IDEAYA Biosciences Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 18, 2024

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Snap on Incorporated 2024 First Quarter Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Sarah Verbsky, Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Gary, and good morning, everyone. We appreciate you joining us today as we review Snap on's Q1 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 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 discuss management's or the company's outlook, plans or projections are forward looking statements and actual results may differ materially from those made in such statements. Additional information and the factors that could cause our results to differ materially from those in the forward looking statements are contained in our SEC filings.

Speaker 1

Finally, this presentation includes non GAAP measures of financial performance, which are not meant to be considered in isolation or as a substitute for their GAAP counterparts. Additional information regarding these measures is included in our earnings release issued today, which can be found on our website. With that said, I'd now like to turn the call over to Nick Pinchuk.

Speaker 2

Nick? Thanks, Sarah. Good morning, everybody. As usual, I'll start with the highlights of our Q1. I'll provide my perspectives on the results, on our markets and our path ahead.

Speaker 2

After that, Aldo will give you a detailed review of the financials. We believe that our Q1 once again demonstrated Snap on's ability to maintain its strength, to engage headwinds, to manage challenges and to leverage the multiple opportunities of our markets. Looking at the results in total, we are encouraged. Like most quarters, we had turbulence from geography to geography and from operation to operation. North America was mixed, but with significant gains in critical industries.

Speaker 2

Internationally, our consolidated results were also mixed, but yielding overall positives as our operations in Europe and Asia overcame the effects of recessions in Europe and the delayed recovery in China. Now the results. 1st quarter sales were $1,182,300,000 about flat to last year. On an organic basis, excluding $6,700,000 from acquisitions and $2,500,000 from favorable foreign currency, our sales were lower by 0.8%. OpCo OI was $270,900,000 an increase of $11,100,000 and the OpCo operating margin for the quarter was 22.9%, up 90 basis points.

Speaker 2

Now both those numbers benefited from the legal payment referenced in our release. But with or without that legal flow, our Q1 OpCo OI and the margin were among our best. It's a strong statement given the turbulence of the day. Financial Services. Operating income grew to $68,300,000 from last year's $66,300,000 and the result combined with OpCo to raise our consolidated operating margin to 26.5%, up over the 25.6% recorded last year.

Speaker 2

And EPS, it was $4.91 including a per share benefit from a legal payment of $0.16 but up $0.31 or 6.7 percent from last year. So those are the numbers. Now let's turn to the markets and the trends we're seeing as we connect with our customers. From an overall perspective, we believe the automotive repair arena remains favorable. Vehicle OEM and dealerships continue investing in tools and equipment preparing for the tide in new models, bringing the latest technologies in drivetrains to the market.

Speaker 2

And in the quarter, our repair systems and information group or RS and I as we call it, expanded our reach into OEM programs and took advantage of the opportunities throughout its global footprint. And as we look forward, we see further prospects for RS and I capitalizing on that trend, supplying dealerships in independent garages with just the products they need to confront the wave of modern platforms that are coming. So the shops are strong. Now let's speak of the technician. The guys and gal that twirl the wrenches punch the keys or tap the screens.

Speaker 2

This quarter, I had multiple occasions to visit with franchisees. And the report was generally that shops are humming, the bays are running at full capacity and all that mirrors what the macro data says nationally. The car park is continuing to age, now at an average of 12.5 years and I think moving up. Technician wages are rising and their hours worked are increasing. We believe it all signals ongoing and robust demand for repair.

Speaker 2

And it's true. The activity is strong, but there is a difference between the industry overview

Speaker 3

and the technician outlook for the

Speaker 2

future and by extension their purchasing sentiment. The mirage of bad news, inflation, 2 wars, the border, the Red Sea, the election, the Iran bombing. For the people who work, the fear of what's coming around the corner impacts the outlook and paraphrasing the characters of Dune, fear is the outlook killer. It erodes confidence. Techs are well positioned and they continue to invest, but it's in quick payback items that will make a difference right away, but don't require a long term payment stream.

Speaker 2

And in response, we're continuing to redirect that we continue to redirect the Tools Group focus in our design efforts, in our facility capacity, in our selling and marketing efforts, working to match the current customer preference. So that's the auto repair. Now our commercial industrial group or what we call C and I, serving critical industries in the most international of all our groups. And in the quarter, C and I managed the difficult challenge of balancing multiple economies that are in economic turbulence. Europe now has more than half a dozen countries in technical recession.

Speaker 2

And then China and the China environment, including the nearby countries, depending on it, they continue to struggle. India, on the other hand, is booming. Modi has the train running. So that's a positive in Asia amidst some very difficult economies. So that's the geographies.

Speaker 2

Now let's focus on the sectors. Areas like aviation continue to be strong. You don't have to read the paper very long to realize there's a significant focus on aerospace production and repair, where the price for failure is high. And that arena is increasing demand for our precision torque products and for our asset control solutions to improve safety and productivity. In addition, in that sort of critical arena, custom kits, matching a set of items to a particular task remains an important business, especially for the military, both domestically and internationally.

Speaker 2

And with that, Critical Industries is a substantial opportunity and we are investing, expanding capacity, adding new products either organically or through the acquisitions we made over the last few years. We're fortifying our runways for growth, extending outside the garage, and we know it's paying off. So overall, the quarter was favorable despite the headwinds. Tools Group pivoting, RS and I expanding with OEM, C and I extending beyond the garage, solving the critical. And the OpCo OI percentage demonstrated once again the power of Snap on value creation processes, safety, quality, customer connection and innovation are rapid continuous improvement.

Speaker 2

Developing innovative solutions that are born out of insight and observations right in the workplace. This understanding melded with RCI helps Snap on to once again hold fast in the turbulence of the day. That's the macro overview. Now let's move to the segments. In the C and I group, sales were $359,900,000 represented a decrease of $3,900,000 or 1.1 percent and that includes $6,700,000 in acquisitions, acquisition related sales, dollars 1,400,000 in unfavorable foreign currency and an organic decline of 2.5%.

