly, as always to try to help the franchisees In selling, giving them more time to sell and maybe sometimes it might take a little longer in this situation.

Speaker 2

So that's why we're deploying our field guides to get out there and provide a little bit more energy and time to the actual selling process. So we think it's a reasonable pivot. This isn't our again, it's not our first rodeo. It's not the Tools Group first rodeo. So we think, okay, things have changed a little bit.

Speaker 2

We know how to respond.

Speaker 4

Thanks for that. And then I guess a related question would be the shift in mechanic sentiment that you saw mid fall. Just how do you think that influences the appetite for credit here and as you track either originations or just other trends in the credit book? I'm thinking more from the demand side,

Speaker 2

Well, yes, you probably see less credit used in that situation. I mean, the originations were I think Alta sat down 1 percent in the United States in the quarter. So I mean, I think you see that kind of thing. And if you go back and you look at our numbers, say, coming out of the COVID, say, quarter 3 and 4 of 'twenty and 1st Q1 of 2021, you'll see that kind of phenomena. So that could be the case.

Speaker 2

Now this is early days to Our people sensed the good thing about this is our people sensed it right away. And so sensing it, they changed their orders. That put a little strain on the factory because When you change the orders, it makes the capacity shrink a little bit. So you have those kinds of things. So I believe that I believe you may see a little pivoting away from that.

Speaker 2

Now I think this is right in tune with everything. I do believe, I've said it many times That there is a kind of bifurcated economy that there's a financial economy, the kinds of people that I said in my remarks that we're talking about the recession is coming, the recession is coming and the people are saying we're going to have a soft landing now. But the people at the grassroots level have a different view of the world. And If you look at the Wall Street Journal, the front page say and the paper edition, there's an article saying just this. Actually, I met a bunch of franchisees and I met a huge number of people in the factories and in the garages in places like Conway and Louisville and Elizabeth and Tennessee and Milwaukee.

Speaker 2

So and they all kind of say the same thing. They've got jobs. They've got the cash coming in. But every day they get up and get bad news for breakfast. And you start to wonder about what's going to happen.

Speaker 2

So it's not that things are bad today, but people worry about how things are going to happen and what's going to happen in the future. And I

Speaker 4

This one might be for Aldo. Just hoping to unpack what happened in the Power Tools business specifically this quarter. If we look at The intersegment, so it seems like things maybe stepped down quite a bit and just trying to reconcile what you saw In order trends versus your impression of underlying trends in power tools, is it possible that there is sort of a one time adjustment in orders So level said inventory on the vans in power tools, am I thinking about that right?

Speaker 3

Well, in subways, there's another buffer between the tools group maintains its own levels of inventory. So you're right, Luke, simply the tools group had less need to buy as much In Power Tools and Diagnostics in the quarter, it doesn't mean necessarily that flows 1 to 1 through to the van because you have inventories in between both inventories at the van itself and then inventories in the hands of the tools group. But yes, the lower sales from C and I and from RS and I to the tools group reflects actually Pretty much power tools and diagnostic related products?

Speaker 2

Actually, I'd offer that What you're seeing phenomena is you're seeing as Alvaro said some adjustment there. And if you looked at if you actually look at careful look at C and I, you'd see they actually had a pop up quarter to their traditional customers. But what happens in the power tools business is our new CT9038 came out 18 volt. It's sold great. Then this happened and that kept selling, but the bigger ticket items in power tools like the 18 volts just kind of dropped off and people tended want the 14.4 volt.

Speaker 2

Our supply chains are a little longer for that. We couldn't supply all of that. So you have that kind of situation. But if you look at the Tools Group level, power tools are not down, especially an outstanding amount. It's mostly between the Tools Group and and C and I.

Speaker 4

Got it. I'll leave it there. Thank you.

Speaker 2

Yes.

Operator

The next question is from Bret Jordan with Jefferies. Please go ahead.

Speaker 5

Hey, good morning guys. This is Patrick Buckley on for Brett. Thanks for taking our questions.

Speaker 4

Can you talk a

Speaker 5

bit more On pricing versus units within the Tools Group, and then looking ahead, is our pricing actions on the table here or more focused on pushing the shorter payable tools?

Speaker 2

No, no. Pricing, we generally have, you know, except in, inflationary exceptionally, exceptional inflationary times, which we've all been through more or less recently, is we get 30 to 40 basis points of pricing, something like that. Most of our advancement comes from RCI and new product, which gets its margins. We get our margins for new product. We don't plan changing that approach.

