Snap-on Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2022

There are 9 speakers on the call.

Operator

Good day, and welcome to the Snap on Incorporated 2022 Second Quarter Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sarah Burbsky, Vice President, Investor Relations. Please go ahead, ma'am.

Speaker 1

Thank you, Mary, and good morning, everyone. Thank you for joining us today to review Snap on's 2nd quarter results, which are detailed in our press release issued earlier this morning. We have on the call today 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 have provided slides to supplement our discussion. These slides can be accessed under the Downloads tab in the webcast viewer as well as on our website snapon.com under the Investors section. These slides will be archived on our website along with the transcript of today's call. Any statements made during this call relative to management's expectations, estimates or beliefs Or that otherwise 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

Any 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 Thank you for their GAAP counterparts. Additional information regarding these measures is included in our earnings release issued today, which can be found on our website. With that said, I'd now like to turn the call over to Nick Pinchuk. Nick?

Speaker 2

Thanks, Sarah. Good morning, everybody. As usual, I'll start the call by covering the highlights of our Q2. Along the way, I'll give you my perspective on our results. Once again, They are encouraging.

Speaker 2

And our markets, they're robust, resilient and promising. And I'll talk about our progress. We believe we're now stronger than ever. And we'll also speak about what it all means. And we believe it means that we're better positioned for more, a lot more.

Speaker 2

Then Aldo will go into a more detailed review of the financials. All we have to do is follow the news. And you know that we live today in the midst of turmoil, inflation, varying supply, continuing unpredictable outbreak, precipitous lockdowns and a war in the Ukraine. And Snap on has shown through it all, wielding our advantages in product, in brand and in people, progressing down our runways for growth, engaging our Snap on value creation, driving improvement, making the most of our resilient markets and extending our positive trajectory, piercing the turbulence. The story of our Q2 is simply one of rising momentum.

Speaker 2

We've been meeting the challenges quarter after quarter And we're simply getting even better at overcoming the difficulties. And going forward, we are confident of our capabilities continue to advance. And here are the numbers that say we should be confident. Our reported sales in the quarter were 1,136,600,000 up versus last year by $55,200,000 or 5.1 percent, including 32,400,000 Or 3.30 basis points of unfavorable foreign exchange. Organic sales growth was 8.4% with gains in every group.

Speaker 2

And And compared to the pre pandemic levels of 2019, our upward drive is clear as a bell versus 2019 sales in the quarter rose 19.5% as reported at 18.7% organically. This is now 8 straight quarters of being above pre pandemic levels. We believe we're continuing an ongoing trend of accelerating expansion and are building momentum with emphasis, Increasing higher and higher demonstrating that we're only getting stronger every day. The OpCo operating income of $246,600,000 was $29,500,000 and the operating margin, it was 21.7 percent, income of $65,300,000 compared to the $68,900,000 of last year. And that result combined with OpCo For a consolidated operating margin of 25.5 percent, up 100 basis points from last year and 130 from 20 19.

Speaker 2

And EPS It was $4.27 up 13.6% from last year and 32.6% above the comparable pre pandemic level recorded in 2019 of $3.22 I've been saying this since the Q3 of 2020. I'll say it again, We believe Snap on is stronger now than when we entered this great withering and the 2nd quarter numbers say it so. Now Now let's talk about the markets. Auto repair remains positive. Most if not all of our key indicators are quite favorable.

Speaker 2

Spending on vehicle maintenance and repair, up. Number of techs, up. Mechanic wages up. The techs are optimistic about their prospects and about the greater need for their skills as new technologies, new complexities Advanced across the car park. And we saw a confirmation of in that broadly held belief for several quarters now as the number of automotive repair technicians continue expanding upward Period after period, higher now than in any of the last 3 decades.

Speaker 2

And when I speak with shop owners and managers, as I often do, It's clear that there's a need for more, many more. And at Snap on, we love it. Vehicle Repair is a strong and resilient market, A feeling that's also reinforced by our franchisees. You can see it in our numbers and you can hear it in their voices. We believe they're more prosperous than ever.

Speaker 2

Besides franchisees and technicians, there's vehicle repair shop owners and managers. This is RS and I's arena. Demand for new and used cars is high, but supplies are limited. It's a well known story. The pandemic has impacted the auto supply chain, sure, But it doesn't matter.

Speaker 2

Lots of new cars or scarcity of new vehicles. The car park is large, aging, getting more To invest to meet the current need and get ready for the future. The variety of drivetrains is expanding, internal combustion, hybrid, plug in, plug in electric, Full electric and every day there's more driver assistance and more vehicle automation, increasing vehicle complexity. Shops now have a greater need For new and updated equipment and they're becoming more and more reliant on service and repair information to guide them through the galaxy of new requirements and procedures. It's all music to our ears actually, because Snap on makes great tools and equipment and it's clearly repair information headquarters.

Speaker 2

RS and I is taking advantage of that trend, creating new equipment offerings and advanced database solutions. We now have a strong array of products in Vital area, Mitchell 1 repair information software and shop management software, SBX, SBX, electronic parts catalog, our dealer FX shop management technologies, The electric vehicle health check solutions and our heavy duty and fast track intelligent diagnostic hardware. These are big databases And getting more powerful and easier to use, helping the shop to fix it right the first time and efficiently. The repair shop is changing, rising in complexity And ours and I has the products to match it. Finally, let's talk about Critical Industries.

Speaker 2

With Snap We say Snap on rolls out of the garage solving tasks of consequence and we do. This is C and I territory, our most international operation And it's where we see the most continuing impact of the pandemic and its children like supply And supply chain disruption and inflation, where customers have been slower to accommodate, where headwinds are still persisting and where our monthly SKU product offerings Are particularly impacted by supply chain challenges. I suppose everybody knows about the 2 month lockdown in Shanghai. That area is Significant C and I Business Center and it's also a key transportation hub for our China factory. So the lockdown was an obstacle.