Speaker 2

It all reflects higher activity with customers in critical industries more than offset by weakness in Asia Pacific and in our power tools. From an earnings perspective, C and I operating income was $55,400,000 That was about the same as last year. The operating margin was 15.4 percent, up 10 basis points and that was despite 30 basis points of headwind from currency and the acquisitions. Within the quarter, the demand for custom kits addressing particular critical tasks remain nicely robust with increased demand for asset control solutions like our automatic tool control products. It was a nice bright spot in C and I.

Speaker 2

On the other hand, power tools was down in the quarter, but help is on the way. 2 new power tool models born out of customer connection were recently introduced, each fulfilling specific needs for each fulfilling specific needs. For repair garages, we launched the PH3045B Air Hammer. This is a tool that replicates the effect of swinging a hammer and hitting a chisel, except the device hurls the hammer 3,500 times a minute. Vehicles are filled with components like ball joints, wheel bearings, suspension, bushings that are packed in tight fit for maximum efficiency.

Speaker 2

This assembly can be a bear. We know this from being in the garage. Well, with our new Air Hammer, the easy to use retainer securely holds the chisel in place while the piston sledgehammers away. It's powerful, but at the same time the compact 2 inches barrel enables the access in tight spaces delivering tremendous power, speed and energy with unlimited runtime. It's a real productivity enhancer, but the essential feature born out of watching the technicians in the shop is the best in class vibration reduction created by special elastomer shocks, allowing the mechanic to pound away and seize suspension components without fatigue or pain.

Speaker 2

No more sore arms from hammer work. The new hammer was introduced late in the quarter and techs have already noticed. Also on Power Tools, our cordless portfolio expanded with the introduction of a new 18 volt nibbler designed for collision repair and metal fabrication. It's a big time saver. It speeds up work that once involved hand shears or other devices help technicians cut any free form shape conceivable out of tough sheet metal.

Speaker 2

Again, the design resulted from customer connection, from watching the tech struggle with shears. Our new nibbler makes a big difference when cutting into fenders, extracting a damaged panel or cutting a ceiling of a car accommodating installation of a sunroof or creating a place anywhere in the vehicle for placing emergency lighting shining away for first responders. I have to tell you, we're encouraged by these innovative new products and by all the others we're planning to introduce as the days go forward. We know work and they all will make a difference right away. C and I, a quarter confronted with international headwinds, strong momentum in domestic markets, led by critical industries extending out of the garage with growing strength.

Speaker 2

Now let's talk about the Tools Group. The Q1 for the Tools Group was below our standard. However, we do remain confident and we do see a pivot to focus on quick payback items registering a positive momentum and a movement. Sales in the quarter were 5 $100,100,000 including and reflected an organic decrease, including an organic decrease or reflecting an organic decrease of 7%. The group's operating income margin was 23.5%, down 100 basis points.

Speaker 2

Notably, gross margin in the quarter rose 90 basis points, reaching 48.2%. You see shorter payback margins aren't shorter on profitability. During the quarter, we worked to redirect our plans, guide our franchisees to innovative solutions that drive productivity and we kept engaging our customer connection observing the task executed in the Bay and using the insights to design and deploy innovative and focused products, offerings that are dedicated to making work easier. Like 2 new products, Just Engineer to address time consuming tasks where simple repairs are made complex by limited accessibility or by seized components that slow the work to a snail's pace. You can see it in the garage.

Speaker 2

For instance, on General Motors, 6L80 and 8L80, 90 transmissions, the valve body bolts are obstructed by the exhaust setup, making it very taxing to do this job with a standard ratchet or socket combination. We were in some of those GM garages and observed the problem firsthand, classic customer connection. And the innovation that followed in our quarter inch drive Torx Plus EPL10 low profile inverted socket, that's a mouthful. That innovation was released in the Q1 and it does make GM transmission work easier. The new cushion design precisely maneuver the new custom design precisely maneuvers between the exhaust assembly and the transmission and gazing the fastener in such a way that provides enough clearance for a ratcheting box or box wrench, a box and wrench or a hand ratchet to access the bolts for easy removal with no exhaust disassembly required, saving more than 45 minutes per repair right away.

Speaker 2

Techs working on GM transmissions can complete more work with this device and make more money. They can do that right away, quick payback. Another example we saw, another example of that was we saw that removing the brake caliber pins on Toyota trucks and sports utilities was very difficult. The pins on 4 Runners, Tacomas and Tundras are exposed to harsh road environments, often causing the parts to become immovable, regularly requiring like heat or excessive force to free the restricted fasteners. And each of those methods requires time and it raises the risk of damage to nearby components, often elevating the complexity of the repair taking a lot more time.

Speaker 2

Watching the work, our engineers produced a unique punch like bit that precisely aligns an air hammer with the dimensions of the pin, maximizing the extraction force without endangering the surrounding Once again, simplifying the task and freeing the tech to move on to other jobs. It's another quick payback item that's now available and popular. Finally in the quarter, we expanded our only the only U. S. Made locking plier lineup by releasing 2 new models, the LP5LN constructed with a tapered nose, it's ideal for additional reach inside confined space to easily access narrow workpieces and the new LP5WC delivering a reliable gripping power to difficult to engage round objects like hoses.

Speaker 2

Beyond the special features of those two models, the full line offers our subcomp kind of 6 inches plier line offers increased accessibility because it's small and enabling techs to maneuver in crowded engine compartments and under the dash. The designs also provide unmatched clamping forces that locking pliers, unmatched clamping forces that will not slip under load with the locking mechanism. The pliers also serve as a second pair of hands. You can lock them up locking up, holding materials securely in place, freeing up the technician's hands to complete another step in the repair. And each unit, each of those locking pliers units is forged and produced on our Elkmont, Alabama plant and they're the only locking models made in the U.