Speaker 2

We're not really going to make a major adjustment in pricing going forward. This is more about shorter payback versus longer payback. It's the idea think of it this way. Just take a simple thing as a tool storage unit. Okay, you can buy a big Epic and boy they are great.

Speaker 2

People love them. They bring people up and show them their box and they say this is My dream, but that's not a quick payback. That's a longer payback. You got to work a long time and get efficiency from the size of that and the features in that to get a payback. But if you get yourself a card, You can move from your workplace out into the particularly in some of these independent shops out into the shop yard or all over the shop and that gives you immediate Savings in time, just there.

Speaker 2

And so that's the kind of thing I'm talking about is that shift to the idea, is this thing going to pay for me right away? Pay me back right away. Wrenches do that, particularly like the synergy I talked about here, which is a leap forward in terms of reliability and access and swing arc and making jobs easier and able to beat the flat rate faster. So those are the kinds of things we're betting on. We've seen it work before.

Speaker 2

So I think the good thing about this is Tools Group saw it started to move on.

Speaker 5

Got it. That's helpful. Thank you. And then was there anything notable to call out in the corporate expense line? Q4 seemed to take a step down from the run rate we saw for the past few years.

Speaker 3

So we had lower spending in the quarter on legal expenses in particular. We had a favorable settlement on a matter. So it was able to reduce our in the quarter, but the run rate for corporate expenses is running in typical fashion.

Speaker 2

Actually in total it's about up $226,000,000 in the year. That's up $5,000,000 or $6,000,000 year over year. $113,000,000 versus about $108,000,000 Yes.

Speaker 5

Got it. That's all for us. Thanks guys.

Operator

The next question is from Scott Stember with ROTH MTM. Please go ahead.

Speaker 6

Good morning and thanks for taking my questions. Nick, could you split out the different sub segments within tools, hand tools, power tools, obviously, it sounds like power tools were down, but and storage units, things like that.

Speaker 4

Well, it

Speaker 2

wasn't a lot of Being down by 1.7 percent is not a lot of good news to go around. The big kahuna moving downwards was diagnostics. They saw the diagnostics and we had we have several ranges of diagnostics and the latest introduced was the SOLUS. It's the low end. I don't want to say low end.

Speaker 2

It's the lowest priced version of our product. And that did okay in the quarter, not as well as we might have hoped in other situations. But what kind of went down was ZEUS, the top of the line and the next one down Triton and Zoos had been introduced last year in Q4, so let's compare this around. But the biggest kahuna down was that. And then after that, I think actually tool storage was up slightly, but all because of carts, pretty much because of carts and shop and tech items were down.

Speaker 2

So hand tools were down some. But if you looked at it, the thing that one of the things that drove the margins, I think the important point out of that, Scott, what drove the margin improvement in the Group despite the lower volume was that the stuff they make, the carts at Algona, the tool storage items And the hand tools were a bigger portion of their sales than in prior year in the prior year. And so that yielded a much greater mix because In hand tools and what the tools group sells for hand tools and tool storage, they get both Distribution and manufacturer margins for things like diagnostics and power tools and shop and tech stuff, They only get the distribution margin. So there's a pretty big difference between those. So you can get some pretty good news or bad news

Speaker 6

So going forward, obviously, you're focusing on quicker payback items. So Obviously, that would be hand tools. You're going to start cranking that up a little bit more.

Speaker 2

Yes. He would say it this way. I mean, there's We like to think, Scott, that we could find quicker payback items and everything. Hand tools clearly, mostly, Often, I should say often are quick payback. The technicians can see quick payback.

Speaker 2

Certain versions of tool storage, as I've said, The cards in particular, which tend to be substantially cheaper and more efficacious because they're kind of an option add on to a big box And then or somebody can't afford a lot and wants to just get in Snap on tool storage in some way at an affordable level. And then the lower end of that product, the Classic Series, which we're working on having in terms of programs coming up, which we've got scheduled for February March. And so that would be the case. Diagnostics, it all tends to be bigger ticket items. So There are there is the SOLACE at the lower end and we have some we'll able to bring out a new diagnostic at some point during the year, which creates interest.