Speaker 2

And beyond that focused event, C and I is particularly challenged By its considerable geographic reach, jousting with the varying impacts and protocols and economic turbulence from country with the varying virus impacts And the economic turbulence from country to country. But I would say, if you look at the quarter, C and I team rose to the occasion And in the quarter, we won games in North America, in Europe and in Asia, despite the difficulties. So I describe our C and I markets as representing continuing opportunity and coupled with automotive repair, we believe our overall markets Our robust right now and there's considerably more opportunity ahead as we move along our runways growth. I can't leave this section about robust progress and abundant possibilities without once again speaking of the engine of our advanced Snap on value creation, particularly in customer connection and innovation, Developing new products and solutions born of the observation gathered right in the workplace, insights that create great new offerings and at the same time help guide the expansion of our franchisee selling capacity with better processes, more effective training and more powerful communication. All of that helped drive our progress overcoming the difficulties, accommodating the virus, taking full advantage of the market opportunities, charting a continuing positive trend moving forward, And we're going to keep it going.

Speaker 2

Well, that's the overview now. Let's move to the segments. And the C and I Group, sales in the quarter were up 2.5 percent as reported or $8,600,000 versus 2021 and that includes 25.3 or 6.7 that includes a $25,300,000 or 7.6 percent organic gain driven by progress across all our divisions. From an earnings perspective, C and I income was 51.7 percent, a decrease of 3.8% compared to 2021. $2,000,000 of that was unfavorable to foreign currency and the rest represents the impact of supply chain turbulence on the multi SKU C and I products.

Speaker 2

The OI margin was 14.4 percent, down 140 basis points from 2021, but did represent progress and that it's 100 basis 100 points sequential Improvement from the last quarter. When compared with the pre pandemic 2019 periods, Sales were up 7.4% organically and the OI margin of 14.4% was down 20 basis points, but that included an 80 Point impact from acquisitions and unfavorable currency. Now continuing bright spot in C and I this quarter and again this quarter was SNA Europe. It did deliver yet another quarter of growth, expanding double digits year over year Well beyond pre pandemic levels, all against the winds in Europe, with the innovative solutions of our BAKO ERGO Tool management system leading the way, tailoring products specific to customer needs. Europe is a varied market and SNA Europe is making increasing gains by matching the products to the specific task.

Speaker 2

And that positive SNA Europe was joined in C and I By valuable contribution from recovering areas in critical industries like aerospace and general industry and from countries in Asia Pacific Like India, Japan and South Korea, all combined to overcome the decline in slower to recover sectors like the military and natural resources. We do remain confident in and committed to extending in critical industries and that commitment is confirmed with great new products. Speaking of product, last quarter, to help solve crucial tasks across both critical industries and automotive repair, we strengthened our 14 point 4 volt micro lithium power tool lineup with the new Snap on CT861 3 8 inches impact rents. It's a very attractive. It's very attractive, but it's also quite functional, featuring a compact design to reach tight spaces, a nylon based Housing for rugged durability and a special toggle switch trigger for precise control.

Speaker 2

The new unit also includes a tri beam headlight For broad illumination, the entire work area. Now that's a feature that makes complex multi point jobs much easier in the low light conditions that often occur in the workshop or in road repair. You can imagine it. The impact wrench also delivers a robust 2 25 foot pounds of bolt breakaway torque and it's controlled by a variable speed drive. So the operator can apply just the right forge for each job and a 14 volt battery with its 2.5 amp hours ensures consistent output And an extended run time which makes for a lot more efficient work day.

Speaker 2

The CTE-three sixty one Began shipping early in the quarter and it was right on target, quickly becoming a $1,000,000 hit product And it's sold out in what seemed like a blink of an eye. Great product. Well, that's C and I, a promising quarter, Volume up nicely, starting to overcome the turbulence, moving down its runways for growth. Now for the Tools Group. Sales of $520,600,000 up $36,500,000 including $7,700,000 of unfavorable currency And a 9.3% organic gain and the operating margin, 23.9 percent, up 250 basis points compared with pre virus twenty 19 compared with pre visor 2019 sales grew $114,800,000 including a 28 percent 28.1 percent organic And this quarter's 23.9 percent operating margin was up 6.30 basis points compared with the those pre virus numbers.

Speaker 2

Coming out of the pandemic stronger indeed, another positive quarter for the Tools Group with growth across all product lines. And beyond this, we see further indications of continuing strength. Other data like the franchisee health metrics, which we monitor every quarter, They remain quite favorable and on a clearly positive trend. We do believe our van network remains quite strong. And it's not just the numbers.

Speaker 2

Just a few weeks ago, I spent time with a couple of dozen franchisees representing the regions On our U. S. And Canadian National Franchisee Advisory Councils and they were motivated and prosperous, enthusiastic about the current performance, Positive about the trajectories of the other vans in the various areas that they represent and very optimistic about their prospects That's fair even more going forward. They believe in their opportunities and they are confident of their future. The Tools Group, Strong quantitatively and qualitatively.

Speaker 2

And that positivity was not just internal. Once again, this quarter it was reinforced by the external view. Snap on was recognized again this year among the top 50 In the franchise industry by Entrepreneur Magazine. And once again in that ranking, we rated in the top and at the top of the tools distribution category, a place we've had for some time. And this type of recognition reflects fundamental Contemporary strength of our franchisee and of our overall mobile van network, it is a powerhouse business.

