Snap-On Q2 2024 Earnings Report

Snap-On EPS Results

• Actual EPS: $5.07
• Consensus EPS: $4.94
• Beat/Miss: Beat by +$0.13
• One Year Ago EPS: $4.89

Snap-On Revenue Results

• Actual Revenue: $1.18 billion
• Expected Revenue: $1.20 billion
• Beat/Miss: Missed by -$17.57 million
• YoY Revenue Growth: -1.00%

Snap-On Announcement Details

• Quarter: Q2 2024
• Date: 7/18/2024
• Time: Before Market Opens
• Conference Call Date: Thursday, July 18, 2024
• Conference Call Time: 10:00AM ET

Snap‑On Incorporated (NYSE: SNA) is a designer, manufacturer and marketer of tools, diagnostic equipment, repair information and shop equipment for professional users. The company’s product range includes hand and power tools, tool storage and cabinets, diagnostic scan tools and software, shop equipment such as lifts and tire changers, and specialized specialty tools for automotive, aviation, marine and industrial applications. Snap‑On also offers information and workflow solutions that combine diagnostic data, repair procedures and parts information to support professional technicians.

Founded in 1920 and headquartered in Kenosha, Wisconsin, Snap‑On has established a long history in the professional tools market. The company serves customers worldwide through a combination of direct sales, independent franchise mobile tool distributors (the familiar tool truck model), retail channels and e‑commerce. Its customer base is focused on professional end users, including automotive technicians, heavy‑duty and industrial service providers, and original equipment manufacturers and service operations.

In addition to physical products, Snap‑On provides recurring‑revenue services such as software subscriptions, diagnostic updates, training and repair information platforms that are used by technicians to diagnose and repair modern vehicles and equipment. The company’s distribution model — particularly its mobile franchise network — is a distinctive element of its go‑to‑market approach, enabling frequent contact with professional customers and tailored inventory on site.

Snap‑On is publicly traded on the New York Stock Exchange under the symbol SNA and is governed by an executive management team and board of directors. Its combination of branded tools, diagnostic technologies and service offerings positions the company to address the evolving needs of professional service providers in automotive, industrial and related sectors across multiple geographies.

Snap-On Q2 2024 Earnings Call Transcript

Key Takeaways

• Overall Results: Q2 net sales of $1.179 billion saw a slight organic decline of 1.1%, but operating margin rose to 23.8% and EPS hit a record $5.07 ($4.91 ex-legal settlement).
• Tools Group sales fell 7.7% organically as technicians delayed big‐ticket purchases, although new quick‐payback products and RCI efforts kept gross margin nearly flat (-20 bps).
• RS&I grew 1.0% in Q2 and lifted its operating income margin to 25.0% (+60 bps), driven by strong OEM dealership programs and innovations like EV-specific lift plates and on-vehicle brake lathes.
• C&I posted 1.2% organic sales growth and a record 16.7% OI margin (+70 bps), thanks to international custom kitting success in military, aviation and energy segments.
• Customer Uncertainty: Technician confidence remains low (“cash rich, confidence poor”), spurring demand for lower-cost, immediate-payback tools over higher-ticket items.

Presentation

[Operator]

Good day, and welcome to the Snap-on Incorporated 2024 second quarter results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference over to Sara Verbsky, Vice President, Investor Relations. Please go ahead.

[Sara Verbsky, VP of Investor Relations at Snap-on]

Thank you, Cole, and good morning, everyone. We appreciate you joining us today as we review Snap-on's second quarter results, which are detailed in our press release issued earlier this morning. We have on the call Nick Pinchuk, Snap-on's Chief Executive Officer, and Aldo Pagliari, Snap-on's Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we'll take your questions. As usual, we 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 a transcript of today's call.

[Sara Verbsky, VP of Investor Relations at Snap-on]

Any statements made during this call relative to management expectations, estimates, or beliefs, or that otherwise discuss management's or the company's outlook, plans, or projections are forward-looking statements, and actual results may differ materially from those made in such statements. Additional information and the factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings. Finally, this presentation includes non-GAAP measures of financial performance, which are not meant to be considered in isolation or as a substitute for their GAAP counterparts. Additional information regarding these measures is included in our earnings release issued today, which can be found on our website. With that said, I'd now like to turn the call over to Nick Pinchuk. Nick?

[Nick Pinchuk, Chairman and CEO at Snap-on]

Thanks, Sara. Good morning, everybody. As usual, I'll start with the highlights of our second quarter, and I'll provide my perspectives on the results, on our markets and our path ahead. After that, Aldo will give you a detailed review of the financials. Our second quarter. Of course, there were challenges. Uncertainty remained prominent among our technician customers, but our repair systems and information, or RS&I group, with repair shop owners and managers and our commercial and industrial, our C&I group, enabling critical paths outside the vehicle shop, they both progressed very nicely, taking full advantage of their opportunities and balancing the tech turbulence in tools.

[Nick Pinchuk, Chairman and CEO at Snap-on]

So our results in the second quarter are a clear and unmistakable demonstration that Snap-on's principal value-creating mechanism, observing work right in the workplace, using the insights learned to create products that make critical, critical tasks easier and more efficient, that works across many industries and in many environment, environments. It highlights that our enterprise is not dependent on a particular customer base. We believe it shows that as we move forward, reaching higher, we do so with greater resilience and with expanding possibilities, and with an enterprise that's broader and stronger than ever before. Like most quarters, we did have headwinds. We had opportunities with disparities from group to group and geography to geography. North America remained mixed, with significant gains in critical industries. Internationally, our consolidated results were varied, but reflected overall positives.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Europe showed some signs of recovery among the scattered economic disruptions from region to region, and the Asia-Pacific markets registered progress overcoming the delayed recovery in China. So now let's talk about the results. Second quarter sales of $1,179.4 million were slightly down from the $1,191.3 million of last year. On an organic basis, excluding $5.7 million in unfavorable foreign currency and $7.3 million from acquisitions, our sales were lower by 1.1%. The OpCo operating income, or OI margin, for the full quarter was 23.8%, up 50 basis points. Now, with that said, that level included the benefit of a final payment from our recent legal win.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Excluding that addition, the OI margin was 22.8%, down from 2023, but still among our very best, surpassed only by the record-setting second quarter of last year. For financial services, the OI grew to $70.2 million from the $66.9 million recorded in 2023. A number that, when combined with our OpCo results, raised the consolidated OI margin to 27.4%, up sixty basis points over the 26.8% of 2023. And EPS, it was $5.07, which included a benefit from the legal payment of $0.16. Again, excluding that legal item, EPS was $4.91, still above last year and representing a new Snap-on level for any quarter. Strength and progress against the wind. So those are the overall numbers.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Now for a view of the markets. The second quarter once again highlighted that the opportunities in automotive repair, they continue to be favorable, marked by the ever-expanding complexity of design, new and diverse powertrains, more interlocking systems to advance driving, driving autonomy, arrays of drive-by-wire sensors, new body materials, and an aging car park now averaging 12.6 years. The opportunity in vehicle repair exists industry-wide, and they appear to be unwavering.... The vehicle OEMs, the dealerships, and the independent shops recognizes the positive trend, and they continue to invest in tools and equipment that will expand their capabilities to support the influx of new models and the ever-rising complexity of repair.

[Nick Pinchuk, Chairman and CEO at Snap-on]

In the quarter, our RS&I group expanded our reach into OEM dealership programs and strengthened our position in independent garages with our repair management software packages and with great new hardware products. So the possibility with repair shop owners and managers are strong. The outlook looking forward is quite positive, and Snap-on is well-positioned to seize the opportunities. Now, let's shift to the technicians. These are the folks who turn the wrenches, make the diagnoses, and execute the repairs. Again, this quarter, I had multiple occasions to meet, you know, with the franchisees, the garage owners, and the techs, and it reconfirmed that the shops and the technicians are prospering. The microdata says it's true. Repair hours are up, tech wages are healthy, the demand for techs is strong, and the number of techs are increasing.