Speaker 2

S. Well, that is the tools group pivoting to match the technicians' current preferences and needs, wielding our customer connections, deploying solutions that improve efficiency by making tasks easier. Now RS and I. The RS and I group's results confirmed, I think, what we've been saying all along. Snap on is well positioned to support repair shops, both dealers and the vast networks of independent shops.

Speaker 2

And in that regard, RS and I sales in the quarter were a quarter of $63,800,000 up 17 point $2,000,000 or 3.9 percent versus last year with an organic sales increase of 3.3%. Operating earnings for the group reached $112,900,000 reflecting an increase of $8,300,000 or 7.9 percent versus last year. The operating income margin was 24.3%, rising by 90 basis points, a powerful performance driven by OEM related activity and sales in undercar. Helping shops prepare for new technologies in terms of OEM related activity and sales in undercar, helping shops prepare for new technologies and enabling system upgrades in the growing collision market. We continue to seek to clearly see abundant runways for growth in RS and I and we're working to take advantage.

Speaker 2

One example of that is the launch of our new heavy duty repair information software. This package combines the vehicle interface capabilities of our Nexiq heavy duty diagnostic units with the horsepower of our Mitchell 1 information database. It's an innovative solution for repair and heavy duty industry, which over the past decade has seen an explosion of new technologies relating to sophisticated emission control along with advanced computer and electrical networks that all combines to present heavy mechanics with complex and complicated repair tasks. Now the solutions are located in one spot. Pets can search by VIN number and access operating specification, troubleshooting tips and interactive wiring diagrams, all big specific to the particular vehicle, all big time savers.

Speaker 2

And this new product was deployed in the quarter and it's a groundbreaking integrated platform that combines diagnostic capability together with vehicle information. It's very powerful and I can tell you the heavy duty industry has noticed. You can see it in the RS and I numbers. And in the quarter, our diagnostic division also released its latest 24.2 software upgrade, expanding our broad range of vehicle coverage and test procedures throughout all our existing hardware. The new upgrade strengthens our already market leading data positions.

Speaker 2

Technicians get access to our SureTrack vehicle specific real fixes, repair tips and commonly replaced parts, all derived from our proprietary database of data records, unmatched insight, not only to interpret what the vehicle trouble codes are saying, but to uniquely use the information to determine the exact problem, analyzing millions of data lines per car predicting the most likely repair. Snap on uniquely provides this capability and in its latest update, we continue adding new models and functionalities, making our proprietary software position even more effective and more powerful. We're confident in the strength of RS and I and we keep driving to expand its positions with repair shop owners and managers to make by making work easier with more and more great new products. Well, that's Snap on's Q1. Sales flat, overcoming the significant headwinds, critical industries advancing again.

Speaker 2

The Tools Group pivoting, matching the preference for quick payback products. OEM, undercar and repair information markets remaining robust. The OpCo OI margin 22.9 percent, up 90 basis points and an EPS of $4.91 strong results that overcame the headwinds and benefited from a legal outcome, all demonstrating the strength in the midst of turbulence. It was an encouraging quarter. Now I'll turn the call over to Aldo.

Speaker 2

Aldo?

Speaker 4

Thanks, Nick. Our consolidated operating results are summarized on Slide 6. Net sales of $1,182,300,000 in the quarter compared to $1,183,000,000 last year, reflecting an 0.8 percent organic sales decline, partially offset by $6,700,000 of acquisition related sales and $2,500,000 of favorable foreign currency translation. Activity in our automotive repair markets was mixed. Gains in sales to OEM and independent shop owners and managers were more than offset by lower sales to technicians through our franchise van channel.

Speaker 4

Within the industrial sector or our C and I group, sales to customers in critical industries were up mid single digits in the quarter as compared to last year. Consolidated gross margin of 50.5% improved 70 basis points from 49.8% last year, primarily reflecting benefits from lower material and other costs and savings from the company's RCI initiatives. Operating expenses as a percentage of net sales of 27.6% compared to 27.8% last year. In the quarter, as noted in our press release, operating expenses included an $11,300,000 benefit for payments received associated with the legal matter. The 20 basis point improvement in the operating expense ratio is primarily due to the benefit from the legal payment, partially offset by increased personnel and other costs, which includes a 20 basis point impact from acquisitions.

Speaker 4

Operating earnings before Financial Services of $270,900,000 in the quarter, including the benefit from the legal payment compared to $259,800,000 in 2023. As a percentage of net sales, operating margin before financial services of 22.9% compared to 22% last year. Financial Services revenue of $99,600,000 in the Q1 of 2024 compared to $92,600,000 last year, while operating earnings of $68,300,000 compared to $66,300,000 in 2023. Consolidated operating earnings of $339,200,000 which included the legal benefit, compared to $326,100,000 last year. As a percentage of revenues, the operating earnings margin of 26.5% compared to 25.6 percent in 2023.

Speaker 4

Our first quarter effective income tax rate of 22.2% compared to 23.1 percent last year. Net earnings of $263,500,000 or $4.91 per diluted share, including an $8,800,000 or 0.1 $6 per diluted share after tax benefit from the legal payment compared to $248,700,000 or $4.60 per diluted share in the Q1 of 2023. Now let's turn to our segment results for the quarter. Starting with the C and I Group on Slide 7. Sales of $359,900,000 compared to 363.8 $1,000,000 last year, reflecting a 2.5 percent organic sales decline and a $1,400,000 of unfavorable foreign currency translation, partially offset by $6,700,000 of acquisition related sales.

Speaker 4

The organic decrease is primarily due to a double digit reduction in the Power business and a high single digit decline in the segment's Asia Pacific operations, mostly associated with lower inter segment sales. These declines were partially offset by a mid single digit gain in sales to customers in critical industries. With respect to critical industries, military and defense related sales were robust as was activity in the aviation sector. Gross margin improved 200 basis points to 40.8% in the Q1 from 38.8 percent in 2023. This is largely due to increased volumes in the higher gross margin critical industry sector, lower material cost and other cost savings from RCI initiatives and 50 basis points from the benefit of acquisitions.