Speaker 2

And that momentum would not have been achieved without a continuous stream of unique new products. And one of those that helped drive our hand tools up again this quarter, Again, this quarter was our new long nose slip joint pliers. It's a special tool with our patented 3 position joint Precisely machined for effortless switching and control, allowing the pliers to it allows the pliers to keep the jaws parallel, increasing With the work piece, it's got a relocated joint, optimized handle shape And unique Talon Grip Serrated jaws. With all of that, our new pliers provide over 50% more pulling power. The machines and hardened teeth are sharp and strong And present 3 different gripping geometries from heavy serrations at the base to fine grooves at the tip.

Speaker 2

Great variability for multiple applications. You can apply different parts of the JUAD. They're manufactured right here in our Milwaukee factory and they're fashioned from special cold forged allied steel for greater durability And strength, these players were launched at the beginning of the past quarter and they've been very well received. When I talked to the franchisees at the NFAC, they said They're flying off the truck and they're right. The sales have already made a hit product status just in 1 quarter.

Speaker 2

Our home offerings are in fact making a difference in the Tools Group. You can't miss it in the numbers. 8 straight quarters above pre pandemic levels. The Tools Group is moving onward and upward with eye catching momentum. And if you look at the numbers Or spend any time with the team.

Speaker 2

You believe it's all systems go and it is. Now on to RS and I. Sales were up 4.6 percent or $18,200,000 versus last year, including $27,400,000 or 7% organic uplift with double digit growth in Undercar Equipment with Diagnostics and Information advancing And with the dealership activity flat, from an earnings perspective, RS and I operating income of $95,700,000 represents a rise of $9,000,000 or 10.4 percent and the operating Margin was 23%, up 120 basis points from the last year. Compared with 2019, sales were up 19.5% as reported And the organic growth was $58,000,000 or 16.8 percent with strong advances in undercar equipment and in Diagnostics and Information Products. For profitability, the OI margin of 23 percent was down 2 40 basis points versus 2019, pretty much reflecting A 110 point impact just from acquisitions and the effect of the margin dilutions from the higher sales of undercar equipment We believe RS and I has great opportunities and we're fortifying its way forward with new products like our Hoffman 609 aligner specifically designed for independent general repair shops where alignment is it's not currently a primary focus and the space is short.

Speaker 2

The new offering allows those all purpose garage to keep the low volume alignment business in house with its compact footprint and portability Enabling easy storage when not in use and efficient deployment when alignment is actually needed. It saves a lot of space, but it gets the job done. With our latest three d system authoring OEM approved accuracy, the 609 enables the handling of even the most complex Alignment systems by those general repair shops, it generates a high return on the investment, doesn't occupy space Needed for other repairs, often needed for other repairs and it fortifies the garage's reputation for technical capability. It's a great value for the general repair shops And they're noticing. Our equipment business has been on a roll with strong double digit equipments growth for double digit For some time, the Hoffman 609 aligner is a big player in that mix, RS and I, Approving its position with FareShoppe owners and managers, growth in undercar equipment and diagnostics and information products and an array of innovative new products and product lines to lead the way.

Speaker 2

Well, those are the highlights of our quarter. Tools Group, strong progress everywhere. Unmistakable strength. C and I are recording a positive performance against the variation across industries and geographies And Aras and I expanding profitable volume with repair shop owners and managers. Snap on overall sales rising markedly, both versus last year at 8.4 percent organically and up 18.7% organically compared with pre pandemic levels, continuing a clear positive OpCo operating margin, a strong 21.7 percent, rising again this quarter, rising again this quarter, Up 160 basis points.

Speaker 2

EPS, dollars 4.27 up versus last year, Up versus last quarter and up versus pre pandemic levels. It was an encouraging quarter. 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 1,130 $4,000,000 of unfavorable foreign currency translation. The organic sales gain this quarter reflects high single digit growth in each of the company's segments and compares to an 8% year over year organic increase recorded last quarter. Consolidated gross margin of 48.7% remained the same as last quarter, but declined 150 basis points from 50.2 percent last year.

Speaker 3

Higher material and other costs were partially offset by contributions from the increased sales volumes and pricing actions as well as from benefits from the company's RCI initiatives and 30 basis points of favorable foreign currency effects. Again this quarter, we believe the corporation through pricing and RCI actions continue to navigate effectively the cost and other supply chain dynamics Operating expenses as a percentage of net sales of 27% improved 310 basis points from 30.1% last year. The improvement is primarily due to higher sales volumes, savings from RCI initiatives and lower costs associated with stock based expenses. Operating earnings from Financial Services of $246,600,000 in the quarter compared to $217,100,000 in 2021. As a percentage of net sales, operating margin before Financial Services of 21.7 percent improved 160 basis from last year and was up 140 basis points sequentially.

Speaker 3

Financial Services revenue of $86,400,000 in Q2 of 2022 compared to $86,900,000 last year. Operating earnings of $65,300,000 decreased $3,600,000 from 2021 levels, primarily as a result of higher provisions for credit losses than those recorded last year. Consolidated operating earnings of 311,900,000 compared to $286,000,000 last year. As a percentage of revenues, the operating earnings margin of 25.5 percent 8% compared to 23.3 percent last year. Net earnings of $231,500,000 or $4.27 per diluted share Increased $23,500,000 or $0.51 per share from last year's levels, representing a 13.6% Increase in diluted earnings per share.

Speaker 3

Now let's turn to our segment results. Starting with the C and I Group on Slide 7. Sales of $359,100,000 increased from $350,500,000 last year, reflecting a $25,300,000 or 7 point 6% organic sales gain, partially offset by $16,700,000 of unfavorable foreign currency translation. The organic growth primarily reflects double digit gains in the segment's European based hand tools business and Asia Pacific operations as well as a mid single digit increase in sales to customers in Critical Industries. Within Critical Industries, solid Gains in General Industry and International Aviation more than offset lower sales to the military.