[Nick Pinchuk, Chairman and CEO at Snap-on]

The number of techs is increasing. It makes sense. New systems, the rise in complexity, the aging car park makes what the techs do more difficult and more valuable. So the economic trajectory of vehicle repair is quite positive. It's an attractive place to be. But it's also clear that while the techs are busy and have cash, their confidence in the way forward is still poor. Every day, there's bad news. Two wars with no end in sight, the border unsettled, the shipping lanes disrupted, tit for tat with China, lingering inflation, and the election. The election! Seems to get more unpredictable with every morning news cycle. The hits just keep on coming, the bad news for breakfast.

[Nick Pinchuk, Chairman and CEO at Snap-on]

It's almost like the grassroots technicians, technicians have a fear of what may happen, and paraphrasing the movie Dune, "Fear is the outlook killer." The franchisees also confirmed to us that with the general uncertainty, the techs are leaning toward purchases that provide quick payback while making the work easier right away. They're kind of cool on longer-term, bigger-ticket items. And knowing that, the Tools Group continues to focus on near-term product development, manufacturing changes, and selling efforts that match those preferences. So now let's talk about the critical industries, where Snap-on rolls out of the garage, solving tasks of significant consequence. This is where the C&I group operates, and it's our most significant international presence, the area where we're most subject to global headwinds. But the news was still reasonably encouraging. For the sectors, the critical industries kept rising in the period.

[Nick Pinchuk, Chairman and CEO at Snap-on]

The military, aviation, and education segments led the way. For geographies, Europe was mixed, several countries in recession, and the ongoing impacts of the Ukraine war. Asia-Pacific also remained mixed. China was weak, driven by its delayed financial recovery, and Southeast Asia again had its difficulties. But both regions, for C&I and for the corporation in total, were positive in the quarter, despite the variations. Now, I'd like to speak more about the critical industry. The demand for customized solutions to drive reliability and productivity keeps rising, and C&I continues to show significant and broad advances in that arena, and we believe there's more coming. So that's the markets. Vehicle techs, cash rich, but confidence poor, preferring quick payback products, repair shop owners and managers, moving upward to match the car park, and the critical industries booming outside the garage. In C&I...

[Nick Pinchuk, Chairman and CEO at Snap-on]

So let's cover the groups now. In C&I, sales were $372 million, representing an organic sales gain of 1.2%, excluding $7.3 million of acquisition-related sales and $3.8 million of unfavorable foreign currency. Higher activity with customers based in those critical industries and the gains in Asia and a gain in Asia that defies the turbulence more than offset declines in our power tool and European based hand tool operations. From an earnings perspective, C&I OI of $62.2 million improved $4.1 million, or 7.1% above last year, and the OI margin, it was 16.7%, up 70 basis points, representing a new record for that group. Gangbusters. Gangbusters for those guys.

[Nick Pinchuk, Chairman and CEO at Snap-on]

The big driver was our international division, continuing its upward trajectory with a double-digit rise and very strong profitability. You know, about 18 months ago, we expanded our capability to make work easier outside the garage by adding another building for industrial custom kitting, serving a range of critical segments, and it's paid off. It's paid off big. Since then, that business has been on a tear, cranking out more and more bespoke product bundles, sophisticated solutions like our automated tool control units that have become the standard for a range of industries, custom kit offerings aimed at specific applications and at making the critical work easier and more reliable. It's driven some nice gains all around the world, and we believe we see many more possibilities in that arena.

[Nick Pinchuk, Chairman and CEO at Snap-on]

So we continue to invest in critical industries, expanding the capabilities, like in our custom tool machine shop in Kenosha, producing low-volume, high-reward items for the most essential tasks. For example, visiting an oil drilling site, we saw that adding a section of pipe on the rigs requires technicians to move around the circumference, constantly repositioning the turning tool. It's a slow and clumsy and imprecise effort. Our custom team tackled the problem, designing both a new bespoke wrench specifically for the task, and enabled by our new Kenosha machine shop, configured a special machining process to produce it, and it all worked.

[Nick Pinchuk, Chairman and CEO at Snap-on]

The special oil rig pipe wrench greatly reduced the rework associated with misalignments and substantially decreased the task time, getting the job done more efficiently and more reliably, and along the way, expanding the Snap-on reputation in the critical oil and gas sector. Also, in the quarter, we introduced a new line of 14.4-volt MicroLithium power drills aimed specifically at diverse applications in aviation and general manufacturing. Tasks in those sectors vary from inserting wood screws to drilling accurate holes in airframes to high volumes on production lines. To span the variety, each tool in the new line, and there's a range of them, is set to a different RPM range, enabling the tech to fit the speed to the job, so substantially reducing rework or irreversible damage. The drills, it's also designed for two operating stages.

[Nick Pinchuk, Chairman and CEO at Snap-on]

The first, slower, allowing the tools to bite into the materials, securing a position for the serious drilling, and the second stage, performing that serious drilling at the predetermined RPM, making a quick and clear cut. Our new industrial micro drills, two-stage design, matched to the task, bringing new levels of accuracy, consistency, and reliability to the work. It's a superior tool for the varied tasks of those sectors, and the customers have noticed. C&I in the quarter, launching customized solutions, maintaining its strong momentum in the critical industry, extending out of the garage and reaching new heights in profitability. Now, for the Tools Group. Sales in the second quarter are $482 million, including an organic decrease of 7.7%.

[Nick Pinchuk, Chairman and CEO at Snap-on]

The group's OI margin in the period was 23.8%, down 250 basis points due to the lower volumes. But gross margins held, down 20 basis points, almost flat. The benefits of new product, manufacturing efficiencies, and rapid continuous improvement, or RCI, is written all over those numbers. And during the quarter, we continued to focus our product development, redirect our plans, and guide our selling programs toward innovative, quick payback solutions that drive productivity. A cornerstone for the pivot is rooted in customer, in our customer connection, standing side by side with the technicians, observing the work, witnessing the difficulties of modern and complex repair, and using the insights gained to create a tool that makes especially difficult tasks much easier.

[Nick Pinchuk, Chairman and CEO at Snap-on]

In the second quarter, those insights led the tool group to design a new torque adapter for use on Ford E-Series commercial vans. The standard procedure for basic brake repair on that model requires the rear caliper bolts to be torqued at over 160 foot-pounds. Not so easy. And the task is made doubly difficult because the bolt is obstructed, making it impossible to access the area with standard tooling without removing auxiliary parts, a big time eater. So we've specifically configured a 21 mm, 12-point flat adapter with a 0.5-in. hex drive to make the work easier and to specification. The device nestles perfectly between the particular obstructions on the model, engaging the fastener, turning a time-consuming task into one of just seconds, and freeing the tech up to tackle the next repair order.

[Nick Pinchuk, Chairman and CEO at Snap-on]

It's made in our Elizabethton, Tennessee plant, and it brings great value to the techs working on the E-Series, and you know, there's a lot of them. Another example is the struggle observed when removing a canister cap that houses the fuel filter on Ford Super Duty trucks. Access to the 36 millimeter hex structure on the top of the cap is impeded by other components. Standard pliers or sockets are out. Seeing the problem, our team created a special low-profile socket, tapered gradually, just to slide into position under the blocking hoses, and then, using a standard ratchet and extension, easily removing the cap, complete the repair. A complicated job made much easier.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Produced in our Milwaukee plant, it's another quick payback item that makes a substantial difference, and the techs love it. A final example comes from observing technicians walking to and from the workpiece, back and forth from their bike, to retrieve standard pliers for basic tasks. A compact design seemed to be the solution, so we expanded our Triple Joint Pliers line to develop a small 4.5-inch plier set with three models, a combination of long nose and a Flank Drive slip joint version for versatility, and they were all pocket-sized to be always at the ready. Pull it out of your pocket, and you're ready to go.

[Nick Pinchuk, Chairman and CEO at Snap-on]

And all designed for, to allow immediate access to remove low-torque fasteners in places, to pull fuses, to adjust hoses, or provide a, you know, some additional gripping levers, leverage for, for basic repairs or just inspections. The new units save steps and make work easier in tight spaces, and they're offered in two handle models: a cushion grip addition to reduce hand fatigue, and for the first time, our bare metal diamond plate texture that provides a superior grip, even with sweaty or oily hands. Cold forged, Cold forged in the U.S., the new pliers are a game changer, and the rollout was a huge hit, making our million-dollar hit product status just during the initial launch. Well, that's the Tools Group....