Speaker 4

Operating expenses as a percentage of sales rose 190 basis points to 25.4% in the quarter from 23.5% in 2023, primarily due to the effects of lower sales volumes, investments in personnel and other costs and a 70 basis point impact from acquisitions. Operating earnings for the C and I segment of $55,400,000 compared to $55,800,000 last year. The operating margin of 15.4% compared to 15.3% in 2023. Turning now to Slide 8. Sales in the Snap on Tools Group of $500,100,000 compared to 5 $37,000,000 a year ago, reflecting a 7% organic sales decline, partially offset by $600,000 of favorable foreign currency translation.

Speaker 4

The organic decrease reflects a high single digit decline in our U. S. Business, partially offset by a mid single digit gain in our international operations. Gross margin improved 90 basis points to 48.2 percent in the quarter from 47.3% last year. This improvement primarily reflects decreased sales of lower gross margin products.

Speaker 4

Operating expenses as a percentage of sales rose 190 basis points to 24.7% in the quarter from 22.8 percent in 2023, largely due to the slower sales volume. Operating earnings for the Snap on Tools Group of $117,300,000 compared to $131,700,000 last year. The operating margin of 23.5 percent compared to 24.5 percent in 2023. Turning to the RS and I group shown on Slide 9. Sales of $463,800,000 compared to $446,600,000 in 2023, reflecting a 3.3 percent organic sales gain and $2,500,000 of favorable foreign currency translation.

Speaker 4

The organic increase includes a high single digit increase in activity with OEM dealerships and a low single digit gain in sales of Undercar Equipment. Gross margin improved 150 basis points to 45% from 43.5% last year, primarily due to benefits from lower material and other and savings from RCI initiatives. Operating expenses as a percentage of sales rose 60 basis points to 20.7% from 20.1% last year, primarily reflecting increased personnel and other costs. Operating earnings for the RS and I group of $112,900,000 compared to $104,600,000 last year, the operating margin of 24.3% compared to 23.4% reported last year. Now turning to Slide 10.

Speaker 4

Revenue from Financial Services increased $7,000,000 or 7.6 percent to $99,600,000 from $92,600,000 last year, primarily reflecting growth of the loan portfolio. Financial Services operating earnings of $68,300,000 compared to $66,300,000 in 2023. Financial services expenses were up $5,000,000 from 2023 levels, including $4,300,000 of higher provisions for credit losses. In the 1st quarters of both 20242023, the average yield on finance receivables was 17.7%. In the 1st quarters of 20242023, the average yields on contract receivables were 9% and 8.7%, respectively.

Speaker 4

Total loan originations of $301,700,000 in the first quarter represented an increase of $800,000 or 0 point 3 10ths of 1 percent from 2023 levels. Increased originations of contract receivables were mostly offset by a low single digit decline in extended credit originations. Moving to Slide 11. Our quarter end balance sheet includes approximately $2,500,000,000 of gross financing receivables with $2,200,000,000 from our U. S.

Speaker 4

Operation. For extended credit or finance receivables, the U. S. 60 day plus delinquency rate of 1.8% is up 30 basis points from the Q1 of 2023, but unchanged

Speaker 3

from the rate reported

Speaker 4

last quarter. Trailing 12 month net losses for the overall extended credit portfolio of $54,100,000 representing 2.75 percent of outstandings at quarter end, which is up 16 basis points from the end of last quarter. Considering the current environment and despite these slight upward trends, we believe that delinquency and portfolio performance metrics remain relatively stable. Now turning to Slide 12. Cash provided by operating activities of $348,700,000 in the quarter represented 129 percent of net earnings compared to $301,600,000 last year.

Speaker 4

The improvement as compared to the Q1 of 2023 largely reflects lower year over year increases in working investment, which included a reduction in inventory during the quarter as well as higher net earnings. Net cash used by investing activities of $63,200,000 primarily reflected net additions to finance receivables of $40,200,000 and capital expenditures of $21,800,000 Net cash used by financing activities of 164,200,000 dollars included cash dividends of $98,200,000 and the repurchase of 248,000 shares of common stock for $70,200,000 under our existing share repurchase programs. As of quarter end, we had remaining availability to repurchase up to an additional $290,600,000 of common stock under our existing authorizations. Turning to Slide 13. Trade and other accounts receivable increased $36,200,000 from 20 23 year end.

Speaker 4

Days sales outstanding of 63 days compared to 60 days as of year end and to 62 days as of the end of Q1 of 2023. Inventories decreased $35,400,000 from 2023 year end. On a trailing 12 month basis, inventory turns of 2.4 compared to 2.3 at year end 2023. Our quarter end cash position of $1,121,000,000 compared to $1,001,500,000 at year end 2023. Our net debt to capital ratio of 1.5% compared to 3.8% at year end 2020 3.

Speaker 4

In addition to cash and expected cash flow from operations, we have more than $900,000,000 available under our credit facilities. As of quarter end, there were no amounts outstanding under the credit facility and there were no commercial paper borrowings outstanding. That concludes my remarks on our Q1 performance. I'll now briefly review a few outlook items for 2024. With respect to corporate expenses, in the second quarter, we believe we could benefit from a legal payment similar to that received in the Q1.

Speaker 4

For the full year, we expect that capital expenditures will be in a range of $100,000,000 to $110,000,000 and we currently anticipate that our full year 20 24 effective income

Speaker 3

tax rate will be in the

Speaker 4

range of 22% to 23%. Tax rate will be in the range of 22% to 23%. I'll now turn the call back to Nick for his closing thoughts. Nick?

Speaker 2

Thanks, Alan. Well, that's the Q1 strength in the midst of tolerance. Even with a part of the enterprise below standard. You see Snap on is a business that reaches very customers in different industries and in various geographies, united in a coherence that is the criticality of work, the essential nature of what we do. And we have the opportunity and advantage in virtually all of those arenas.