Speaker 3

Gross margin of 37.3%, although improving sequentially, declined 220 basis points from 39.5 percent in the Q2 of 2021. This is primarily due to higher material and other input costs Being partially offset by the benefits from higher sales volumes and pricing actions and savings from the segment's RCI initiatives. Operating expenses as a percentage of sales of 22.9% in the quarter improved 80 basis points from 23.7% in 2021, primarily due to the effects of higher sales volumes. Operating earnings for the C and I segment of $51,700,000 compared to 55 point $5,000,000 last year. The operating margin of 14.4% compared to 15.8% a year ago.

Speaker 3

Turning now to Slide 8. Sales in the Snap on Tools Group of $520,600,000 increased 7.5% from $484,100,000 in 2021, reflecting a 9.3 percent organic sales gain partially offset by $7,700,000 of unfavorable foreign currency translation. Organic sales growth reflects a double digit gain in our U. S. Business and a low single digit increase in our international operations.

Speaker 3

In the U. S, sales were up across all product lines and included particularly robust sales of full storage in the quarter. Gross margin of 46% in the quarter compared to 45.5% in the Q1 of this year, but declined 80 basis points from 46.8% last year. The year over year decline is primarily due to higher material and other costs and 10 basis points of unfavorable foreign currency effects, partially offset by benefits from higher sales volumes and pricing actions. Operating expenses as a percentage of sales 22.1 percent proved 3 30 basis points from 25.4 percent last year, reflecting the benefits from higher sales volumes and savings from RCI initiatives and including the effects of lower expenses associated with the company's franchisee stock purchase program.

Speaker 3

Operating earnings for Snap on Tools Group of $124,400,000 compared to $103,500,000 last year. The operating margin of 23.9 percent improved 250 basis points from 21.4 percent a year ago. Turning to RS and I Group, Shown on Slide 9, sales of $416,800,000 compared to $398,600,000 a year ago, reflecting a 7% organic sales gain, partially offset by $9,200,000 of unfavorable foreign currency translation. The organic gain is comprised of a double digit increase in sales of undercar equipment and a low single digit gain in the sale of diagnostic and repair information products to independent shop owners and managers. Activity with OEM dealerships was essentially flat.

Speaker 3

Gross margin of 40 3.2% declined 150 basis points from 44.7% last year. This is primarily due to higher material and other input costs and increased sales and lower gross margin businesses. These declines were partially offset by benefits from pricing actions and savings from RCI initiatives as well as from 50 basis points of favorable foreign currency effects. Operating expenses as a percentage of sales of 20.2% improved 270 basis points from 22.9% last year, primarily due to benefits from sales volume leverage, including higher activity and lower expense businesses and savings from RCI initiatives. Operating earnings from the RS and I group of 95 point $7,000,000 compared to $86,700,000 last year.

Speaker 3

The operating margin of 23% improved 120 basis points of 21.8% reported a year ago. Now turning to Slide 10. Revenue from Financial Services of $86,400,000 including $800,000 of unfavorable currency translation compared to $86,900,000 last year. Financial Services operating earnings of $65,300,000 compared to $68,900,000 in 2021. Financial services expenses of $21,100,000 were up $3,100,000 from 2021 levels, mostly due to $2,400,000 of increased provisions for credit losses.

Speaker 3

While provisions have increased versus the historically lower provision rate Experienced last year, loan portfolio trends remain stable. As a percentage of the average portfolio, financial services expenses were 1% and 0.8% in the 2nd quarters of 2022 2021 respectively. In both the 2nd quarters of 2022 and 2021, The average yields on finance and contract receivables were 17.5% and 8.5% respectively. Total loan originations of $307,600,000 in the 2nd quarter increased $21,800,000 or 7.6 percent from 2021 levels, reflecting an 11% increase in originations of finance receivables, partially offset by a decrease in the origination of contract receivables. Moving to slide 11.

Speaker 3

Our quarter end balance sheet includes approximately $2,200,000,000 Of gross financing receivables including $1,900,000,000 from our U. S. Operation. The 60 day plus 2019 and reflects the seasonal improvement we typically experience in the Q2. As it relates to extended credit or finance The trailing 12 month net losses of $40,400,000 represented 2.33 percent of outstandings at quarter end, which is down slightly from the 2.34% reported at the end of last quarter.

Speaker 3

Now turning to Slide 12. Cash provided by operating activities of $140,800,000 in the quarter compared to $238,200,000 last year. The decrease in the Q2 of 2021 primarily reflects an $87,700,000 increase in working investment. The change in working investment dollars is largely driven by greater demand, including increases in receivables and higher levels of inventory this year. In addition to demand based requirements, the inventory increase also reflects higher in transit inventory amounts as well as incremental buffer stocks associated with the supply chain dynamics and the current macro environment.

Speaker 3

Net cash used by investing activities of $73,800,000 Included net additions to finance receivables of $53,500,000 and capital expenditures of $21,300,000 Net cash used by financing activities of $112,200,000 included cash dividends of $75,700,000 and the repurchase of 251,000 shares of common stock for $53,800,000 under our existing share repurchase programs. As of quarter end, we had remaining availability to repurchase up to an additional $420,800,000 $8,000,000 from 2021 year end. Days sales outstanding of 60 days compared to 58 days at 2021 year end. Inventories increased $89,500,000 from 2021 year end and on a trailing 12 month basis inventory turns of 2.7 compared to 2.8 at year end 2021. Our quarter end cash position of $812,900,000 compared to $780,000,000 at year end 2021.

Speaker 3

Our net debt to capital ratio of 8.3% compared to 9.1% at year end 2021. In addition to cash and expected cash flow from operations, we have more than $800,000,000 available under our credit facilities. And as of quarter end, There were no amounts outstanding under the credit facility and there were no commercial paper borrowings outstanding. That concludes my remarks on our 2nd quarter performance. I'll now briefly review a few outlook items for 2022.

