Snap-on Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 2, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the Snap on Incorporated 2022 4th Quarter and Full Year Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Sarah Bursky, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Cole, and good morning, everyone. Thank you for joining us today to review Snap on's 4th 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 a 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

Additional information and the factors that could cause our results to differ 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?

Speaker 2

Thanks, Sarah. Good morning, everybody. Wow, it's been some year and quite a quarter. China knee jerking from 0 COVID and strict lockdowns to living with COVID and unprecedented virus explosion Diminished, but still continuing spikes in the supply chain. The ongoing Ukraine war, the emergence of the reemergence of Brexit And now the rising shadow of recession, echoing in almost daily public pronouncements and through it all, Snap on delivered another in a long line of encouraging performances.

Speaker 2

We'll go through it. Starting with the highlights of the quarter and the year, I'll give you my perspective on the results, the market environment and our progress. And after that, Aldo will move into as usual Aldo will move into a more detailed review of the financials. The 4th quarter was encouraging. We believe it emphatically demonstrates the continuing resilience of our markets and the capability of our operations to achieve in the face of difficulty, Wielding the power of our products, our brands, our people and our strategic position, it all combined to serve as clear evidence of what we already know.

Speaker 2

Snap on is unique and extraordinary operation. The results for the 4th quarter serve as more testimony to that fact And there are an unmistakable demonstration of our continuing momentum. Of course, we did witness differences from group to group and within the operations, but we believe The overall results are compelling. 4th quarter sales of $1,155,900,000 as reported, Up 4.3% from 2021 included a substantial impact from unfavorable foreign currency of $37,700,000 a 3 70 basis point headwind and an organic sales increase of 8% over last year and that represented a 22.7% rise over 20 This now represents the corporation's 10th consecutive quarter above pre pandemic levels. It's a trend of, I think, some significance in uncertain times like these.

Speaker 2

From an earnings perspective, our OpCo operating income for the quarter, including the impact from unfavorable foreign currency was 248,000,000 up 6.8% compared to 2021 and 44.7% above the 2019 pre pandemic level. The OI margin for the quarter, it was 21.5%, improving by 50 basis points over last year and 360 basis points over 2019. It's the same resiliency that's been demonstrated over the years as we paid dividends every quarter since 1939 without a For Financial Services, operating income of $63,900,000 was down from $63,900,000 was down from the $67,200,000 in 2021. That decrease reflected Our forecast to return to more historical provision levels, but all while keeping delinquencies flat to last year. And our overall quarterly EPS reached The $4.42 $0.32 or 7.8 percent above 2021 and up 43.5% compared with 2019.

Speaker 2

Well, those are the numbers. Now to the markets. We believe that automotive repair remains very favorable. It makes sense. The average age of vehicles continue to increase.

Speaker 2

The complexity of repairs is rising steeply as new platforms enter the vehicle park and enter they have, Starting in dealerships. And we have seen a resurgence in dealership projects despite still recovering supply chain. Changes in internal combustion, the rise of electric vehicles And the expansion of vehicle autonomy have made dealerships eager for new equipment to support complex repair tasks of the evolving vehicle park And we see it. Projects and powertrains aside, dealerships continue to see healthy demand in repair, in maintenance and in warranty, Driving the need for shop expansion and more technicians. You can see it in the macros, repair spending, technician numbers, technician wages, all up.

Speaker 2

Our dealership segment is expanding. And for our independent repair shops, confidence remains sky high across the board. Shop owners and managers confirm that demand for repairs for technicians over complex skills are all rising and our sales growth in that sector mirrors that enthusiasm. We believe we're moving into what we can be called the golden age of vehicle repair and our tools group and our RS and I group are uniquely positioned with the product, the brand and the people to take full advantage even in the midst of turbulence. You can see it.

Speaker 2

Now for the critical industries, where our commercial and industrial group or C and I operates. We continue to see progress, But the group spans wide jurisdictions and as such various headwinds across the geographies and the industries have attenuated some of those gains. For geographies, Europe with the war and the reemergence of Brexit and China impacted by the COVID chaos were a stark contrast to relatively strong North American markets, A lot of variation. And the range and variability among sectors also continue to be a challenge. Natural resources, heavy duty fleets, general industries And international aviation were robust, but the military area remained challenged.