Speaker 2

And as a consequence, even when the largest of our entities is not a standard, we find a way in other areas to maintain overall strength. It's that coherent strategic breadth and the experience and capability of our team to execute that has made Snap on so resilient, moving consistently upward for all these years and this quarter was another demonstration of that resilience. C and I, engaging economic challenges across geographies, extending to critical industries, proving that Snap on can roll out of the garage, exploiting the considerable opportunities and do it profitably. The Tools Group, acting to adapt, pivoting to accommodate the tech's uncertain outlook and their preference for quick payback products and doing it with still enviable margins. In fact, with gross margins up 90 basis points showing the promise of their pivot.

Speaker 2

Arce and I seeing opportunities with Pear Shop owners and managers and making the most of it despite the challenges in Europe, volume and margins growing in a very imperfect environment and the credit company working against the grain of short payback preferences and still raising profits. And it all came together to keep activity flat despite the difficulty. To register an OpCo operating margin of 22.9%, up 90 basis points and to record an EPS of $4.91 numbers that are among our strongest ever results with or without the legal benefit. And as such, we look ahead with confidence, fortified by our inherent advantages in our product, deep, wide and growing, solving more critical paths every day, advantages in our brand. Snap on is the outward sign of pride, working men and women taking their jobs.

Speaker 2

And advantage in our people, committed, capable, turbulence tested many times, a team that knows how to ring the positive out of the difficult. And fueled by those advantages, we believe Snap on will maintain its strength, moving positively throughout 2024 and well beyond. Now before I turn the call over to the operator, I'll speak directly to our franchisees and associates worldwide. The Q1 was a resilient and robust demonstration of Snap on strength against challenge. And it all reflects your extraordinary effort to make it so.

Speaker 2

For your contributions to the results, you have my congratulations. For the special capabilities you bring to bear on behalf of our team every day, you have my admiration. And for the unshakable belief you consistently display in our future, you have Mike Banks. Now I'll turn the call over to the operator. Operator?

Operator

We will now begin the question and answer Our first question today comes from Scott Stember with ROTH MKM. Please go ahead.

Speaker 5

Good morning and thanks for taking my questions.

Speaker 2

Good morning, Scott.

Speaker 5

Nick, it sounds like within tools that Power Tools was the weakest. Could you maybe quantify that how much and maybe just talk about how the other sub segments like tool storage, diagnostics and hand tools did?

Speaker 2

Power tools was down the most. Interesting thing, power tools, I hate to say tough comparison, they did have a difficult comparison year over year. Last year was one of the bigger quarters. It actually was up sequentially. So we saw some movement there in the pivot towards shorter payback items versus where we were in the Q4.

Speaker 2

I think that was certainly down the biggest and as I think Aldo said, it was down double digits. Diagnostics was down, but the one of the things that did help the profitability was the fact that tool storage was up and hand tools wasn't as afflicted as the others. And so therefore, what the tools group actually makes, remember that in the array of products, the tools group for tool storage and hand tools gets both a distribution and manufacturers margin. So that really is what describes the product array. It was kind of when we look at it, we can see the effects of pivoting.

Speaker 2

Tool storage was up, but it was in what we call the lower end. We're kind of pleased with it because we worked hard on the Algona plant trying to do this pivot to get more capacity in the accessories and in the classic line in the cards. And the accessories in the classic had big quarters. And those are the lower cost items, people don't get as embroiled and longer payback. So we're kind of pleased with that.

Speaker 2

And hand tools, I showed you some of the raise out of customer connection that we rolled out and we're rolling out more going forward.

Speaker 5

So some of the 2 new power tools that you referred to, you said help is on the way. When do you think we'll start seeing this? Is this starting to ship to the or

Speaker 2

the clinical challenge? Saw some of that in the quarter towards the end of the quarter. The way the quarter played out, things got better. I think sales of demand and sales of food demand got better as the quarter went on. So we kind of had some momentum.

Speaker 2

I hate to overplay that because I've seen I've been here a while. I see all kinds of calendarizations from quarter to quarter. The Andes did have Easter this year. It still looked pretty good. So I think we're kind of encouraged by that.

Speaker 2

What I meant by that was I like those 2 that I brought out. We brought out other ones and we have an array of new ones coming out in the second quarter around power tools. So I think what I meant there is help us on the way as we had we introduced in the quarter a couple of things plus others, those 2 I mentioned, plus we've got others coming.

Speaker 5

Got it. And just last question, if you were to take out the intercompany pressure in RS and I and C and I, what were the external sales? How did they do in both of those segments in the quarter?

Speaker 2

Well, yes, look, if you look at it organically without currency on acquisitions, which would raise the numbers actually just apples to apples is C and I was up 2.2% externally and I think RS and I was up almost 6%, 5.8%. So RS and I was pretty good right in our right where we expect them to be all the time. So RS and I really had a pretty good quarter. And actually, given Europe, 7 countries in recession. And so you see this kind of thing, I think the Hansel's business in Europe was kind of indephalated.

Speaker 2

And so the other businesses went pretty well. So we're pretty pleased with those businesses.

Speaker 5

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

Operator

The next question is from Christopher Glynn with Oppenheimer. Please go ahead.

Speaker 5

Thanks. Good morning, guys.

Speaker 2

Hi,

Speaker 5

Craig. Nick, the nice descriptions on the NPIs, I was actually laughing a bit because had that issue with the, I think the caliper pins on my Sequoia last time I fixed the brakes. So I don't think Sequoia was on your list, but you can add it.

Speaker 2

So we've got times of things that sell. When we talk about short payback items, these guys can see the tool and say, hey, I haven't spent a dog's age fixing these things and this helps. So I think it works out okay for us. Yes.

Speaker 5

Hey, I was wondering if you could contrast, share some thoughts on the kind of decent strength from repair shops with an auto repair umbrella versus the technicians having some confidence?

Speaker 2

Look, we've seen it before. We actually saw it in the financial recession, the great financial recession back, what, more than 10 years ago. And the COVID is the COVID, the shots weren't down that much. They were down for a few weeks and then they figured out what to do. And they were humming in both situations, but the technicians were confidence poor.