[Nick Pinchuk, Chairman and CEO at Snap-on]

pivoting to technicians' preferences, producing innovative, quick paybacks, making work easier, new tools matched to the task and guided by customer connection, bringing quick value to the techs, to the techs, and you can see the value play out in the gross margins. Bringing quick value to the techs, and you can see that play out in the gross margins, almost flat in the downturn. You can also see, I think, our unwavering support for the franchisees in the operating expense. It was about flat, even in the turbulence, even in the downturn, even with the lower sales. We'll maintain our training, our programs, and our efforts in the field, even in this turbulence. You see, we believe the uncertainty will recede, recede, and we want the network to be strong and fully loaded when that occurs. Now for RS&I.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Group sales of $458.8 million in the quarter, representing a $4.3 million or 1% organic increase that was partially offset by $1.5 million of unfavorable foreign currency translations. Those gains reflected higher activity with OEM dealerships, attenuated by lower sales in the diagnostics division. The OI margin, it was an even 25%, rising 60 basis points and among the group's best. The numbers reflect the strength of RS&I products and programs for repair shop owners and managers as we help them match the evolving challenges of the modern car park. Speaking of the product evolutions and our progress with OEM programs, the traditional method of lifting vehicles is becoming more complex with the onset of new hybrid and EV platforms.

[Nick Pinchuk, Chairman and CEO at Snap-on]

The batteries require changes in lift points to adjust for the different center of gravity on EVs. To complicate the matter, each model design presents a different problem. In response, we designed steel floor plates matched to particular models that serve as guides in positioning the vehicle in the exact location that puts the lift arms in the proper place for that vehicle, enabling a safe procedure and an easy lift. The OEMs and the shops, they enthusiastically receive the innovation as another in a long line of the modifications needed to match the evolving car park. They need to facilitate to match that change, and we're helping them do it. Another successful RS&I release was the Pro-Cut X1 HD on-vehicle brake lathe specifically for heavy-duty platforms like buses, fire engines, and semi-trucks.

[Nick Pinchuk, Chairman and CEO at Snap-on]

The lathe cuts away imperfections and abrasions on a brake's rotor surface that always arise during regular operations. The result is a fully restored component that supports optimized brake performance without the need of a replacement. The previous choice for heavy-duty brake repair work was to disassemble the brake assembly or either order new parts or smooth the rotor on a standalone bench lathe. In either case, a laborious process. The new Pro-Cut design avoids both the time and the effort to lift the heavy components off the vehicle, and it eliminates the cost of new parts. We believe it's another game changer. Garage owners have seen the value, and we project that the Pro-Cut design will become the industry standard.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Also on RS&I, C&I. Car-O-Liner serves the vehicle collision market, serves the vehicle collision market, serves the vehicle collision market with a number of heavy-duty items. A good example during the quarter is the release of our low-profile frame bench, innovatively designed for holding the work piece at an optimal height, making it easier for technicians to interact with the damaged vehicle. The bench is rugged for heavy collision work and integrates with our existing pulley solutions that stretch and contort the chassis back into position. The ability to raise and lower the benches in multiple positions while still engaging with the vehicle reduces fatigue with the user and makes the process much easier.

[Nick Pinchuk, Chairman and CEO at Snap-on]

The collision space is quite robust, driven by the changing vehicles, and as such, Car-O-Liner's been on a continuing positive trajectory, and the new bench makes our advantage in that market even stronger. RS&I, expanding its reach with shop owners and managers, confronting the increased complexity, focusing on developing innovations that simplify the difficult and help shops prosper along the way. Well, the RS&I quarter was quite strong. Well, those are the second quarter results. Tools Group, down, impacted by uncertainty, pivoting to customer preference, launching new product, holding the gross margins, and maintaining the network. C&I and RS&I, providing the multi-sector power of customer connection and new product, recording strong profitability, balancing the headwinds of technician uncertainty.

[Nick Pinchuk, Chairman and CEO at Snap-on]

The overall corporation, launching a broad range of products, from tapered sockets, to industrial power tools, to collision benches. Sales about flat. OI margin, 23.8%. 22.8% excluding the legal benefits, one of our highest, and EPS $5.07, $4.91 excluding the legal item, setting a new high. Performance achieved against the wind. It was an encouraging quarter. Now I'll turn the call over to Aldo. Aldo?

[Aldo Pagliari, CFO at Snap-on]

Thanks, Nick. Our consolidated operating results are summarized on slide 6. Net sales of $1,179.4 million in the quarter, compared to $1,191.3 million last year, reflecting a 1.1% organic sales decline and $5.7 million of unfavorable foreign currency translation, partially offset by $7.3 million of acquisition-related sales. Sales activity was similar to what we experienced in the first quarter. While our franchise van channel revenues continued to be dampened by affected technician confidence, our sales with repair shop owners and managers again increased year-over-year. Encouragingly, activity with customers serving the critical industries remained robust. Consolidated gross margin of 50.6% compared to 50.7% last year, reflecting the lower sales volumes, largely offset by savings from the company's RCI initiatives.

[Aldo Pagliari, CFO at Snap-on]

Operating expenses as a percentage of net sales of 26.8% compared to 27.4% last year. In the quarter, as noted in our press release, operating expenses included an $11.2 million benefit for the final payments received associated with the legal matter. The 60 basis point improvement in the operating expense ratio is primarily due to the benefit from the legal payments, partially offset by the effects of lower sales volumes. Operating earnings before financial services of $280.3 million in the quarter, including the benefit from the legal payments, compared to $277 million in 2023. As a percentage of net sales, operating margin before financial services of 23.8%, including a 100 basis point benefit from the legal payments, compared to 23.3% last year.

[Aldo Pagliari, CFO at Snap-on]

Financial services revenue of $104.5 million in the second quarter of 2024, compared to $93.4 million last year, while operating earnings of $70.2 million compared to $66.9 million in 2023. Consolidated operating earnings of $350.5 million, which includes the legal benefit, compared to $343.9 million last year. As a percentage of revenues, the operating earnings margin of 27.4%, including the legal payments, compared to 26.8% in 2023. Our second quarter effective income tax rate of 22.6%, compared to 22.9% last year.

[Aldo Pagliari, CFO at Snap-on]

Net earnings of $271.2 million, or $5.07 per diluted share, including an $8.7 million, or $0.16 per diluted share after-tax benefit from the legal payments, compared to $264 million, or $4.89 per diluted share in the second quarter of 2023. Now let's turn to our segment results for the quarter. Starting with the C&I Group on Slide 7, sales of $372 million compared to $364.2 million last year, reflecting a 1.2% organic sales gain and $7.3 million of acquisition-related sales, partially offset by $3.8 million of unfavorable foreign currency translation.

[Aldo Pagliari, CFO at Snap-on]

The organic increase is primarily due to a double-digit gain in sales to customers in critical industries, partially offset by low single-digit decline in the segment's European-based hand tools business and a double-digit reduction in the power tools operation, the latter mostly associated with lower inter-segment sales. With respect to critical industries, defense-related sales are strong, as was activity in the aviation sector. Gross margin improved 220 basis points to 41.7% in the second quarter from 39.5% in 2023. This was largely due to the increased sales volumes and the higher gross margin critical industry sector, savings from RCI initiatives, and 50 basis points of benefit from acquisitions.

[Aldo Pagliari, CFO at Snap-on]

Operating expenses as a percentage of sales rose 150 basis points to 25% in the quarter from 23.5% in 2023, primarily due to investments in personnel and other costs and a 60 basis points impact from acquisitions. Operating earnings for the C&I segment of $62.2 million compared to $58.1 million last year. The operating margin of 16.7%, compared to 16% in 2023, and represented a new milestone of achievement for the segment. Turning now to Slide 8. Sales in Snap-on Tools Group of $482 million compared to $523.1 million a year ago, reflecting a 7.7% organic sales decline and $800,000 of unfavorable foreign currency translation.