Speaker 2

Overall, however, Order demand for most of the critical industries has been strong and we believe that's a great signal for C and I's future. So C and I does have challenges across geographies and the segments, but we have made advancements and we see opportunities for tomorrow. Going forward, we believe we'll keep moving down our runways for growth, our wide runways for growth. And as we proceed, we're also fortified, As all of you heard before, by our Snap on value creation processes, safety, quality, customer connection, innovation and rapid continuous improvement or RCI, They're the core processes that drive our ongoing progress, especially customer connection and innovation, growing our product line. Our franchisees and our direct sales force possess a strategic advantage, standing face to face with professional techs, Understanding their individual challenges, showcasing the solutions created by our powerful products and demonstrating their use.

Speaker 2

Our resilient markets do represent a significant opportunity and we are there to take advantage up close and personal like no one else Right where the jobs are done and it's working. 2022 was a year of substantial headwinds, but our team prevailed with the year achieving new heights. Sales of $4,492,800,000 up 5.7 percent reflecting organic gain of 8.7% compared to 2021 And a 20.2 percent organic increase versus 2019. The OpCo OI margin for the year was 20.9%, up 90 basis points from 2021 and exceeding the pre pandemic margins by 170 basis points. As reported earnings per share for the year were $16.82 up 12.7 percent from 2021 and represented a rise of 35 5% from 2019, it's all evidence of the decisive and ongoing momentum that marked the year and the quarter.

Speaker 2

Now to the operating groups. Let's start with C and I. 4th quarter sales of $343,200,000 for the group were down $15,500,000 versus last year, including $21,200,000 in unfavorable currency and a 1.7% organic gain. Our Specialty Tools division was a clear positive with double digit gains. Precision is becoming essential every day And our torque products are putting us right in the middle of that rise.

Speaker 2

Our critical industries also showed strength, especially in North America, propelled growth in natural resources, general industry heavy duty, partially attenuated by lower military activity. Outside North America, it was a different story. S and A Europe was down and China was diminished. OI for C and I was $47,900,000 down $2,200,000 primarily from the $2,300,000 in unfavorable foreign currency. The group's operating margin was 14%.

Speaker 2

It was flat to last year, but still represented an advance of 120 basis points over the pre pandemic level of 2019 and that was against 50 basis points Of negative currency and acquisition dilution. The specialty torque business within C and I really is making significant strides. Torque is hot and Snap on has a widening array of new offerings to prominently participate in that trend. Products like our new series of digital torque checkers. It's from our Norbar engineering team.

Speaker 2

You might remember, we acquired Norbar a few years ago. Our Norbar engineering team in England, more compact And easier to use, it helps technicians validate the accuracy of torque instruments close to the workplace, saving a lot of time. Our new checkers accommodate torque measurements from 5 inches pounds to 1500 foot pounds and ranches from a quarter inch to 1 inches covering jobs from Precision fasteners and a jet cockpit to a heavy duty bolt on a giant oil rig, a wide range of applications and its compact Steel housing easily mounts in a variety of this is the key. Compact steel housing easily mounts in a variety of convenient locations at the point of issuing or in the pathway of the workflow Like tool cribs, aviation hangars and manufacturing cells, making torque checking an easy exercise. With an accuracy of plus or minus 1%, our new checker increases process quality without work interruption, raises consistency in assembly activity And with its streamlined documentation feature greatly improves the management of fastening in any application.

Speaker 2

The initial launch was Well received by any operation that relies on precision torque and there are a lot of them. And as you can imagine, the new Checker is right on Track to be a step on hit product with sales of $1,000,000 in the 1st year. So it looks like it's a pretty strong product for us. C and I mixed progress challenged with headwinds, but it did have significant areas of improvement paving the way for future growth. Now on to the Tools Group.

Speaker 2

Quarterly sales of $542,700,000 up $37,900,000 including 9.5% in unfavorable currency and a 9 6% organic increase, gains in the U. S. Operation and continued expansion in the international networks. And it was all led by big ticket items, tool storage and diagnostics, both with BOFFO double digit gains. Operating earnings for the Tools Group were $116,100,000 in the quarter, so 5.6 percent $5,600,000 above 20.21 And that included $4,500,000 in unfavorable currency.

Speaker 2

The operating margin was 21.4%, 50 basis points below last year, But that was impacted by currency and by product mix, but it was still a result of considerable strength. Tools Group again represents the ongoing power and market leadership of our VAD network. It's written across the financials. And that positivity is clearly and boldly echoed in the voices of our franchisees. I can tell you, I was just at one of our annual kickoffs, it's unmistakable That they're pumped, enthusiastic and confident.