Speaker 2

They didn't know where the world was going. So if you remember, I think it's approximated, in the beginning of the COVID, we had the recoveries coming out and we had that D shaped recovery in the 3rd Q4. That was driven a lot by Hanzo's. Small payback and power small payback items, short payback items. And so that's what they do.

Speaker 2

They kind of say, I don't know. It's very interesting. Financial economy, we have all these calculations. The people at work, they get up every morning and they see the news for breakfast and enough of it is bad, they start to lose confidence. And so that's what they're saying.

Speaker 2

They're saying they're thinking, geez, I don't know where these wars are going to go. They're going to start raising taxes, our kids are going to have to fight. The border seems to be a migration, all those things. And they start saying, well, I'm not I know I'm doing good now, but I'm not sure what's going to happen in the future. They don't think in terms of soft landing, hard landing.

Speaker 2

I'm not sure what's going to happen in the future. So they don't want to get themselves out in traffic. Sometimes the narrative about everyday working people is that they're profligate and borrow in bad times. That's not been my experience. These people are pretty Okay.

Speaker 5

And sticking with those texts, so maybe we're seeing the lagged effect of inflation and rates a bit here on small private operators. And you're focused on pivoting the focus to match the faster payback. Should we basically figure you need a couple of quarters to align that as you rejigger the organizational?

Speaker 2

I don't know. Certainly, I'm tasking in the Tools group to do it at light speed. But and we are working on it with alacrity. It is an unknowable amount because what happens is as you move your capacity around and the fact is as you refocus your capacity, no matter how you start putting that thing, you start setting yourself back. You set up more tasks to deliver.

Speaker 2

And sometimes that can be a problem. We did despite the number, the number was worse from a I think a little bit in the quarter, but we saw progress there. We saw the characteristics shifting. And so we think that's going to work for us because we've seen it's worked before. I don't know how long that will take.

Speaker 2

Certainly, we expected to see improvement as we go forward. What the rates of that improvement are, I cannot tell.

Speaker 5

Under it. Makes sense. Thank you, Nick.

Speaker 3

Yes.

Operator

The next question is from David MacGregor with Longbow Research. Please go ahead.

Speaker 3

Yes. Good morning, everyone. Good morning, Nick. I guess, based on our work, we expected the weaker confidence from technicians, but we also know you were more promotional than normal in Q1 with the regional kickoffs and the follow ons. And clearly, franchisees were not responding to those elevated promotional levels to the extent we thought.

Speaker 3

I guess going forward, do you raise further the promotional discounts and incentives? Segment continuing at a negative mid single digit pace through the balance of the year? It sounds like your answer to the last question was kind of a more passive approach where you just have to wait and see how things play out as opposed to maybe taking more active initiatives?

Speaker 2

I don't know if I accept your first premise that we were more frenetic in our promotions in the Q1 than usual. I don't know that to be true. David though, I'm not reviewing every promotion all the time either. So I couldn't sit here and review them all. I don't think so though.

Speaker 2

I don't think our view is like this. The real solution to this is to pivot. And the more these small products, these short payback products, and they're profitable, that we get out, the more sales we'll have. I think trying to promote against the wind is like pouring water up a rope. And so we're not going to do that.

Speaker 2

We're not going to do that. I'm not that desperate. You know what I mean? I mean, look, this is a quarter, okay. The quarter is substandard, but we expect improvement.

Speaker 2

And by the way, I think our margins are still enviable. So I'm not going to we're not going to go I'm not saying we won't have good promotions. That's not what I'm saying. But I'm saying we're not going to get our hair on fire on this and the promotion line. We will get our hair on fire in trying to pivot, designing short payback items, altering the capacity in the factory and having our people in sales work more on put more energy into getting our franchisees how you're going to sell these shorter payback items.

Speaker 2

Sure, if somebody wants to buy an Epic, we'll be happy to accommodate them. But that's what I'm talking about here. I don't think we're going to be promoted any more than normal, any different than normal, let's put it that way, except maybe to focus promotions on maybe some short payback items to try to give people some energy around it. Promotions aren't actually, David, promotions aren't necessarily cost reductions, although they appear to be sometimes, price reduction. Sometimes it's just about creating energy and focus, It's like having a pep rally.

Speaker 3

I'm pretty certain that your post regional kickoff promotions were up year over year versus last year, but I can follow-up with you offline on that.

Speaker 2

I'm not saying you're wrong, David. I'm just saying I'm not aware. I don't feel like we were frenetic about it. That's all. I don't Okay.

Speaker 3

You're talking to

Speaker 2

the wrong guy if you want. If you think I'm following every promotion, I don't. But the envelope I kind of described to you, we expect to follow.

Speaker 3

Yes. Just a couple of follow-up questions, Nick. Can you talk about the progress you made this quarter with incremental manufacturing capacity and maybe the extent to which that increased ability to ship provided a partial offset to the negative top line?

Speaker 2

Well, I don't know about the volumes, but we certainly got out what we I liked what happened in Algona, David, the storage plant. It seemed as though Algona, which has been pounding away on it for a long time, as I know you're very well aware, had made pretty good progress. I think we're a little behind that in say like Elizabethton and Elkmont and certainly Milwaukee in terms of the hand fill plants, maybe a little more difficult to create the changes and create the pivot. So I was pleased with what happened and I don't know though, not so much liquidation. I don't think there was that much of that.

Speaker 2

I think that would have been helped in the Q4 some too. So I don't know. Not really a big factor in this situation.

Speaker 3

Okay. Just last quarter, you had some inventory put back from franchisee attrition that contributed to the negative growth. Was franchisee attrition up again this quarter and was the inventory put back again the source of negative growth?