[Aldo Pagliari, CFO at Snap-on]

Analogous to last quarter, the organic decrease reflects a high single-digit decline in our U.S. business, partially offset by a low single-digit gain in our international operations. Gross margin of 48.8% in the quarter declined 20 basis points from 49% last year, and that's primarily due to sales—lower sales volumes. Operating expenses as a percentage of sales rose 230 basis points to 25% in the quarter, from 22.7% in 2023, largely due to the effects of lower sales volume. Operating earnings for Snap-on Tools Group of $114.8 million, compared to $137.7 million last year, the operating margin of 23.8%, compared to 26.3% in 2023. Turning to the RS&I Group, shown on Slide 9.

[Aldo Pagliari, CFO at Snap-on]

Sales of $454.8 million compared to $452 million in 2023, reflecting a 1% organic sales increase, partially offset by $1.5 million of unfavorable foreign currency translation. The organic gain includes a high single-digit increase in activity with OEM dealerships, partially offset by a mid-single digit decline in sales of diagnostic and repair information products to independent repair shop owners and managers. Gross margin improved 50 basis points to 45.5% from 45% last year, primarily due to savings from RCI initiatives.

[Aldo Pagliari, CFO at Snap-on]

Operating expenses as a percentage of sales of 20.5% improved 10 basis points from 20.6% last year, and the operating earnings for the RS&I Group of $113.6 million compared to $110.4 million last year. The operating margin, 25% compared to 24.4% reported last year. Now, turning to slide 10. Revenue from financial services increased $7.1 million, or 7.6%, to $100.5 million from $93.4 million last year, primarily reflecting the growth of the loan portfolio. Financial services operating earnings of $70.2 million compared to $66.9 million in 2023.

[Aldo Pagliari, CFO at Snap-on]

Financial services expenses were up $3.8 million from 2023 levels, including $3.5 million of higher provisions for credit losses. Sequentially, the provision for credit losses was lower by $1.3 million. In the second quarters of 2024 and 2023, respective average yields on finance receivables were 17.7% and 17.6%. In the second quarters of 2024 and 2023, the average yields on contract receivables were 8.9% and 8.6% respectively. Total loan originations of $308.1 million in the second quarter represented a decrease of $18.2 million, or 5.6%, from 2023 levels, primarily reflecting a high single-digit decline in extended credit originations, partially offset by higher originations of contract receivables.

[Aldo Pagliari, CFO at Snap-on]

Consistent with the sales activity in Snap-on Tools Group, extended credit originations in the U.S. declined and were only partially offset by growth in originations internationally. Moving to slide 11. Our quarter-end balance sheet includes approximately $2.5 billion of gross financing receivables, with $2.2 billion from our U.S. operation. For extended credit or finance receivables, the U.S. 60-day-plus delinquency rate of 1.6% is up 30 basis points from the second quarter of 2023, but down 20 basis points sequentially from the 1.8% reported last quarter. Trailing 12-month net losses for the overall extended credit portfolio of $58.6 million represented 2.94% of outstandings at quarter end. Considering the current environment, we believe the delinquency in portfolio performance metrics remain relatively stable and are consistent with pre-COVID era experience.

[Aldo Pagliari, CFO at Snap-on]

Now, turning to slide 12. Cash provided by operating activities of $301.1 million in the quarter represented 108% of net earnings and compared to $270.3 million last year. The increase, as compared to the second quarter of 2023, largely reflects decreases in working investment and higher net earnings. Net cash used by investing activities of $60.2 million, primarily reflecting net additions to finance receivables of $41.2 million and capital expenditures of $23.2 million. Net cash used by financing activities of $127.9 million, including cash dividends of $98 million and the repurchase of 174,000 shares of common stock for $47.4 million under our existing share repurchase programs.

[Aldo Pagliari, CFO at Snap-on]

As of quarter end, we had remaining availability to repurchase up to an additional $271.1 million of common stock under our existing authorizations. Turning to slide 13. Trade and other accounts receivable decreased $7.8 million from 2023 year-end. Days sales outstanding of 60 days were unchanged from year-end. Inventories decreased $40.9 million from 2023 year-end. On a trailing twelve-month basis, inventory turns of 2.4 compared to 2.3 at year-end 2023. Our quarter-end cash position of $1,232.7 million compared to $1,001.5 million at year-end 2023. In addition to cash and expected cash flow from operations, we have more than $900 million available under our credit facilities.

[Aldo Pagliari, CFO at Snap-on]

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 second quarter performance. I'll now briefly review a few outlook items for 2024. For the full year, we expect that capital expenditures will be in the range of $100 million-$110 million, and we currently anticipate that our full year 2024 effective income tax rate will be in a range of 22%-23%. I'll now turn the call back to Nick for his closing thoughts. Nick?

[Nick Pinchuk, Chairman and CEO at Snap-on]

Thanks, Aldo. Wow! That's our second quarter. A period of continuing turbulence born out of the uncertainty in the grassroots, the techs, uncertainty on the near-term environment, customers, techs that are cash rich and confidence poor. But it was also a period where our value-creating mechanism, observing tasks right in the workplace, connecting with customers, and translating the insights in an innovation that can make tech critical tasks easier, where that core of our business, a core of our business model demonstrated that its efficacy stretches well beyond our traditional customer technician customer base, and it does so quite profitably. It was an interlude in which our Snap-on value creation processes showed its ongoing strength, particularly visible in the Tools Group, where it drove product value and operating efficiency, that buttressed gross margins that stayed close to flat, despite the lower volumes.

[Nick Pinchuk, Chairman and CEO at Snap-on]

You can see that written all across the quarter. The Tools Group, an uncertainty-driven decline in volume, continuing an unreduced support for its franchise network, but with profitable, quick payback products and RCI, keeping gross margins at reasonable levels, offsetting some of the volume impact. RS&I, seizing the opportunity to help shop owners and managers, matching the the rising vehicle repair complexity and doing it very profitably, achieving an OI margin up 25%, one of its best.

[Nick Pinchuk, Chairman and CEO at Snap-on]

C&I, rolling out of the garage to critical industries, overcoming the recession in Europe and the turbulence in Asia to grow in each theater, continuing the upward trajectory of its customized kitting business, driving expansion in critical industries and achieving an OI margin of 16.7%, up 70 basis points, its highest ever. And it all came together for a positive performance for the overall enterprise. Sales about flat against the uncertainty. OI margins 22.8%. 22.8%, excluding the legal payment, one of our very strongest, and EPS $5.07. $4.91 without the legal payment, the highest for any Snap-on quarter. It was an encouraging period.

[Nick Pinchuk, Chairman and CEO at Snap-on]

We believe that with the strength of our business model, with the opportunities inherent in our broad markets, and with the considerable and hard-won experience of our team, Snap-on will remain, will remain resilient in the turbulence, making the most of its abundant possibilities in our markets, and will continue to advance, making progress through 2024 and well beyond. Now, before I turn the call over to the operator, I'll speak directly to our franchisees and associates. I know, a lot of you are listening. The strength Snap-on has demonstrated in the turbulence and the associated advantages we carry into the days ahead have been created by all of you. For the considerable capabilities you bring to bear every hour, you have my admiration. For the significant success you've achieved in the quarter and for many periods before, you have my congratulations.

[Nick Pinchuk, Chairman and CEO at Snap-on]

For the unwavering belief you hold in the future of our team, you have my thanks. Now, I'll turn the call over to the operator. Operator?

[Operator]

Thank you, and we will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily for the first question. Our first question today will come from Luke Junk with Baird. Please go ahead.

[Luke Junk, Senior Research Analyst at Baird]

Good morning. Thanks for taking the questions, Nick. To start with, just hoping we could get an update on the facility expansion projects that you have going on right now, both kind of progress incrementally, timing, and then, you know, how things are progressing versus your expectations, and to what extent you can leverage that to pivot the, the mix and, you know, really focus on those quicker payback items that, that folks are looking for.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Concerning what they are?

[Luke Junk, Senior Research Analyst at Baird]

Facility expansions, I think,

[Nick Pinchuk, Chairman and CEO at Snap-on]

Yeah, I had-

[Luke Junk, Senior Research Analyst at Baird]

Both the Milwaukee and, yeah.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Okay, facility expansion, I can talk about that. Look, Algona added some space that's in place. They're starting to use it now. Now, the thing is, you use it, but you figure out how to be more efficient. So just because it's in place and you're in the saddle, doesn't mean it's gonna work at high efficiency. But that's breaking some bottlenecks out there and allowing us to build things like, you know, we're bringing out a new workbench. You know, we're bringing out a 36-inch small EPIQ toolbox that's smaller than we ever saw before, than we've had before, and therefore, it's a lower price situation. In other words, quicker payback item. So that's working. And in Milwaukee, we're expanding 25%, and we've expanded the machining area. Some of the machines are in.