Speaker 2

They know they are growing and they firmly believe there's more to be had. And our Franchisee health metrics confirm all of that to be true. The quantitative trajectory delayed in that data supports every bit of the positivity of the positive attitude. And the franchisees expressed their excitement in more formal ways. During the quarter, we were recognized by the Franchise Business Review, which surveys franchisee satisfaction.

Speaker 2

And it's the latest ranking, their publication once again latest annual ranking, that publication once again listed Snap on As a top 50 franchisee franchise marking the 16th consecutive year we received that award. And internationally Snap on was ranked number Number 1, in Elite Franchisees Magazine's top U. K. Franchises for 2023, finishing not only Above the U. K.

Speaker 2

Only franchise systems, but also coming in ahead of the very popular global brand, a number of very popular global brands. That type of recognition reflects, I think, fundamental strength of our van business and would not have been achieved without a continuous stream of innovative new products. As part of that Snap on continues to lead the industry with great Tool storage innovation is designed to improve productivity and allow techs to personalize their workspace. We're the 1st to market with the LED power top, brightly lighting the gleaming snap on tools like special jewels as each drawer is accessed. It's quite a sight.

Speaker 2

It enables the techs to show the pride in their work. And building on that feature, in December, we started shipping the first of our new Iris Tool storage units. It's a 68 inches special edition EPYC roll cap, which allows the technician to adjust the drawer lighting with an infinite array of color selections. It is an eye catcher. Coated in storm gray paint paired with red trim and it also features besides its appearance, It also features for the first time a specially lit Snap on logo nameplate.

Speaker 2

It's innovative, striking and as for all Epic boxes, All of them. It streams functionality. The power top and the power door provides 10 electrical outlets and 4 USB ports throughout the roll cap. That ensures that all the cordless tools, the lights, the accessories are charged and at the ready. It also features our unique Speed Drawer For smart customizable tool organization, it's a very popular and productive feature in the shops.

Speaker 2

Convenience, productivity and distinction. The Iris received an overwhelming reception, helping to Drive the landmark tool storage we had in just in the Q4, landmark tool storage quarter we had just recently It shows that Pride really is a powerful salesman. You show that every day. Well, that's our Tools Group, booming in the U. S, progressing internationally, continuing the stream of new products, building the brand, enhancing the van channel And moving forward with momentum.

Speaker 2

Now for RS and I. In the Q4, our RS and I group results confirmed what we've been saying all along. Snap on is well positioned for the ongoing rise in vehicle repair. RS and I sales in the quarter of $437,900,000 increased 11.6 percent including $9,500,000 unfavorable currency and a 14.3 percent organic gain, 14.3 percent, boom shagalaka. That rise was authored by it was a great, Great performance and that Verizon is offset by double digit increase in OEM dealerships as manufacturers continue to release new models, invest New equipment and implement essential tool programs.

Speaker 2

But our business in the independent garage also expanded nicely with double digit growth in our undercar equipment And on our diagnostics and repair information products, twin pillars of strength. Shop owners need upgrades to follow the changing car park And they now have confidence regarding their futures to act on that imperative and Snap on is ready to help. Arts and I operating earnings for the quarter were $110,600,000 up 13.8 percent. And again, the operating margin, it was Wielding Snap on value creation, connecting with customers, launching innovation, executing RCI Doing what they're expected to do, keep raising profitability. One example is our diagnostic business.

Speaker 2

Double digit growth led by new products. Last quarter, we mentioned the launch of our game changing handheld Unit the ZEUS Plus, well, it's selling at a record pace. It's hard in hardware and in software subscriptions. It's a great unit that again raises the bar for an advanced repair, providing technicians with a powerful help in Troubleshooting and diagnosing the most complex of vehicle repairs, ZEUS Plus makes those special challenges that take up so much shop time appear quick And easy, and the techs are noticing. RS and I, the repair shops are confident seeing a great future And RS and I has the products to pave their way.

Speaker 2

Well, that's our Q4. OpCo organic sales rising 8%, 10 quarters of consecutive growth from pre pandemic levels. Tools Group demonstrating strength, organic sales up 9.6% over last year rising 33.2% From pre pandemic levels, RS and I products to meet the needs of the vehicles of today and of tomorrow. Activity up 14.3 percent organically, gains in both OEM dealerships and independent shops, C and I showing And it all drove a 21.5 percent operating margin for the overall enterprise, rising 50 basis points from last year And an EPS of $4.42 up over every comparison. It was another encouraging quarter.