Speaker 3

We anticipate that capital expenditures will be in the range of $90,000,000 to $100,000,000 In addition, we currently anticipate, absent any changes to U. S. Tax legislation, that our full year 2022 effective income tax rate Will be in the range of 23% to 24%. I'll now turn the call back to Nick for his closing thoughts. Nick?

Speaker 2

Thanks, Alo. Well, that's our Q2. Markets that are resilient and getting more robust by the day. These are interesting times indeed. Pandemic, inflation, supply interruptions, a war and pop up lockdowns, but Snap on brings to this turbulence considerable advantage in Product in brand and in people.

Speaker 2

It's enabled our team to cut through the turbulence, continuing a positive trajectory and you can see it in the performance. C and I on a growth path again with a 7.6% organic increase despite being our most impacted business. RS and I gains with repair shop owners and managers Driven by hardware and its expanding information portfolio. Sales up 7% organically and an OI margin of 23%, up 120 basis points from last year And the Tools Group. Gangbusters results.

Speaker 2

Sales up 9.3% organically versus last year and up 28.1% versus 2019, 8 straight quarters above pre pandemic levels and an OI margin of 23.9%. And it all came together for overall Snap on organic growth of 8.4%, NOI margin of 21.7% And an EPS of $4.27 all high watermarks despite the turbulence. It was an encouraging quarter and we emerged from that period with rising momentum. It is a turbulent time, but Snap on is driven by attractive markets, By unique strengths and by an experienced and capable team that's achieved clear and consistent performance and period by period Has become stronger and stronger in navigating the issues of the day. And we believe these inherent advantages will continue to prevail as we go forward on a Clear and upward trajectory through the remainder of this year and well beyond.

Speaker 2

Before I turn the call over to the operator, I'll speak directly To our franchisees and associates, I know they listen in. A corporation is an organization where people come together to create a benefit for themselves And others that they could not author individually. You've done just that again this quarter. For your success in that endeavor, you have my congratulations. For the energy and the skill you bring to our efforts, you have my admiration.

Speaker 2

And for the commitment you unfailingly demonstrate to our team. You have my thanks. Now I'll turn the call over to the operator. Operator? Thank

Operator

you. We can take our first question now from Scott Timber of MKM Partners. Please go ahead.

Speaker 4

Good morning and congrats on the very strong results.

Speaker 5

Thanks, Scott. Can we talk

Speaker 4

about tools? You mentioned that everything was up and it sounded like tool storage had another very strong quarter. Was That related to the new mobile cart and maybe just try to size up how big Tools storage was in the quarter and trying to figure out how

Speaker 2

to I don't like to get in. I don't I think it's if you start worrying Too much about quarter to quarter, Scott. Scott, you go ickety, bickety boo around here, about because things change depending on the models you bring out. But I'll say that full storage was the leader. It was double digits, nice quarter and it can and parts are again a factor.

Speaker 2

What's happening this time is we started to get more of the bigger boxes out, the Epic and the Master Series. We had some great new offerings, our Supernova Master Series with the electric blue and the copper trim that seems very popular. So it was a great quarter. Carts were continued to be strong, but Epic, The bigger boxes, the regular tool storage box, which we call rolled caps, were also made the difference. So it was a pretty good quarter.

Speaker 2

The tools group really I mean, I think it did have a great quarter. By the way, did I mention that the Tools Group OI margin was 23.9% in the quarter? I think that says it all, I tell you. And by the way, in the quarter hand tools were already were also up. And also that's a nice factor for us, up strongly.

Speaker 2

But the big part of this quarter Go

Speaker 3

ahead, I'm sorry.

Speaker 2

Go ahead. Go ahead.

Speaker 4

I was going to ask about the sell in to the van and off of the van, the inventory situation right now on the van?

Speaker 2

Yes. Look, the inventories are up at their The guys are crying for more inventory when I go out there and their inventory turns are substantially below pre pandemic levels. So the inventory turns are higher at this time. I'm not below pre pandemic levels, they're above pre pandemic levels. So they're substantially higher at this time.

Speaker 2

And the sell through was better this quarter than it was last quarter. When you look at it overall, it seems to be right in line with our overall sales. So we think it's Moving along nicely. I do believe our guys want more inventory stuff. I do believe they want more.

Speaker 2

And I would say in our business There's still we've got a little better at delivering, but we still like to we still have a pretty good backlog. People are Clamoring for our products still.

Speaker 4

Got it. And then lastly on RS and I, you talked about undercar doing really well. Is that Related to the collision part of the business or is

Speaker 3

that just across the board?

Speaker 2

Yes. Well, it's across the board, but the collision business has been a star In this situation, we acquired Car Liner a few years ago and we anticipated that collision with the Deployment of the neural network around the sensors, around the sort of driver assist systems would make collision a very lucrative area and it So collision is among the top for undercar equipment. But generally, it's all rolled pretty well. The independent repair shops are optimistic. They're seeing the well, I said it in my call, investment spending up, Technicians up, wage is up.

Speaker 2

They can see it all coming through. So they're white hot in terms of their optimism, in terms of the situation. So get them to invest more. That's what you're seeing in Undercar Equipment.

Speaker 3

Got it. Thanks for taking my questions.

Speaker 2

And we

Operator

can now take our next question from Luke Junk of Baird. Please go ahead.

Speaker 6

Good morning. First, I wanted to ask about originations. It's going positive this quarter, up nicely both year on year and up really strong sequentially, Following some fits and starts recently, can you just give us a peek under the hood there in terms of what's driving that? Do you think it's sustainable? And what if Any impact did last quarter's system breach have on the numbers this quarter?