[Nick Pinchuk, Chairman and CEO at Snap-on]

We're still delivering others because they were ordered, frankly, to adjust to the pivot. So we've had partial expansion of some of our flexible socket impact lines and also some of our bit lines. So that'll be sort of developing through the expanding and getting better and bigger during the quarter. And as we move out, it'll get more and more efficient. And then, we're building, probably for the fourth quarter and first quarter, we're building more capacity into the plating line up there as we expand it. In Elizabethton, on the other hand, that's where we make the wrenches and hot forge them.

[Nick Pinchuk, Chairman and CEO at Snap-on]

We've expanded the plating line already there, and that's up and operating, and we're putting more machines in there to fill another expansion, to build more effective wrenches, you know, using cold forming to reduce the near net shape and making the allow raising our capacity for those for ratchets in that situation. And we're expanding our adjustable wrench capacity down there because it's in demand, and we can't build enough of them. So you have, though, that'll give you some examples, I think, in terms of Algona. And it's. I think Algona increases by about 25%. The Milwaukee increases by 25%. Algona is 30, 30%, and Elizabethton will be 35% at the end. So and then, so they're all in place. Some of it is working, some isn't.

[Nick Pinchuk, Chairman and CEO at Snap-on]

But what it has done is it's broken some of the difficult workarounds we've had in the places. So part of the things you see in gross margin is some of the efficiencies that are coming out of the already, you know, partial expansions being completed and up and running.

[Luke Junk, Senior Research Analyst at Baird]

That, that's very helpful. Could you maybe comment on tool storage, specifically in the quarter, Nick? We, you know, saw the benefit, I think, already in the first quarter of you having the capacity in place and flexing it like you just spoke to. Did, you know, did the growth continue in the second quarter?

[Nick Pinchuk, Chairman and CEO at Snap-on]

The product line, every product line in this quarter was more balanced. Every product line was down some in the quarter, and big ticket, you saw the originations. I think originations were down more. Originations, you know, which is a surrogate for big tools, for big ticket sales and the longer payback sales, was down more than the Tools Group was down in the quarter. So the big ticket items were a smaller percentage of that. Now, diagnostics was probably the big player in that, because diagnostics was comparing to a launch of the SOLUS Plus last second quarter of last year.

[Nick Pinchuk, Chairman and CEO at Snap-on]

So a non-launch quarter has, you know, you know, you can have different comparisons with, with, with that in this, this quarter like this, where you with a, with a launch quarter. But generally, tool storage, if you're talking about the efficacy of tool storage, one of the things this is doing is it's allowing us to sell and pivot to provide people the accessories, the benches, the carts that technicians are more receptive to in this situation. So that will accrue to us. You know, it's a question of how quickly we can get that, that burned into the to the Algona production process.

[Nick Pinchuk, Chairman and CEO at Snap-on]

It's working a little bit now, but in the quarter, technician uncertainty, I think, was a little higher this quarter, so you probably, like you might see the conditions are a little more uncertain. And so I think big ticket was down again.

[Luke Junk, Senior Research Analyst at Baird]

And then, lastly, just, you know, given the uncertainty in terms of, you know, tax right now, do you meet or, or change your approach to the SFC at all this year, just in terms of promotions and positioning? And could it be maybe a venue to refine your approach in this more unsettled environment, kind of exiting this year into 2025, you think?

[Nick Pinchuk, Chairman and CEO at Snap-on]

Yeah. I mean, the thing is, you know, not the overall thing. The overall thing is the SFC is three purposes, you know, maybe four. One is to have a training seminar. We're gonna train the heck out of things, you know, things we think need training. Some of those are smaller ticket diagnostic units, some of them are hand tools, and so on. So we're working on those things in the SFC. We're gonna continue that because we're gonna continue to support... Like I said, we wanna be at full strength and fully loaded when we come out of this difficulty with the Super 7 and our network.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Then we have kind of a, you know, a tool show, which is several football fields, and you wanna let the people touch the tools, and that's where we'll have some change, because we'll be trying to emphasize the quicker payback items, which we think that technicians want. For example, for one of the warm-up promotions for the SFC was the Super 7, which is filled with the hand tools, wrenches and ratchets and hammers and torque units. And it did go pretty well. You know, it did get subscribed almost as a sellout. So we're gonna try to push in that situation. So we'll be trying to emphasize by physical presentation and by verbal urging, the idea of quicker payback items, not completely neglecting tool storage or diagnostics in that situation.

[Nick Pinchuk, Chairman and CEO at Snap-on]

And then, you know, the other thing about the SFC is you need the SFC, I think, because you don't touch your franchisees that often, and we all want to give them a message. And, you know, reinforce that they have enlisted their economic future with a strong and robust business called Snap-on.

[Luke Junk, Senior Research Analyst at Baird]

I'll leave it there. Thank you.

[Operator]

Our next question will come from Brett Jordan with Jefferies. Please go ahead.

[Patrick Buckley, Analyst at Jefferies]

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

[Nick Pinchuk, Chairman and CEO at Snap-on]

Good morning.

[Patrick Buckley, Analyst at Jefferies]

On the RS&I, could you talk a bit more on the dispersion between the OEM dealer customers and the independents? Is that independent shop softness similar to what you're seeing in the Tools Group, just more cautious given the backdrop, or is there something else out there?

[Nick Pinchuk, Chairman and CEO at Snap-on]

Well, remember that, that's, that characterization, we are strong in the dealerships because the OEM programs have been strong in our, the change. The idea, that was the purpose of the lift discussion with the EVs, is that really, the OEMs are calibrating up, are raising their game to match the different drivetrains and the more autonomy, and the OEMs are launching programs to do that. And either associated with new models or new capabilities, like demonstrated in a lift. So you see that, and that is marking. That business grew, again, high single digits in the quarter. So that is buoying, is underpinning that. And also, it's around the, you know, some of the software in that business with our, with our, electronic, parts catalogs.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Now, if you pivot, it's a little more complicated situation with the independents, because flowing through RS&I is the diagnostics. They have the diagnostics division because of its dependence on the information bases, which are integral to other RS&I products. So diagnostics was like big ticket, was down in the Tools Group, so that dragged down some of the, the RS&I volume. If you look at RS&I and C&I both sell to the Tools Group, power tools and C&I, diagnostics and RS&I. And if you look at them, they were up, I think the number was 1% organically at RS&I, one point two percent organically in, in C&I. But if you looked at them externally, excluding sales to the Tools Group, internal sales, C&I was up 3.9% organically, and RS&I was up over 4%. And so it isn't...

[Nick Pinchuk, Chairman and CEO at Snap-on]

You know, it's a little more complicated description of that. We describe it that way based on the efficacy of the actual reported numbers. So we do see some progress in independent shops, particularly with our direct sales businesses. You see, one of the things that is happening in RS&I, it's coming out in RS&I, is that when we can get up and sell directly to the customer with our, I think, really strong product line and broad, we do pretty well. We're still doing pretty well, but a part of that business goes through distributors. And when they go through distributors, we're seeing a pull-off of that business. We saw it particularly in some of the RS&I businesses. So I don't think it's the independent shops, I think it is the distributors themselves...

[Nick Pinchuk, Chairman and CEO at Snap-on]

Or maybe getting a little white-knuckled at this time and maybe taking down some of their inventories, some of those distributors. So you're seeing that over. It's kind of a complicated, complicated, but I'll summarize. We're doing pretty well with the dealerships. We're doing well selling to direct independent shops, which means they're doing pretty well. They're doing—they're still robust, but the ind—the intermediaries are a little bit more reluctant.

[Patrick Buckley, Analyst at Jefferies]

Got it. That's helpful. And then within the Tools Group, could you talk about how pricing compared to units during the quarter, or maybe just additional color around how successful these lower payback items are and improving volumes and how that mix is affecting things?