Speaker 2

Now I'll turn the call over to Aldo. Aldo?

Operator

Thanks, Nick. Our consolidated operating results are summarized on Slide 6. Net sales of $1,155,900,000 in the quarter increased 4.3% from 2021 levels, reflecting an 8% organic sales gain, partially offset by $37,700,000 of unfavorable foreign currency translation. The organic sales increase this quarter reflects double digit Gains in the repair systems and information group, high single digit growth in the Snap on Tools group and low single digit gains in the commercial and industrial group. From a geographic perspective, double digit sales growth in both North and South America more than offset weaker demand in Europe.

Operator

Consolidated gross margin of 48.5 percent improved 40 basis points from 48.1% last year. Contributions from the increased sales volumes and pricing actions, 40 basis points of favorable foreign currency effects and benefits from the company's RCI initiatives more than offset higher material and other costs. Again, this quarter, we believe the corporation Pricing and RCI actions continue to navigate effectively the cost and other supply chain dynamics of the current environment. Operating expenses as a percentage of net sales of 27% improved 10 basis points from 27.1% last year. Operating earnings before Financial Services of $248,000,000 in the quarter compared to $232,200,000 in 2021 As a percentage of net sales, operating margin before Financial Services of 21.5% improved 50 basis points from last year's 4th quarter.

Operator

Financial Services revenue of $88,300,000 in the Q4 of 2022 compared to $86,900,000 last year. Operating earnings of $63,900,000 decreased to $3,300,000 from 2021 levels and included Consolidated operating earnings of $311,900,000 in the quarter compared to $299,400,000 last year. As a percentage of revenues, operating earnings margin of 25.1% was unchanged from last year. Our 4th quarter effective income tax rate of 22% compared to 22.3% last year. Net earnings of $238,900,000 or 4 $0.42 per diluted share increased $15,200,000 or $0.32 per share from last year levels, representing a 7.8% increase in diluted earnings per share.

Operator

Now let's turn to our segment results for the quarter. Starting with C and I Group on Slide 7. Sales of $343,200,000 decreased from $358,700,000 last year, reflecting a $5,700,000 or 1.7 percent organic sales gain, which was more than offset by $21,200,000 of unfavorable foreign currency translation. The organic growth primarily reflects double digit gains in the segment's specialty torque business as well as a low single digit increase in sales to customers in critical industries. These gains were partially offset by a mid single digit decline in segment's European based hand tools business.

Operator

With respect to Critical Industries, gains in sales to heavy duty fleets, mining and general industry more than offset lower activity with the military. Gross margin of 37.7 percent improved 120 basis points from 36.5% in the Q4 of 2021. This was primarily due to increased sales volumes and pricing actions, Benefits from RCI initiatives and 20 basis points of favorable foreign currency effects, partially offset by higher material and other input costs. Operating expenses as a percentage of sales of 23.7 percent in the quarter increased 120 basis points from 22.5 percent in 2021, mostly due to reduced sales in lower expense businesses. Operating earnings for the C and I segment of $47,900,000 compared to $50,100,000 last year.

Operator

The operating margin of 14% was unchanged from last year. Turning to Slide 8. Sales in the Snap on Tools Group were $542,700,000 compared to $504,800,000 a year ago, reflecting a 9.6 percent organic sales gain, partially offset by $9,500,000 of unfavorable foreign currency translation. The organic sales growth reflects a double digit gain in our U. S.

Operator

Business The low single digit increase in our international operations. The quarter benefited from robust demand for our recently launched ZEUS plus diagnostic platform as well as our tool storage product line. Gross margin of 43.2% in the quarter declined 70 basis points from 43.9% last year. The year over year decrease is primarily due to 40 basis points of unfavorable foreign currency effects, increased sales of lower gross margin products and higher material and other costs. These declines were partially offset by benefits from the higher sales volume and pricing actions.

Operator

As a reminder, the Snap on Tools Group serves as a distributor for products such as diagnostics, which is made by our Arisen item. Operating expenses as a percentage of sales of 21.8 percent improved 20 basis points from 22% last year. Operating earnings for the Snap on Tools Group of $116,100,000 compared to $110,500,000 last year. The operating margin of 21.4 percent compared to 21.9 percent in 2021. Turning to the Iris and I Group, shown on Slide 9.