Speaker 2

But lower ticket items are just at the bottom end of diagnostics. And then power tools can have I don't want to say big ticket items, but the 18 volts are a little more expensive. 14.4 is a lot more affordable and you tend to have a very focused application for it, where the 18 volt tends to be broader applications, you bring that power to any place, Whereas the 18 the 14 volts tend to be saying I got this problem in this particular chassis area of the car that I see, so I'm going to use that 14 or both. So that tends to be quick payback as well. Those are the kinds of things you see.

Speaker 6

Got it. And then just a last question on the bigger Victor, you said that the overall market, the underlying conditions look pretty strong. You're not seeing any Warning signs for the businesses themselves, demand. I mean, O'Reilly reported it last night and they said that Their professional business was up double digits. So I just want to make sure that we're not look this is not a canary in the coal mine that the underlying business?

Speaker 6

I don't think

Speaker 3

so. I mean

Speaker 2

the thing is everybody says the business is good. I mean I don't know. First of all, I have 2 answers to that. One is the metrics. If you look at the BOL data, That all seems positive.

Speaker 2

I mean the miles driven are up and that's a long way thing. But the spending on Household spending on repair up 4% year over year, that's a pretty good number. The number of techs up 4.5%. It used to be 1%. They're growing at 4.5%.

Speaker 2

The technician wage is up at 7%. So those kinds of things are good things. And the car park, of course, keeps growing. And So they keep pumping it in. And the auto industry, while this doesn't make a difference too much, is starting to come back.

Speaker 2

And They're still rolling out those new technology. So all that seems to be from a quantitative point of view seems to be positive. Now the Bureau of Labor data can trail, so I don't know, and people have questions about that. But then when you go out in the windshield survey and talk to not only the people, our franchisees who are out there every day, but you talk to the general people who work, they think Cash is rolling for them. They're not going to say they're cash rich, but they are.

Speaker 2

And so I think things look good right now. And I don't expect this to change.

Speaker 6

Got it. And just to firm up the follow-up on Something you said earlier, you would not be surprised to see the Tools Group return to positive organic growth

Speaker 2

Well, we don't give guidance, but I think I said like 4 times in my remarks, They weren't at standard.

Speaker 7

So

Speaker 2

We expect them to grow. If we don't grow, they will be below our expectations.

Speaker 6

Got it. That's all I have. Thank you.

Operator

And our last question today comes from David MacGregor with Longbow Research. Please go ahead.

Speaker 7

Yes. Good morning, everyone, and thanks for taking my questions. Let me just start by sort of picking up on the last line of questioning. It sounds like hand tools and And storage doing maybe a little bit better in relative terms. But that's also where you were adding capacity in Elizabethton and Milwaukee and Algonquin.

Speaker 7

Are they doing a little bit better because you finally just have a little more capacity and you're able to liquidate some of that backlog? Or is there maybe a better underlying story of those categories?

Speaker 2

That's a complicated question because of the situation. I mean, I guess, I don't know. I think this way though. I'm pretty sure we're doing better Because we had in the queue some ability to adjust for shorter payback items in those areas. That's pretty much the way I can answer it.

Speaker 2

Now what I will tell you is, David, this is an operating guy's Song is that when you're thinking that you're going to have big you're going to have promotions rolling out of your factories And all of a sudden your customers come up and say, never mind, we want to go over here. This tends to create a lot of, Shall I say, inefficiencies. And so you have to adjust to that. So I don't think we got the full result of the capacities we had hoped the capacity expansions we had hoped to get in the Q4 because of those changes. They just optimize what you've added.

Speaker 2

And so that's part of it. That's a factor in all of this. Yes, the backlog for some of the backlog for tool storage was down. So we liquidated some of that, but we still have backlog in those areas. So it's a complicated answer, I think.

Speaker 2

You might have some of that, But on the other hand, we couldn't fulfill it as much. We couldn't have liquidated as much as we would have had we had full had able to roll in the way we had planned to roll in our production plants coming out of the SFC.

Speaker 7

Okay. Just a couple of other questions for you, Nick and Aldo. The trucks, I would love to get your sense of your organic growth was down 5.7. Do you think the truck sell through was?

Speaker 2

I sort of know what it was and it was better than that. In the quarter and for the year, generally it was better. This all tends to come out in a wash though in the long run. But in the Q4, the trucks were not down, were Substantially, we're still down, but not anything like the Tools Group.

Speaker 7

Down low single digits?