Speaker 2

I would say there was inventory put back, but maybe a little bit less than about the same, I suppose, as the Q4, maybe not quite the same, maybe not quite the same. So we didn't see quite the biggest what happened is I think the phenomena there, David, is that remember I said that everybody was like, they were white hot coming out of the SFC and then all of a sudden everybody started to get a little nervous and that caused a little more put back. I don't think we had that transition piece in this period. So that probably ended up not having as much put back.

Speaker 3

Okay. And the last question for me, just on credit. I guess I'm trying to make sense of the flat originations given the it sounds like the diagnostics business in particular might be pretty weak. How much of that do you think was kind of revolving account transfers and what's changing in terms of these

Speaker 2

I don't think Not much. You watch that. That I'm pretty sure I know that number. That didn't change.

Speaker 4

It's actually lower. Okay.

Speaker 2

Yes. Not really in the

Speaker 3

back half. Okay. Yes. But what's changing in terms of the EC approval rates? And I guess you mentioned EC originations were down low single digits.

Speaker 3

I'm just guessing overall credit penetration rates are directionally lower.

Speaker 4

Can you just talk a little

Speaker 3

bit about what you're seeing in credit trends?

Speaker 4

I don't think the penetration rates are different at all. I think it's what Nick has described as lower sales of big ticket items. And if there's lower big ticket items, then there's lower EC originations. But I don't think there's anything dramatic in terms of a shift of any sort in terms of how Snap on Credit is participating in

Speaker 5

the sales of the Tools Group.

Speaker 2

If it helps, David, remember, there's the small faster payback items. So in diagnostics, diagnostics was down, but the smaller end SOLID's Plus was strong in the quarter and that doesn't get EC'd as much as say the top end of ZEUS. So some of that's in that situation, but not really much change. You know as well as I do that, EC doesn't necessarily follow directly to the activity. Okay.

Speaker 3

Right. Good. Thanks very much gentlemen.

Operator

The next question is from Gary Prestopino with Barrington Research. Please go ahead.

Speaker 5

Hi, good morning all. Good morning, Gary. Nick, can you maybe could you maybe just help me out here? I mean, the market for repair order repairs is very strong. It sometimes takes longer than you would expect to get your car repaired even on a collision side.

Speaker 5

But you're saying your power tools are down and diagnostics down. Don't the technicians really need to have these products in order to do their jobs correctly and efficiently and quickly? So I guess what I'm asking is, is this just really a function of maybe what's going on with Tools Group is that your diagnostic products have kind of permeated the channel and there's not a lack of demand that is maybe being driven by the fact that everybody's needs have been taken care of. And then on the other side, the power tools, maybe there's just hasn't been the opportunity to innovate as much as you had maybe last year to drive growth. I'm just trying to square all this together.

Speaker 2

Look, I think the thing is you could in diagnostics, we did sell the quicker payback items, the Solus Plus. It was the big ticket ones like ZEUS, which is quite a bit more expensive that didn't sell. In power tools, yes, it can be it can follow very strongly what's introduced in a certain period of time. The power tools, I think, looks worse than it is. Like I said, it was up sequentially with some reasonable gain.

Speaker 2

So I think we see progress in the power tool. So I do think, I don't think we're seeing that. We've seen it before where technicians will focus on things. They have an array of things they want to buy from Snap on. And often when they're confronted with this, they make a transition to say, well, where how can I I want to see the world play out a little bit more?

Speaker 2

I'll buy this wrench or I'll buy this smaller box or I'll buy a small diagnostic or I'll maybe hold on to my power tool a little bit longer. People need the products. But on the other hand, it is an imprecise thing. Sometimes we'll say, okay, I need a particular power tool or a diagnostics because I had trouble last week on this particular on some Toyota or maybe on a BMW. And they'll say, well, I'll wait a little while because I won't see another BMW for a month or 2 or a quarter or 3 or 4 months.

Speaker 2

You'll see that. It's an imprecise situation. Simply, our view of it is more it's always influenced by product, about the new stuff that rolls out. It's a complex array. But what's happening at least as far as we can report and I've talked to a lot of guys is that technicians, one guy in Northern California said the techs are scared.

Speaker 2

Another guy I talked to in Kentucky, Crittendon, Kentucky said they're getting involved in the everyday news. It's weighing them down. I got another guy in Nevada and Reno who said they're assessing over the election. So I'm telling you, this is kind of a it's sort of a saying, where is the environment going to go? I'm going to keep my powder dry for a while.

Speaker 2

I'm going to just take it bit by bit. I don't want to take a big bite. So when they want to figure out how to repair cars, they don't take a big bite. All right. And then I

Speaker 5

guess the last, you had mentioned that this had happened before, I think in the great recession. And I think it's

Speaker 3

just Yes,

Speaker 2

and in the COVID. Gary, and in the COVID.

Speaker 5

So how long did this take to flush out? Was this a couple of quarter phenomenon?

Speaker 2

In the COVID, I would say it took 3 quarters, maybe 2 quarters for people to get used. And basically that was driven more by the we're talking about attitude. It took about 2 quarters, maybe 2.5 quarters for them to say, the all clear is blowing. Nothing's really going to happen. We're out of the COVID.

Speaker 2

In the great financial recession, it's a little longer, but it all depends on how used they get to it. Now we help this by pivoting. Remember that in this situation, we help it by giving them more small bites. So some of this has to do with matching the product that the new product available that's tantalizing them, which customers are willing to take on. And that's what we're doing.

Speaker 5

Thank you.

Speaker 2

Sure, Larry.

Operator

The next question is from Luke Junk with Baird. Please go ahead.

Speaker 6

Hello. Good morning. Thanks for taking the questions. Maybe just pivoting on that last point there, Nick. Just trying to get a feel for your gut of how much you think is under your control as you make this pivot and like you said, just matching new products with where the demand is right now in terms of I guess I'd be interested to get your perspective on the last 6 months.

Speaker 6

Just how much that feedback has changed of what mechanics want and to what extent are the franchisees able to kind of give you demand clues? Or is it more about kind of pushing the right products to the franchisees and helping the right product?