[Nick Pinchuk, Chairman and CEO at Snap-on]

Well, the price per unit is a lot lower, huh? You know, so you got to sell a lot more wrenches to make up for a tool storage box. That's pretty important, and that can weigh on your volume. But I would offer to you, you need to look no further than gross margin. Gross margin down 20 basis points with a, what was it? 7.7% organic sales down. Gross margin down 20 basis points. How does you think that happened? Well, it happens because the new tools you bring out, the new wrenches, you know, the new tools we're bringing out, they are selling at good margins. That doesn't mean we're pricing the existing businesses, but a lot of these new tools, and a lot of them are rolling out.

[Nick Pinchuk, Chairman and CEO at Snap-on]

We got wrenches and ratchets and extensions and adapters and things that are specially made, like the E-Series and the Super Duty trucks we talked about. People are willing to pay big premiums for that kind of stuff, and it's playing out in the gross margins. Part of the story about the Tools Group is, we held the margins pretty well, and we kept spending at lower volumes. We didn't back off of the SG&A supporting the franchisees. So in effect, we could have blunted the volume even more if we didn't want to, if we didn't believe that the sun is coming out again and we want to be at full strength. So those are the balances. Gross margin is a big success.

[Nick Pinchuk, Chairman and CEO at Snap-on]

If you look at the gross margin overall, the corporation, C&I is up 220 basis points. The RS&I is up 50 basis points. The overall corporation is 50.6%, only down 10 basis points. So what you're seeing in our financials are, boy, we're still pretty robust. That's why I love the idea of C&I and RS&I buoying up the turbulence of the Tools Group. Because if you look at the overall business, you say, "Hey, you know, this business at the gross margin level looks pretty healthy.

[Patrick Buckley, Analyst at Jefferies]

Great. That's all for us. Thanks, guys.

[Operator]

Our next question will come from Gary Prestopino with Barrington Research. Please go ahead.

[Gary Prestopino, Analyst at Barrington Research]

Hey, good morning, everyone.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Morning, Gary.

[Gary Prestopino, Analyst at Barrington Research]

Just wanted to address the corporate expenses looked like they were down, and I would assume that's the impact of the legal settlement, right?

[Nick Pinchuk, Chairman and CEO at Snap-on]

Yes, except-

[Gary Prestopino, Analyst at Barrington Research]

Okay.

[Nick Pinchuk, Chairman and CEO at Snap-on]

It was down, I don't know, like, what? $18 million or something like that? Maybe 18 change.

[Gary Prestopino, Analyst at Barrington Research]

8.9.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Okay. This pains me to tell you this, Gary. Pains me dearly, because you got $11.2 million, I think, for the legal settlement.

[Gary Prestopino, Analyst at Barrington Research]

Right.

[Nick Pinchuk, Chairman and CEO at Snap-on]

And then you got $7 million in change for reduced management, stock-based compensation and bonuses estimated-

[Gary Prestopino, Analyst at Barrington Research]

Right

[Nick Pinchuk, Chairman and CEO at Snap-on]

for the year. So it hurts me to tell you that on this, on this call, but in fact, that's the difference in this quarter.

[Gary Prestopino, Analyst at Barrington Research]

Right. And I could also see the stock comp was down. And I guess what I'm getting at is that, looking forward in the back half of the year, should it be, without the impact of any legal settlement, somewhere between $20 million and $25 million a quarter?

[Nick Pinchuk, Chairman and CEO at Snap-on]

I'm more at the top end of that. I would think more at the top end of that, actually.

[Gary Prestopino, Analyst at Barrington Research]

Okay. All right.

[Nick Pinchuk, Chairman and CEO at Snap-on]

That's what I think, you know.

[Gary Prestopino, Analyst at Barrington Research]

The other question I want to ask you is, you know, quite obvious that there's a slowdown here in the buying of diagnostic equipment. Some of it deals with the fact that you just had a great year last year. But when does it get to the point where the technician or the shop starts falling behind, if ever, if that occurs really, with not upgrading their diagnostic product? And my understanding is that with these products, it really speeds up your production, you know-

[Nick Pinchuk, Chairman and CEO at Snap-on]

Right

[Gary Prestopino, Analyst at Barrington Research]

... of being able to repair cars.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Sure.

[Gary Prestopino, Analyst at Barrington Research]

Does that start coming into play here as we work deeper into this-

[Nick Pinchuk, Chairman and CEO at Snap-on]

Sure, it does.

[Gary Prestopino, Analyst at Barrington Research]

- you know, sluggishness?

[Nick Pinchuk, Chairman and CEO at Snap-on]

Sure, it does. I think. Look, I think, I think this is the thing. I think you got two things going on. One, I hate to say the comparison, but it is true that we launched a new product last second quarter, and you're comparing against that.

[Nick Pinchuk, Chairman and CEO at Snap-on]

But you also have the technicians' clear aversion for bigger ticket items at this point. They don't want to—they're less likely. You can hear it in the, in broadly in the originations. You know, they're gravitating toward other things. I was with franchisees and garage owners in Syracuse and in Atlanta, and I had all the regional guys in here, and I was bombarding them with questions for probably longer than they wanted to be. And they all said the same thing: People are starting to—you know, they're just worried. There's a fear in the situation of where they're going, so they don't want to get embroiled in paying back over years as much. They're a little more conservative about that.

[Nick Pinchuk, Chairman and CEO at Snap-on]

They're not propagating or spending. So you see that. But your overarching point is quite true. Eventually, people have to say, people do say, "Boy," and it's like this... you know, you could, the car nowadays, you used to be able to fix the car by sound. Now you have to look at the, mostly people have to look at the trouble codes and try to discern what the trouble codes mean, and then try to fix it. That's what scanners do. They tell you what the trouble codes are. Those are the simpler and competitive diagnostic units. But ours, what we confirmed in the legal settlement, we have a proprietary database that will take those data points, those trouble codes, and decode them, telling you what's actually wrong with the car.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Right now, the previous set, if you can only scan, you have to figure that out for yourself. Our database will put you right on target. So eventually, as the cars go up in complexity, people aren't gonna be able to, they, just like they haven't been able to read now, they're not able to read the, to even know, get an idea about the car, even start without knowing what the trouble codes mean. In the future, they're gonna have to be able to decode the trouble codes because it's gonna get even more complex, and you see that weighing on the situation. And so we expect that to all figure out, that all come out in the next, you know, the next, you know, over the next period. You know, we'll be launching new diagnostics, which will have new hardware, and our software keeps getting better.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Now, one of the things we do see, Gary, is supporting your point, is people who have diagnostics really fall in love with them, and so they wanna update their software. Our subscriptions are going up. Part of the reason why the tool was able to hold its margins is because its software content is moving upwards. So people value it, but eventually, they're gonna want new hardware.

[Gary Prestopino, Analyst at Barrington Research]

Okay. Thank you.

[Operator]

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

[David MacGregor, Analyst at Longbow Research]

Yeah, good morning, everyone, and thanks for taking the questions.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Hi, David.

[David MacGregor, Analyst at Longbow Research]

Hey, good morning, Nick. Hey, let me just ask you about sort of the second half and expectations here. I mean, given second quarter negative organic growth in Snap-on Tools, does that suggest kind of second half growth should be negative as well? And I mean, Q2 was not a challenging compare, and so I guess I'm just wondering how much forward visibility you have, given the truck inventory levels and pre-SFC order growth.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Well, I don't know. I think I wouldn't have said that Q2... Q2, Q2 last year, you're right. On a year-over-year basis, if you just look at year-over-year, Q2 last year was down, you know, wasn't down, but it was tepid, let's say. So it wasn't, in that case, it wasn't as strong. But if you look back, if you look sequentially, the movement between the first quarter and the second quarter isn't that much different in last year versus this year, you know? So it's not so inconsistent. It isn't like that's a big difference. If you're talking about the second half, boy, there's a lot of things going on. One is that for some time...

[Nick Pinchuk, Chairman and CEO at Snap-on]

So it's hard to judge what the second half would be like. You're not gonna get me to say that it'll be negative in the second half because we have plans we think provide some overcoming to that. And for some time now, for several quarters, the sales off the van have been bigger than the sales to the van on a year-over-year basis. Now, we saw some of that change toward the end of the quarter, so I don't know where it's gonna go. If you wanna look at it... So from a, I would say when you look at it from an operational point of view, you know, you think sooner or later, this is gonna have to play out more positively.