Speaker 2

Last quarter, I don't think had any impact on this quarter. But It was mostly in the last quarter where you saw it might have had some impact on originations because last quarter you From a sales point of view, there was a skewing towards the back end of the quarter because the breach was in the early parts of the quarter. So you saw that going out. And as I said last time, we thought we had pretty robust sales in some of the big ticket items, but they hadn't made their way through the vans yet necessarily. And that Probably worked out this quarter.

Speaker 2

I think the big driver though, Luke, is the product. I think the optimism of the technicians And the product itself, I think what does drive originations is the view of people saying, wow, I really like These Epic boxes, I got them. And we had them more available now. We're getting better at delivering them. During the pandemic, you had some fits and starts.

Speaker 2

So We're pushing a little more cards and now we have a little bit more of the basic roll cap. So I think that's what drove the higher originations in this time. We still see pretty good RA. The finance by the franchisees seemed pretty solid. That wasn't down in the quarter.

Speaker 2

So that was pretty strong. As I said, hand tools were up. So I think it's pretty much product driven. What you see in the tools group, I mean, The Tools Group is on a pretty big momentum. If you look back over the pre pandemic levels, they're up 9% What was that Q4 2020?

Speaker 2

Then 15% and 17% and 21% and 22% and 24% and 28% this quarter. And by the way, they came through the quarter. They exited the quarter strong. They're on the motoring. They've got momentum rolling.

Speaker 2

And so I feel pretty good about that. And that's playing out in some of the now broader product lines in tool storage. We did, as I said in the last call, that doesn't mean that the cards were down any. They were still strong in the quarter, just that the roll caps got bigger.

Speaker 6

That's very helpful. Thanks for that, Nick. And then second question within RS and I, I'll ask Undercar Equipment again, it's been an area of consistent strength in that business going all the way back to the start of 2021. We count Six straight quarters of double digit growth overall. Where do you think we are in the investment cycle there realizing that that growth has been weighing on RS and I gross margins?

Speaker 6

And looking forward to some point when that starts to normalize, how quickly would you anticipate higher software margins starting to come through at that point as well?

Speaker 2

Well, I think look, I think higher sophomore margins are you're going to see it. One of the things you're seeing in our remember we said, we're pivoting away from titles Well, we sold updates. We call them titles, but they're basically updates on software every 6 months. We're pivoting to a subscription business. So that tends to stretch out your revenues a little bit.

Speaker 2

It affects your revenues in the quarter. And so but our subscriptions Our subscribers are up deep double digits in this quarter year over year. So that seems to be working for us. So we are pretty pumped About the possibilities in that, but you have some, I guess I would say recognition questions As you go through this period, so you don't quite see it coming through, but I can see it coming through in the future. And as I said, With the array of electronic products we have around software, from the diagnostics software to the Mitchell 1 software To dealer FX, to electronic parts catalogs, to vehicle checks, we feel we are And it's going to become bigger and we're going to see it roll through that business earlier.

Speaker 2

Now if you ask me, do I Expect to see the equipment business attenuate. I hope not. I'm not hoping for it. Just because it's low margin doesn't mean I don't want the profits. I Yes.

Speaker 2

So and I could see that going. That was down for you might remember it was down it was pretty much flat on its back for a couple of quarters, couple of 3 quarters earlier and it's bouncing back from that. We've seen a lot in independent repair shops and I would figure After the dealerships start to get used to the situation, I think they're a little discombobulated by the low supply and what are they doing associated with this. So they're a little bit A little more reluctant in this situation. When they come online, I think that will be even greater.

Speaker 6

Then if I could just sneak one more in, maybe this one would be Good for Aldo to tackle. Could you just remind us of how rising interest rates affect the credit company both in terms of Funding, if at all, and the rates that you charge and particularly just wondering if there's anything that you think is misperceived that you'd want to address about a rising interest

Speaker 3

Thanks for the question, Luke. Actually, it has a little effect. If anything, it might create a more favorable environment. And why do Say that again, we fund long. So if you look at Snap on the balance sheet, we don't fund day to day.

Speaker 3

So the rising interest rates Do not have a foreseeable immediate impact on our borrowing capability because as you can see there's plenty of cash on the balance sheet and there's nothing that's coming due for quite some time. So we're stable in terms of the cost of our funds going into that business. Our stated rates have been pretty consistent really for a decade plus. So They're not the lowest rate out there, but they're lower than what might be available to people that are on a credit card format and things of that nature. So we think our rates are appropriate For the credit profile of the customers that we serve, we think that they those types of customers recognize that.

Speaker 3

So we're the kind of the Lender of choice if they do decide to engage in any type of lending activity. And I think because we provide that Stability, it gives a little bit of form of reassurance. So as interest rates go up, competitors' rates, if they were ever Considering them and when I say competitors, I'm thinking of things like credit cards. Those interest rates are going up for people that are in the subprime category. So we're going to be pretty stable and our approach is going to be pretty consistent.

Speaker 3

Yet I think the competition's rates might be going up, which you can argue maybe creates a slightly

Speaker 6

Okay. I will leave it there. Thank you for all the color this morning.

Operator

We can now take our next question from Bret Jordan of Jefferies. Please go ahead.

Speaker 7

Hey, good morning guys. Good morning. When you think about the organic growth and obviously pretty inflationary environment, could you talk about sort of what the contribution From units are versus the contribution from price?

Speaker 3

And then I guess as a follow-up, I think

Speaker 7

you may well, I'll ask that first,

Speaker 2

Go ahead. As a follow-up what? The follow-up, I think you called out,

Speaker 7

I think it's C and I and RS and I sort of inflation in some of the cost of goods. And Could you sort of talk about where you're seeing, is it metals, labor, where you're seeing inflation, what you can do to sort of pass that through and the timing of that? No,

Speaker 2

by the way, just to I have a better before the Tools Group guys will execute me if I leave This conference call, not saying that, A, you also have inflationary impacts on and prices going up. So it's not just RS and I and C and I. They also have Deal with that and I got to give him credit for that. But look, here's the thing, it's hard for us to determine because We know we have some pricing, but it isn't the majority of it. Looking at our factories, we know we have products in demand that are rolling off there and our guys are in demand, so we know that that's a positive situation.