Operator

Sales of $437,900,000 increased 11.6 percent from $392,500,000 in 2021, reflecting a 14.3 percent organic sales gain, partially offset by $9,500,000 of unfavorable foreign currency translation. The organic gain is comprised of double digit increases in sales of undercar and collision repair equipment In activity with OEM dealerships and in sales of diagnostics and repair information products to independent shop owners and managers, including those diagnostic sales affected by the Snap on Tools Group. Gross margin of 45% declined 110 basis points from 46.1 percent last year, primarily due to a 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 80 basis points of favorable Foreign currency effects. Operating expenses as a percentage of sales of 19.7 percent improved 160 basis points from 21.3 percent last year, primarily due to benefits from sales volume leverage, higher activity in lower expense businesses and savings from RCI initiatives.

Operator

Operating earnings for the RS and I group of $110,600,000 compared to $97,200,000 last year. The operating margin of 25.3 percent improved 50 basis points from 24.8% reported a year ago. Now turning to Slide 10. Revenue from Financial Services of $88,300,000 including a $1,200,000 of unfavorable foreign currency translation compared to $86,900,000 last year. Financial Services operating earnings of $63,900,000 including $900,000 of unfavorable foreign currency effects compared to $67,200,000 in 2021.

Operator

Financial services expenses of $24,400,000 were up $4,700,000 from 2021 levels, mostly due to $4,800,000 of higher provisions for credit losses. While provisions have increased versus the historically lower provision rate experienced last year, we believe that the loan portfolio trends remain stable. For reference, provisions for finance receivable losses in the current quarter were $12,800,000 as compared to $8,400,000 in the Q4 last year, yet lower than the $14,100,000 and the $16,000,000 recorded in the 4th quarters of 2019 2018 respectively. As a percentage of the average portfolio, financial service expenses were 1.1% and 0.9% in the 4th quarters of 2022 and 2021 respectively. In the 4th quarters of 2022 and 2021, the respective average yields on finance Receivables were 17.6 percent 17.7 percent.

Operator

In the 4th quarters of 2022 2021, The average yields on contract receivables were 8.6% and 8.5% respectively. The blended yield for the portfolio was 15.7% in the Q4 of 2022, which is the same as last year. Total loan originations of $299,700,000 in the 4th quarter increased $43,400,000 or 16.9 percent from 2021 levels, reflecting a 17% increase in originations of finance receivables 16.7% increase in originations of contract receivables. The increase in finance receivable originations reflects the continued Strong sales of big ticket items by our franchisees during the quarter. Moving to Slide 11.

Operator

Our quarter end balance sheet includes approximately $2,300,000,000 of gross financing receivables, including $2,000,000,000 from our U. S. Operation. The total global gross portfolio is up 3.4% year over year. The 60 day plus delinquency rate of 1 point On a sequential basis, the rate is up 10 basis points, reflecting the seasonal trend we typically experience between the 3rd 4th quarters.

Operator

As it relates to extended credit or finance receivables, trailing 12 month net losses of $43,800,000 represented 2.44 percent of outstandings at year end. While this was up 6 basis points from a year ago, it is 47 basis points lower than year end 2019. Now turning to Slide 12. Cash provided by operating activities of $210,600,000 in compared to $222,700,000 last year. The decrease from the Q4 of 2021 primarily reflects A $36,500,000 increase in working investment, partially offset by improved net earnings.

Operator

Net cash used by investing activities of $67,900,000 included net additions to finance receivables of $47,300,000 and Capital expenditures of $22,700,000 Net cash used by financing activities of $145,800,000 including cash dividends of $86,000,000 and the repurchase of 284,000 shares of common stock for $65,300,000 under our existing share repurchase programs. As of year end, we had remaining availability up to an additional $362,400,000 of common stock under existing authorizations. Turning to Slide 13. Trade and other accounts receivable increased $79,400,000 from 2021 year end. Days sales outstanding of 61 days compared to 58 days at 2021 year end and to 67 days as of the pre pandemic year end of 2019.

Operator

Inventories increased $229,300,000 from 2021 year end. On a trailing 12 month basis, inventory turns of 2.5 compared to 2.8 at year end 2021 and to 2.6 turns as of year end 2019. The growth in inventory primarily reflects higher demand, including inventories to support new products. Additionally, Given the dynamics of the current supply chain situation, our level of safety stocks and in transit parts, components and raw materials are up as our year over year costs associated with finished goods. Our year end cash position of $757,200,000 compared to $780,000,000 at year end 2021.