[Nick Pinchuk, Chairman and CEO at Snap-on]

But then when you look at uncertainty, your guess is as good as mine about how the uncertainty is gonna play out. It seems to me as though, like I said in my remarks, the hits just keep on coming. And so does anybody think if you look at the uncertainty in the world, that it's less uncertain or it's the same today as it was, say, three months ago? I don't think so. I don't think so. And so you hear that out of the technicians. I don't know where it's going in the third quarter or the fourth quarter. It's hard to say. But I think there's some positives that would mitigate toward positivity, the things we're doing, the products we're bringing out, the pivots we're making.

[Nick Pinchuk, Chairman and CEO at Snap-on]

But on the other hand, if you look at the macros, it's a black hole. You don't know. It's very opaque. So your guess is as good as mine in that situation. All I know is, the only thing I can control is to try to do the pivots, to try to match what the technicians say, and take advantage of every opportunity we have. And the message of this quarter is that RS&I and C&I show that the model works in those places, and it can make a lot of money, and they provide good offsets.

[David MacGregor, Analyst at Longbow Research]

Right. Nick, you, the operating expenses in the second quarter in the Snap-on Tools segment deleveraged. You characterized that mostly as volume related. I guess it sounds now like you're about to lean more heavily into, you know, training and maybe advertising and promotions, and I'm just wondering how you expect that OpEx to continue deleveraging-

[Nick Pinchuk, Chairman and CEO at Snap-on]

I don't know.

[David MacGregor, Analyst at Longbow Research]

in the second half.

[Nick Pinchuk, Chairman and CEO at Snap-on]

What happened—My view of the second quarter, you may have a different view of it. My view of the second quarter was we didn't back off. We kept spending the same. We spent a little bit more, so-

[David MacGregor, Analyst at Longbow Research]

Do you continue doing that in the second half?

[Nick Pinchuk, Chairman and CEO at Snap-on]

We didn't back off because of lower volumes. So I'm not, I'm not, I'm not talking that I'm gonna sally forth with a lot more expenses, but I'm holding the support. I'm holding the support. We're doing what we do, only we're adjusting it to match the current situation. I didn't mean my comments before that we're gonna open the floodgates and spend a lot more. I didn't mean that. What I meant is I'm holding, because I thought we were doing a pretty good job of supporting before. Now, I think we held that in the second quarter. We'll probably do that again, but it will be a different, different array versus the, you know, matched to the current environment.

[David MacGregor, Analyst at Longbow Research]

... Got it. And then can you just talk about cadence within the quarter? You mentioned a moment ago in responding to the question that, the, your, your trucks were destocking right up until late in the quarter.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Sure. Yeah, right.

[David MacGregor, Analyst at Longbow Research]

I was just gonna-

[Nick Pinchuk, Chairman and CEO at Snap-on]

Yeah

[David MacGregor, Analyst at Longbow Research]

... get you to talk about cadence. Please go ahead, sorry.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Well, the cadence was pretty, I think, consistent throughout the quarter. I think toward the end of the quarter, we had, you know, a less destocking events, you know, in the last month or so. So that's a positive. However, sometimes, I'll tell you, David, sometimes that sometimes that happens because it's the last month. So it's hard for me to interpret whether that's a last month phenomena that happens once, you know, once in a while, not uncommonly, but not all the time, and hasn't happened recently. But it did happen. So maybe that's a positive. It's hard for us to predict out of the one month. But I think if you go back through the quarter, it was about the same levels. You know-

[David MacGregor, Analyst at Longbow Research]

Right

[Nick Pinchuk, Chairman and CEO at Snap-on]

... the relationship was about the same levels, except for that last month.

[David MacGregor, Analyst at Longbow Research]

Your early July experience wouldn't give you a framework for interpreting that?

[Nick Pinchuk, Chairman and CEO at Snap-on]

No, it's too early, you know?

[David MacGregor, Analyst at Longbow Research]

Right.

[Nick Pinchuk, Chairman and CEO at Snap-on]

And then you got too much stuff floating through July. You know, somebody asked me, somebody asked me, not on the call, but he asked me, "Well, are people pulling back in early July, waiting for the SFC? Are they responding?" We did have a, you know, like I said, just a minute ago, we had the Super 7 program that rolled out and seemed to be pretty well received with this, you know, a full array of hand tools. We gave him a great shotgun blast, the hand tools, for this promotion, and that seemed to get enthusiasm up. And, you know, it was pretty close to expectations. You know, I think it was, you know, like kind of sellout type of thing, or close to sellout.

[Nick Pinchuk, Chairman and CEO at Snap-on]

So, so that seemed to go okay, but, you know, that is weak evidence to proclaim where the world is going. It's, it's better than a poke in the eye with a sharp stick.

[David MacGregor, Analyst at Longbow Research]

Sharp stick.

[Nick Pinchuk, Chairman and CEO at Snap-on]

But-

[David MacGregor, Analyst at Longbow Research]

Got it

[Nick Pinchuk, Chairman and CEO at Snap-on]

... but you're not gonna be able to, you can't extrapolate to... It's dangerous to extrapolate out of that too much. Now, I hope it is. You know, the floodgates are gonna open, everything is gonna go well. Happy days are here again.

[David MacGregor, Analyst at Longbow Research]

Okay.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Maybe.

[David MacGregor, Analyst at Longbow Research]

Last question for me.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Sure.

[David MacGregor, Analyst at Longbow Research]

Last question for me, if I could, just on credit. I mean, what are you seeing in an increase in RA transfers, and what would originations have looked like without the RA transfers, and-

[Nick Pinchuk, Chairman and CEO at Snap-on]

Not really seeing-

[David MacGregor, Analyst at Longbow Research]

Credit penetration, anything?

[Aldo Pagliari, CFO at Snap-on]

No change there, David. The mix of activities is pretty much similar to last quarter. So no, they have not pivoted to RA transfers as a method of funding activity on demands or anything like that.

[David MacGregor, Analyst at Longbow Research]

Great. Thanks very much, gentlemen.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Sure!

[Operator]

Our next question will come from Scott Stember with Roth MKM. Please go ahead.

[Scott Stember, Analyst at Roth MKM]

Good morning, guys.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Morning, Scott.

[Scott Stember, Analyst at Roth MKM]

Nick, is there a way of trying to see how much of the tool sales decline is really just based on the fact that you still don't have the available capacity to make product? Just trying to frame that out. And if, you know, if you can't do that, maybe just give us an idea of when would you expect to have all of the capacity and all the bottlenecks cleared up to make sure-

[Nick Pinchuk, Chairman and CEO at Snap-on]

Well, let me-

[Scott Stember, Analyst at Roth MKM]

... that you're at least making what they need?

[Nick Pinchuk, Chairman and CEO at Snap-on]

You're thinking, you're thinking toward the... If everything's in place, it gets better every day, Scott. You know what I mean? We get better every day on that situation because some of the capacity is in there, and some of the machines are there. So for example, we're half - we're 50% of the expansion we wanted in flex staking in Milwaukee. So that's helping us, but it's not enough, you know. And so you've got adjustable wrenches, not enough. You've got some of the smaller ticket tool storage, not enough. You know, so we're getting out of those. On the other hand, it's hard for me to say how much really would play out. I mean, that would give you a - that gives you gradual boosts. So I do think you saw...

[Nick Pinchuk, Chairman and CEO at Snap-on]

You know, as you know, in the quarter, when you're selling smaller ticket items, you gotta sell a lot of wrenches to make up a tool storage box, you know? So it tends to put a, what I would call, a weight on your overall revenue. So I think you saw some of that in tools with this quarter. We're trying to fill up the bucket on that, but it's gonna take us a while to do. Now, third quarter will be better than the second, and the fourth quarter will be better, and the first quarter after that will be better. So when you know, the translating that into revenue and profit numbers, it's hard for me to say. Really hard for me to say, so I can't really put a number on it.