Speaker 2

The other thing is it's hard because we have list prices, But the list prices vary from product to product and they come out on an average. You might say you're raising sales 3.5% or something like that, but it's product spread. And then overlaying on top of that, we have a lot of new tools. We keep rolling new tools. In fact, dollars 1,000,000 tools, We have dozens a quarter rolling out and then across the network and then we have Promotions that occur week to week and they can be lean or rich and taken up the big effect.

Speaker 2

So it's hard for us to say. I would say the Minority of the increase is in pricing and the majority is in volume for us. We think that's the situation in this situation In our environment. Now that varies from group to group and so on. Now if you talk about where we're getting the biggest impact, our biggest Inflationary in cat, Brett, is trying to buy on a spot market because we've said we want to deliver the best we can.

Speaker 2

We have demand, we want to deliver. We're not keeping up with all the demand, So we're buying like chips on a spot market and that can go that can fluctuate wildly. We buy components for power tools and other things on a spot market. That can move wildly. If you look at commodities, I would say, look, we buy several many grades of steel, but if you look at Steel for tool storage and steel for, let's say, lifts, hot rolled and cold rolled, they're both Coming off a little bit.

Speaker 2

They're getting a little better. They're coming down. If you look at steel for hand tools, it's at its top level. Now they're still not back to the steady state levels, but they backed off a little bit. The steel for hand tools, which we call rod steel, that's pretty much reached the top level and it's flattened out, but it hasn't abated for us yet.

Speaker 2

And we're not seeing too much abatements and freight here. So you see those kinds of things flowing through. I would expect this stuff as the I believe That as the COVID turbulence starts, the micro viscosity stop happening, you're going to see this stuff start to drift downwards, You're not going to have the interruptions in supply and therefore it's going to get more regular and therefore the prices are going to come down. But I don't have a crystal ball on That's sort of our view of the situation.

Speaker 7

Okay. If you were to think about your price inflation, your sticker price inflation Year to date, I guess, how would you is it low, mid single digits on pricing?

Speaker 2

It's hard for me to say because it Change it's all over the map depending on where you are. In the Tools Group, you have a list price. In the other places, you're pricing Product by product and it depends on the size of the product and a lot of different things. So all I'm saying is I think if you wanted to step back and you look at our pricing, It's the minority of our growers.

Speaker 7

Okay, great. Thank you.

Speaker 2

Mostly get share, get volume out of it. Okay.

Operator

And we can now take our next question from Christopher Glynn of Oppenheimer. Please go ahead.

Speaker 5

Hey, thanks. Good morning. Good morning, Chris. So Nick, some pretty strong comments on the momentum in Tanner across the Tools Group. I did want to drill down into that in terms of The relative contributions of market penetration and Overall, kind of advancing into technicians not traditionally served versus a revenue per technician

Speaker 2

Yes. We don't have it's hard for us to get a handle on all of that because You tend to start out with people at lower levels, but we are adding technicians. I can't parse the thing for you. We're certainly aiming at that and Being successful, but we're also selling more to the existing technicians because their wages are going up. They're getting more optimistic.

Speaker 2

And also it's not a situation where we see static activities. I will say the number of technicians we have on the books are going on. And that includes some new people. So that's about all I can give you on that. I think there are both things in play Because of the optimism and it makes sense.

Speaker 2

I just want to add this because it makes sense because we believe It's great for us to get new technicians and that's a one component of growth that I've talked about for a dog's age here. But It's also in this environment clear that existing technicians, young or old, are going to need new products And they're actually going to need more, a greater array of these products as you get more and different powertrains, as you get more These automated features in the system. So we anticipate both effects being lucrative forward motions. It'd be wrong to think that either one was maybe to think that they weren't both good avenues for growth.

Speaker 5

That makes sense. Yes, it was kind of meant to particularly drill into the expanding the tech group. Sure. That's great. And then on C and I, clearly a stronger quarter year over year and sequentially versus kind of the trends we've seen in the Past few quarters, were a little more kind of stable, steady.

Speaker 5

So I'm wondering if your sense of Things getting rolling there versus you kind of got a bit more out the door this quarter?

Speaker 2

No, I don't well, We'd like to think we got a bit more out the door, but I don't think that's it. I think look, I think we're making a little bit of penetration. As I tried to say in our remarks, We're getting better at handling the turbulence. I like to say we're not as dumb as we look and a lot of people would say that would be impossible. But we're kind of learning quarter by quarter and C and I has the longest learning curve because they have the most impact of all this stuff that's happening.

Speaker 2

I mean, CIs in Shanghai. They're the ones that by the way, we're up in Asia in C and I. So they did pretty well in that regard. So what we're seeing is, We're seeing our ability to manage the turbulence better. We're also seeing some warming.

Speaker 2

Like in this quarter, one of the things I was very encouraged by Is that the military wasn't down as much in the quarter. The military is kind of coming back. It's Still down. You know what I mean? I'm still I don't like it, but it's still it's coming back.

Speaker 2

So it wasn't as big of a hole this Quarter as it has been in the past. And also general industry, I don't know if you saw that comment, general industry was up and And aviation in total was up, clearly international aviation, believe it or not. So general industry, which implies the widest category for us in terms of that, that hits So many different segments, that was up strongly. So I kind of think the critical industries are coming, getting stronger, Covering from the impact. So we feel pretty good about that and our business is getting better.