Speaker 2

Yes. Sure. Yes. I mean, so you would say maybe that you don't know, but they've kind of liquidated some things. And part of it is, Delivery if you pick a particular product and you say you shift to that product, we do have inventory, but the point is sometimes you don't have that product and you don't have that product and you have to make changes in the factory.

Speaker 2

Sometimes you couldn't even deliver what they wanted.

Speaker 7

Let me just shift to credit for a second if I could. And Aldo, you normally share the breakdown on originations between finance receivables and credit receivables. Would you be kind enough to do that for us again this quarter?

Speaker 3

No, the EC receivables, the originations were down and that was more than offset by a contract receivables. And similar to results of the Tools Group EC originations in the United States were down more than what we saw internationally. It was actually up in terms of EC originations. So that kind of gives you some of the blend.

Speaker 7

Okay. And I guess within those origination numbers, how can you distinguish between merchandise versus franchisees flipping RA and do you see?

Speaker 3

Actually, I was pleased to see I know you're asking, David. Actually, in the quarter, it was less Then what would be the typical mix of what we call transfers, RA transfers where they transfer items from the revolving accounts over to EC, there's actually a less of an effect of that. But for the full year, it's very consistent with where we expect it to be. So there's been no signs of franchisees using the credit company to finance their operations by moving things from their evolving accounts I think that's what you're after.

Speaker 7

Yes. And do you get a sense that there's an opportunity here to maybe I mean, you've got a very high quality credit portfolio. I don't think that's ever been in doubt. Certainly, that's our sense. Do you get a sense there's maybe an opportunity here to relax a little on the credit standard in order to reinvigorate demand?

Speaker 2

No.

Speaker 7

It was a nice tight answer, Nick.

Speaker 3

Well, if you think about what we said. People are lacking confidence to some degree for big ticket items. I don't think the way home is to discount the interest rate you're going to charge them to provoke a sale. So we're not into the discounting isn't usually our style. It doesn't mean we might not come up with creative promotions and bundling and things like that, But I don't think this accounting is a way home.

Speaker 7

And so what's the take on the regional kickoffs? Just Help us think through first half, the what you're seeing in the initial kickoff?

Speaker 2

I think we usually comment on the usually in the Q1 call, but in general, we tried to shift the kickoffs at the last moment for We took a different approach to kick off this time. We saw this problem. We try to concentrate on shorter payback items that seem to go reasonably okay with those items. And then we established a little more program in February March thinking that if we kind of stretch the kickoffs into other months, then we would be able to have better adjustments to the current situation. So that's sort of what we did in the kickoff.

Speaker 2

I was at one In Las Vegas, it turned out yes, they usually send me to Deadwood, South North Dakota. This time, I got to go to Las Vegas. And we had the Canadian guys there. That seemed to go okay. They seem to be positive.

Speaker 2

The franchisees don't seem to be daunted by this. They just report what they see.

Speaker 7

Right. The last question for me is just maybe on the competitive dynamics. You've been fairly steady in terms of the number of trucks you have on the road now for quite a number of years. I gather maybe there's a few more company owned versus franchisee owned The mix overall, but at the same time, your competitors have been increasing the number of trucks on the road. And you sense this is starting to have a little bit of an impact on you.

Speaker 7

Do you feel like maybe there was a little bit of share loss this

Speaker 2

We're booming upwards and I don't talk about it now. You could think that, but I don't think so. I think, look, we got we have I don't think I think we're covering the universe With the 3,400 or so franchisees that we have, so you could argue that some locations might be seeing competition where they haven't. But there are few locations, David, that don't have any competition. So what does happen sometimes is, okay, somebody 1 or 2 or 3, 1 of the other competitors will put somebody in place, But that guy our guy in that territory has already been dealing with people and the other guy has his own competition and it might create More business, but I never knew the franchisees saying that.

Speaker 2

Right. So why you logically might think that would be the case. And we think about it all the time. And I ask the question all the time. But they almost never say that, in fact never.

Speaker 2

Tom, are you seeing

Speaker 7

any change in franchisee attrition rates?

Speaker 2

No, that's pretty held the same, pretty much the same in the quarter. So just in the quarter, I think we saw more longer in the tooth guys leaving the quarter, interesting phenomena. But that was that's just a sort of anecdotal view of it. I don't know actually what that could make some difference, but I don't think We worry about that in particular in terms of the day to day dynamics of the competition.

Speaker 7

Got it. Thanks very much. That's all I've got.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Sara Verbsky for any closing remarks.

Speaker 1

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

Operator

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

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