Operator

Our net debt to capital ratio of 9% 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. As of year end, there were no amounts outstanding under the credit facility and there were no commercial paper borrowings outstanding. That concludes my remarks on our 4th quarter performance. I'll now briefly review a few outlook items for 2023.

Operator

Anticipate that capital expenditures will be in a 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 2023 effective income tax rate will be in a range of 23% to 24%. I'll now turn the call back to Nick for his closing thoughts. Nick?

Operator

Thanks, Aldo.

Speaker 2

Well, That's our quarter and our year. I would say we can characterize particularly the Q4 as a period where the hits just kept on coming. Sporadic supply shortages, war, Brexit, lockdowns, virus explosions And a constant drumbeat of recession warnings that served up bad news for breakfast every day. You can also describe the recent past of the time when Snap on clearly demonstrated the resilience of its markets and the power of its businesses. C and I, engaging the full range of challenges across sectors and geographies, but overcoming growing 1.7% organically, registering an OI margin of 14% flat to last year, reflecting the turbulence of the moment, but up 120 basis points from pre pandemic The Tools Group, big ticket items surging.

Speaker 2

Organic sales growing 9.6 Overall, OI margin at 21.4 percent, up big from pre pandemic levels, down from last year, but primarily due to 40 Success in both OEM dealerships and independent shops. Sales up 14.3% organically and an OI margin of 25.3%, Up 50 basis points from last year. We said we're well positioned for the comeback in repair shops and our RS and I is showing just that. And the credit company, OI down, but financial originations growing a strong 17% and all of it Authored strong numbers for the corporation. Organic sales up 8% versus last year, 22 point 7% versus pre pandemic levels.

Speaker 2

OI margin of 21.5%, 21.5%, up 50 basis points compared with 2021 360 basis points over 2019. Full year organic sales were up 8.7% and the OI margin for the year was 20.9%, a rise of 90 basis points. And finally, EPS for the quarter of $4.42 up 7.88% versus last year and 43.5% versus pre pandemic levels. The hits did just keep coming, but Snap on over We exited the year stronger than when we entered and we left the quarter in December with greater position and strength than we had in early October. We do have momentum and you can see it in the numbers.

Speaker 2

We believe our markets will remain resilient, Offer ongoing and abundant opportunities and with our inherent advantages The breadth and quality of our products, the unique and aspirational nature of our brand and the considerable capabilities of our experienced team, We believe we will maintain the momentum and extend our ongoing positive trajectory throughout 2023 and well beyond. Now before I turn the call over to the operator, I want to speak directly to our franchisees and associates. I know that many of you are listening. You are the people of work. The individuals who contributions collectively fostered these results.

Speaker 2

As I look back over the quarter, over 2022 And in fact, over the past 3 years, it's clear your efforts as you met the justifiable fear with extraordinary vigilance helped Our society and our company from disintegrating while we engaged and prevailed against the COVID. We often say that Snap on people are unique, Special and consistently make a difference. The past 3 years have clearly proved it so. For your ongoing achievement in the past quarter and many others, you have my congratulations. For your continued dedication In enabling the work of our society, you have my admiration.

Speaker 2

And for your confident commitment to Snap on and its future, 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. And our first question today will come from Luke Yunck with Baird. Please go ahead.

Speaker 3

Good morning. Thanks for taking the questions. I apologize if any of this has been covered in the prepared remarks, joined the call a little bit late morning. First question

Speaker 2

It was really good.

Speaker 3

Thanks Nick. That's helpful summary. I'll tell you Mark, you may have a question to start with. And what I'm wondering is, now we've got several commodities, including steel that are off of their Highs that we saw in 2022? And can you just help us understand how that might start to flow into your P and L this year, In the Tools Group, I know that typically there's at least a couple quarter time lag that's associated with that.

Speaker 3

Is that still A good way to think about it and at the same time still broader inflationary pressures out there. If you could also comment on your approach to pricing as we begin 2023?

Speaker 2

Yes. I think look, I think the I'll answer the last question first. I think our approach to pricing is an As we see the situation when we meet the individual timing, like the individual quarters, I think you're going to see a mixed result. You said it correctly that things work its way and some kind of lag into your P and L as you go forward in terms of the pricing. If you look back, you I do see a mixed review and say steel for example, hand tool steel is down some.