Speaker 2

No, no, no, no, no. It's demand clues. I mean fundamentally, it's on a macro basis, Luke. I don't know if it's 6 months. So this sort of started sometime in October.

Speaker 2

I don't know how long it is. But the thing is that it's pretty much about what people will say, if I buy this now, I can get a payback now and I don't get committed for longer terms. So I'm not that's the description in general. Of course, everything I say about the technicians probably doesn't apply to every technician in every garage is probably a great landscape for this. But that's simply what we're doing.

Speaker 2

So we're getting feedback from the franchisees on this and we're doing a lot of customer connection on it. I'm talking to franchisees all the time. We'll have the NFAC in here in about 4 weeks. I'll talk to them about it. We're making a lot of calls.

Speaker 2

So we're getting feedback from those guys and we have pretty good feedback right now. We know where we're trying to go. And so that we believe that will work for us. Of course, it all won't work, but once we execute on that, then we'll iterate to hone in. Now how long that takes?

Speaker 2

And as I said before, I think our view is our standard is to keep improving. I'm not so sure how quickly, but I do think we have the capacity to do it and we've done it before.

Speaker 6

And then maybe a question on RS and I, if I can sneak it in, just the expanded opportunity you're right now seeing with OEM dealerships, especially kind of new technologies and new things coming into the market. Just that seems more of a secular opportunity. I mean, do you see the opportunity as any different versus this business historically, either in in the scope of the opportunity or even the margin opportunity maybe?

Speaker 2

Look, I think three things about RS and I. One is that you've got the opportunity associated with the number of new models people are launching. I saw the slanted guy on TV about a month ago. He was talking about 30 new models. I don't know if you how we're going to get all of those.

Speaker 2

But every time a new model comes out, this is good business for us. And every time they have a warranty, a kind of recall, stuff like that. And that business has been pretty good now for some time, was up nicely in the quarter double digits and the profitability is strong now. So that's a good bit. And so that's the unique at this point.

Speaker 2

And I think it will keep going as the technologies keep changing. Then you see the equipment business. The equipment business wasn't as it was up, but it wasn't as strongly up because Europe was pummeled by the equipment business. Those recessionary businesses in Europe, I mean, Germany being in recession was a big blow for us in this situation. And so that was hard.

Speaker 2

That will come back. But it does have the collision business and the equipment business in North America, all of which are booming. And those are nice margins. The margin was up in that business. So that's fueling some of it.

Speaker 2

And then our software keeps doing pretty well. We talked about the heavy duty software. And we did have this legal benefit, which was in this orb, and it confirmed the proprietary nature of our database. So I think that's all those things are better than a poke in the eye with a sharp stick.

Speaker 6

I'll leave it there. Thanks, Nick.

Speaker 2

Okay.

Operator

The next question is from Sherif El Sabahi with Bank of America. Please go ahead.

Speaker 5

Hey, good morning.

Speaker 3

Good morning. How are you? Doing well. Thanks. And thanks for all the great color you've provided.

Speaker 3

I just had one small specific question. Just within power tools, are there any specific markets or end uses that saw an outsized pullback or drove the decline year over year?

Speaker 2

Say that again, please. Sorry.

Speaker 3

Are there any specific markets or end uses for power tools that saw an outsized pullback or stood out when you were kind of looking at the numbers?

Speaker 2

No, I don't think so. I think there is a constant movement between pneumatic and cordless in the power tools or a lot of people are converting to cordless. Not everything can be converted to cordless because people want to have continuous power. And of course, the pneumatic will keep going. So if you're doing something over and over, sometimes people prefer pneumatic guns because they don't run out of battery and they're lighter and all that stuff.

Speaker 2

So if you have a repetitive situations, but there's a general motion to cordless. We haven't seen any if you look at the nature of the product line, products in power tools, what you see is sales that follow introduction of new products. So every time you bring out a new product that tends to raise that particular category. I haven't seen much of a particular pullback. I think the need for power tools in industrial settings, in critical industry settings remains moving apace.

Speaker 2

And the garage is less so because of the aforementioned uncertainty. That's all. That's the only color I can add from that situation.

Speaker 5

Thank you. Appreciate it.

Speaker 2

Sure.

Operator

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

Speaker 5

Hey, good morning guys. I don't think we've touched on the sell in versus sell out on the U. S. Franchise tools. Do you have any color as far as what their POS looked like versus their take rate?

Speaker 2

I'm not sure. What do you mean by point of sale? Okay. Yes, look, sell off the van was better than our sell to the van this quarter, particularly towards the end. So that's we sold our franchisees sold more off their vans than they bought in this situation.

Speaker 5

Okay. And

Speaker 2

I guess And that gap expanded a little bit as we went forward in the quarter.

Speaker 5

And I guess their sell out rate, how do you think that compares to the general market growth rate? I guess, do you think you're keeping up from a market share standpoint? Or is there any shift there?

Speaker 2

I don't know. You may have a better view. Look, if you talk I just talked I talked that we talked to 36 franchisees and none of them mentioned I'm losing share. Nobody mentions I'm losing share. So I don't think that's happening, although these are windshield surveys and not based in data, but they don't seem to be in that situation.

Speaker 2

They can say their view is, well, tougher to sell because people aren't buying. I don't have the big ticket items I used to sell and that carbs down my product line that I can get people to move on.

Speaker 5

Okay. There seems to be a little gap between with the Matco numbers at the end of last year. So they're not commenting about Matco becoming more aggressive as far as pushing their volume?

Speaker 2

Nobody is saying that. I don't know. The macro guys are smart guys. They may be able to they may have some magic if we don't know. But every place, it's hard to what we found is that we never really pay too much view of that over one quarter.

Speaker 2

Those things go up and down. So I don't know. I can't really comment on their business, but I'm not hearing anything from our franchisees that would indicate that's a problem for us.

Speaker 5

Great. Thank

Speaker 2

you. Generally, we think that we sell to different people anyway. All right. Thank you. Sure.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Sarah 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.

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