[Scott Stember, Analyst at Roth MKM]

Great. And then just a last question. You know, when you're talking with the shops and just with your franchisees, what are you hearing about how your competitors are faring, at least at the shop level? I'm just trying to sense if there's any share loss or

[Nick Pinchuk, Chairman and CEO at Snap-on]

I don't, you know, to tell you the truth. Competitors, either shop guys or techs never really mention the competitors to me, you know, so. But I don't know. I'm the CEO, you know, so I'm not so sure they would. You know, I don't know. But they never really. You go into the shops, you'll see competitors, you know, you can see. I don't see any increased presence of the competitors. I will tell you that when I talk to franchisees or I talk to our regional sales developers, who are all in here for 12 hours in a room with me, they didn't mention the competition, really. You know, I think we would say that the enemies we have are mostly uncertainty and us.

[Nick Pinchuk, Chairman and CEO at Snap-on]

So we're trying to, you know, the speed at which we can pivot helps some of the problem, but the uncertainty will still lay over even when we've fully pivoted. You know, so you kind of got that going on. We don't see any incursion in it. Now, that doesn't mean we don't look at competitive product, you know, with a fine-tooth comb and try to figure out, well, is it—do they have something we don't have? Do people say it's better? What is their pricing? How do they deliver? How do they support? You know, what kinds of things can it do for the customer? We do that all the time, but I don't think that's part of our problem. It doesn't appear to be.

[Thomas J. Hayes, Analyst at CL King]

Got it.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Usually, the competitors are selling to a different customer base, actually.

[Thomas J. Hayes, Analyst at CL King]

Gotcha. Thanks again.

[Operator]

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

[Christopher Glynn, Senior Analyst at Oppenheimer]

Hey, thanks. Yeah, was just first curious about, you know, net cash position now, the remaining repurchase authorizations, a small proportion of your liquidity. So your kind of balance sheet position's in a different spot than I've seen in past years. Wondering how you're thinking about that?

[Nick Pinchuk, Chairman and CEO at Snap-on]

Well, I'm thinking about it. But, you know, look, I think you have to reassess how we're going forward. I mean, the thing is, we-- I think you know our cash, our view of cash usage, you know, going forward, capital usage, and the first idea is to make sure our business is fully funded. Secondly is, we look at the dividend, which, the dividend, you know, it's coming up, and we have paid a dividend every quarter since 1939, and we have never reduced it. So we assess that in perpetuity. That's our guiding principle. But we have increased the dividend, I think now, every quarter for almost 13 years. This-- if we increase it again, it would be the 14th.

[Nick Pinchuk, Chairman and CEO at Snap-on]

I'm not giving you any inside information about whether we're going to increase or go flat or anything, but we'll be looking at that pretty carefully. Then we have acquisitions, which we're constantly looking at. And, you know, you've heard the story before, that we have this landscape. In fact, we have guys out, as we speak, looking at other acquisitions. And I don't know if they'll play out or not, because we're careful with our money. And then we have stock buyback, which you already pointed out has authorization now that's a little bit less than it was before, and so we'll have to assess that as we go forward. That's how I'm thinking of it, really.

[Christopher Glynn, Senior Analyst at Oppenheimer]

Okay. And my follow-up, just back to SOT. Curious if there's any interesting geographic dispersion. We've got a big country here, lots of regions, different economies to a degree. On the incremental weakening, you seeing any kind of dispersion in the regions?

[Nick Pinchuk, Chairman and CEO at Snap-on]

Well, I can tell you this. In the last six months, I've met with franchisees and customers in almost, you know, like, in the Midwest, in the East, just recently in Syracuse, in Atlanta, and the Southwest. And there hasn't been that much difference. That's one of the scratchers, you know? I think this uncertainty, we saw this before. I do think the grassroots economy is impacted by the uncertainty broadly, and the techs may be among... Maybe the techs are special because car repair continues robust, so they are - a lot of people are confidence poor, but the techs are also cash rich in that situation. So that may be, that may be part of the, part of the, part of the issue. I don't see much.

[Nick Pinchuk, Chairman and CEO at Snap-on]

I talk to our regional guys, you know, all nine regions are in here, you know. Yeah, there's some differences, and we try to look at those differences and try to figure out, maybe should we franchise more? Are those operations different? We haven't been able to come up with much, actually. So I don't see much difference. Even though you would say there would be, you don't really get the same story from techs everywhere.

[Christopher Glynn, Senior Analyst at Oppenheimer]

You think techs are getting hit with more regulatory and compliance costs?

[Nick Pinchuk, Chairman and CEO at Snap-on]

The techs? I don't think-

[Christopher Glynn, Senior Analyst at Oppenheimer]

Yeah.

[Nick Pinchuk, Chairman and CEO at Snap-on]

I don't think. I don't know. I don't think the techs, the garages maybe. The garages might get more regulatory compliance costs. I don't think the techs so much. They don't mention it so much, I think. I don't hear that, but small businesses. I mean, the National Association of Manufacturers goes wild over regulations, you know? They talk about how much it costs. They say for every small manufacturer, so every small manufacturer has to pay $35,000 per employee per year in regulation costs. So I think by extension, you would say small businesses, like garages, would have that problem, but I don't think the techs would be burdened with it.

[Christopher Glynn, Senior Analyst at Oppenheimer]

Thanks, Nick.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Sure.

[Operator]

Our next question will come from Tom Hayes with CL King. Please go ahead.

[Thomas J. Hayes, Analyst at CL King]

Thanks, guys. Appreciate you fitting me in.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Sure.

[Thomas J. Hayes, Analyst at CL King]

Just quickly, Nick, maybe any color you could provide that, what you're seeing on the, on the positive side, on the critical industries. I think you guys called it out as a bit of a bright spot. Is there anything maybe on avionics or military or natural resources that stands out?

[Nick Pinchuk, Chairman and CEO at Snap-on]

You mean booming as it is? Is that? Yeah, no. Critical industries are double digits again, and, you know, the military has been consistently strong. A cool thing is we include education in the critical industries, because we believe it's critical to influence. And one of the things about it is, the education business has been up nicely, and what that says is the young people are hungry for Snap-on products. And so that's a cool thing for us. We really like that. So you see that. I don't have anything in terms of. Boy, it seemed like aviation was strong this quarter, and I would expect to continue. And you'd have to believe, given the Boeing situation...

[Nick Pinchuk, Chairman and CEO at Snap-on]

that customers in aviation would be pretty anxious to be able to have accuracy and documentation, which we offer in spades in our product for that particular industry, and I think that's driving some of it. I think the military is obvious. I think the military, you know, every nation is on edge. For example, you know, you have countries in Europe who are looking to double their their military, and they're coming to us to help them upgrade, to manage their fleet of airplanes. And so you see some of that. So I think those two, those two types of general, general thrusts are working. But you also see in a general industry is strong. The overall industry is strong because I think the industry in this time is looking for efficiency, and repair is efficiently, the quicker you can do it.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Now, the overarching thing that we're noting is that in all these industries, they're looking for customized product that will match their particular problems, because the critical industries is replete with those opportunities and tasks, where you have to have particular array of products to match them. That's why the custom kitting is doing so well. We almost have not many competitors in this situation as a manufacturer, so that is really working for us. And it seems like whenever we give the Industrial Group runway, they run to daylight and take it. So I think we feel pretty good about that position, that business.

[Operator]

Appreciate the color. Thank you.

[Nick Pinchuk, Chairman and CEO at Snap-on]

Sure.

[Operator]

This will conclude our question-and-answer session. I'd like to turn the conference back over to Sara Verbsky for any closing remarks.

[Sara Verbsky, VP of Investor Relations at Snap-on]

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 your lines at this time.

Participants

Analysts

• Aldo Pagliari, CFO at Snap-on
• Christopher Glynn, Senior Analyst at Oppenheimer
• David MacGregor, Analyst at Longbow Research
• Gary Prestopino, Analyst at Barrington Research
• Luke Junk, Senior Research Analyst at Baird
• Nick Pinchuk, Chairman and CEO at Snap-on
• Patrick Buckley, Analyst at Jefferies
• Sara Verbsky, VP of Investor Relations at Snap-on
• Scott Stember, Analyst at Roth MKM
• Thomas J. Hayes, Analyst at CL King