Speaker 2

Now that's why we were particularly pleased about The 7.6% growth organically in C and I. That made us that gave us great encouragement. In reality, the 14.4%, yes, it was down 140 basis points year over year, but 14.4% ain't chopped liver for C and I. It's not so bad. It was up 100 basis points versus last quarter and down 20 versus 2019 against a pretty Severe impact of acquisitions and currency, I think, was 80 basis points.

Speaker 2

So those data points were pretty good for us. We were encouraged by it.

Speaker 5

Great. Thanks for the color.

Speaker 2

Sure.

Operator

And we can now take our next question from Gary Barrington Research. Please go ahead.

Speaker 5

Hey, good morning, everyone.

Speaker 2

Barry, how are you?

Speaker 5

No, I am just fine. Thanks. Hey, Nick, just a question as it evolves with all the hybrids and electric vehicles that are starting to come into the car Or have been in the car park for years now. With your products set there, right now, are you seeing demand from technicians for Specific hand tools or more diagnostic and calibration tools in the repair of these kind of vehicles?

Speaker 2

I think you see more demand for the diagnostics, but you also see the I think if you look at the they are in the car park, but they are if you look at it's one thing to look at them versus the sales. If you look at them in The sales, if you look at them in the car park, it gets to be pretty thin. You're not seeing not that many garages are seeing a lot of them. So the guys are talking to us about this and we sell hand tools and we sell some diagnostics that you have. It's not a special diagnostic form, but it's a diagnostic that would have the capabilities to deal with those things.

Speaker 2

So you're not And they're still pretty thinly distributed across, unless maybe you're in Southern California or something like that or maybe New York City or something, you might see some of those garages, but we're not seeing Huge demand. Mostly, we're getting ready for what we think will be the demand going forward. We think this is going to be a tidal wave. And so that's one of the reasons why we acquired DealerFX to get a look at these things. Okay.

Speaker 2

Thank you. Sure.

Operator

And we can now take our next Question from Ivan Feinsett of Tigress Financial Partners. Please go ahead.

Speaker 8

Hi. Thank you for taking my questions. Congratulations on another great When you were talking about like you bring on a new tool and it sold out pretty quickly, how fast can you ramp up? Is it because you didn't anticipate the demand would be so strong? Or you're seeing still dealing with shortages?

Speaker 8

And how quickly Can you ramp up for another production run?

Speaker 2

I would say we didn't expect it to be that big. This one, the couple of course, this is an earnings call.

Speaker 7

So I picked some of the ringers,

Speaker 2

I put them on. But the thing is that those guys blew out the doors and we didn't anticipate it being that good. Otherwise, we would have done a bigger run To begin with, so that's the situation. This is demand was really high. Now on top of that, I will tell you that we believe we need more capacity Because we have demand, so we're looking at that situation wise.

Speaker 2

And we'll have to go back and try to schedule another run-in the hand fill plants, which is already over scheduled, We'll try to put that in and roll out with some more. Obviously though, if you're doing that, I mean, the reason why we're running the hand tool plane is they got a lot of demand. So we see ourselves as sitting on some further opportunities if we can just roll out more product. And we're working on it. In terms of expanding the plant, we have an expansion plan for our Milwaukee, Hansel's plant, which where this place was built.

Speaker 8

And then, as your franchisees interact with OEM mechanics, What kind of feedback or discussions are they having about preparing to ramp up for new tools to handle the EVs that are at some point going to

Speaker 2

Look, I think they're having talks about that. But generally, You're talking about insulated tools, some of the obvious stuff like some diagnostic stuff, some insulated tools, some lift tables for the batteries, Those kinds of things. And then what will happen, Ivan, is the mechanics don't know yet what they don't know. You know what I mean about Those new cars get into the dealerships and the mechanics will discover where they need new tools to deal with it. That's a whole other level of array.

Speaker 2

So we're talking right now about the common things that you might you observe from early days From the you hear from the OEMs or you see the very, very, very early days in the OEM garages. And those are the things that I just talked about, like insulated tools and some diagnostics, Some analysis routines and also some lift tables and other stuff around electric vehicles. And then you're going to hear As the guys start repairing them, let's say, geez, these particular vehicles are different. I need a special tool to do this. And that's where we start rolling out Our activity, we start building more tools to match that.

Speaker 2

That's a whole other array and that's when the thing really takes off for us.

Speaker 8

And then I assume you're going to need some kind of new types of lifts to handle the access or battery swapping because the way

Speaker 2

the freight rate is

Speaker 8

All true.

Speaker 2

All true. I I didn't mention that, but that's right. And the same thing. The reason I didn't mention is handled by another division, but that's also true. A lot of this stuff is going to the equipment the equipment the whole equipment line that doesn't go through the vans is a whole other issue.

Speaker 2

That's going to need new stuff because these things are heavy. As you know, being a car expert.

Speaker 8

Well, then I guess then the same thing is going to hold true for undercarriage and collision because the way the EVs are structured And the way you have to repair them around the battery and the whole structure, eventually, there's going to be a huge upgrade cycle for Undercarriage and Collision, right?

Speaker 2

Correct. Correct. You got it. That's right. I mean the batteries are Before I I think most people don't realize how heavy these batteries are actually.

Speaker 2

There's a lot of weight Underneath that chassis these days. So it's going to be an interesting it's going to revolutionize garages, I believe, as things go out. And again, I want to point out that the OEMs will figure this out early, but then there'll be a lot of unforeseen complications That changed it again after your first wave of changes. So we're pretty pumped. That's why I say we're entering the golden age of car repair.

Speaker 8

Yes, very exciting. Congratulations again and look forward to ongoing success.

Speaker 2

Okay. Thank you.

Operator

This concludes the Q and A session. I would now like to hand the call back to Sarah Burbsky for closing remarks.

Speaker 1

Thank you all for joining 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

This concludes today's call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Snap-on Q2 2022
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