Speaker 2

It's not down to pre pandemic levels, but tool storage steel is down closer to pre pandemic levels. So you see some variation in that. And it doesn't look like they're going to go back up. It looks like you're going to I would expect you To see them, if they go to pre pandemic levels, maybe that's equilibrium. But if you're above that, we kind of expect it to kind of go downwards.

Speaker 2

The thing that and you'll see that work its way Drew, and give us some relief going forward, but the timing of that is a little uncertain based on what you said associated with the lag. The big impact from the supply chain for us has been The availability of certain items and so sometimes even today, even as the supply chain is regularized, you can't find certain things and you have to go out in the spot market and get it. This Particularly bedevils C and I, Tools Group less so, but it's impacted some of the RS and I things from time to time. So supply chain, I would say, in terms of a negative factor is abating but not disappearing as we go forward. That's what I see.

Speaker 2

So it's taking some pressure up. It's hard for me to predict though about certain supplies that could come up at any time. So you see that kind of situation.

Speaker 3

Thanks for that Nick. My follow-up question is around credit. So if you look at credit performance, I mean it's been very good. If we look at delinquency rates in the back half of the year Versus normal seasonality, that's in the context of what's becoming clearly more just more macro risk. Generally speaking, originations trending higher.

Speaker 3

How do you balance credit in 2023 between managing the risk side and pushing on what does seem like it could still be an incremental growth driver for the Tools Group given where coming from?

Speaker 2

Well, look, I think this we don't change our policies in terms of risk based on the externals So much. We don't raise or drop our credit standards associated with do we need sales or not. We pretty much focus on the same customer and look at it from the same way going forward. I think what you're seeing in rise of originations, it has nothing to do with the credit Necessarily the credits of the customers. I think everybody says that professional technicians have had a pretty strong balance sheet for some time.

Speaker 2

I think what you've seen is a combination of compelling product and our technicians seeing the great opportunities they have. Numbers of demand for technicians up, wages up and the repair systems up. You can see it in the macros, sort of getting more confident To invest in big ticket items. I think to the extent you see originations, that's not driven by any credit policy, that's driven by big ticket items and whether we use credit or not will be dependent on how well the products are selling in the marketplace. Now right now, The thing about it is that if you have big ticket items leading the way in a robust quarter and they were up double digits, the word I Bapa was the word I said.

Speaker 2

I think that says a lot for confidence because what my experience is and I've been here a while. My experience is that when people when things start to look gloomy a little bit in professional technicians, the need doesn't go away, but they tend to shift more To shorter payback items, not big ticket items. That's what happened in the great financial recession. So the fact that we had a big ticket boom, I think it gives me a lot of great confidence in our future.

Speaker 3

I will leave it there. Thanks for the color Nick.

Operator

Sure. And our next question will come from Elizabeth Suzuki with Bank of America. Please go ahead.

Speaker 4

Great. Thank you, guys. So the I mean, the automotive repair industry has arguably had some benefit from the surge in Used vehicle values that caused some older vehicles to stay on the road for longer and vehicle owners to invest in maintenance. So I guess as used vehicle values are falling and Potentially some more new vehicles start to get on the road and get into dealerships. I mean, is Snap on agnostic to that shift in vehicle

Speaker 2

Yes, really. I mean the thing is we serve the dealerships just as well. I mean you could argue that older cars Have more repairs and maybe you'd be entitled to that. But in reality, it's a long wave event, Liz. The fact that new cars will be coming the fact That used cars were being held longer.

Speaker 2

We don't really think that makes that much a difference. We followed it for years. And when you look at a year or a quarter when, let's say, scrappage is up or scrappage is down, it doesn't seem to affect the numbers at all. So for us, I think if you said, okay, the car park is going to get younger over time, then that would be Some pressure on repair, but the car park has gotten older every year since 1980. So I don't think that's going to change very much.

Speaker 2

And we I would not put the shift to used cars as much of a factor in the Strength of the automotive repair market from our perspective. So I think any change from that is not going to make a difference really. And We do serve the dealers. We actually get our revenues in the Tools Group is about The dealership revenue from the dealerships in the Tools Group actually almost dead on reflects the amount of repair That they have as a percentage of the total repair done in the country. So we're kind of agnostics between dealerships and independent repair shops.

Speaker 4

Got it. Okay. That makes sense. And then just a question on capital allocation. I'm curious to get your thoughts on the company's current appetite for M and A and which segments you feel are potentially more fragmented and where Snap on could continue to roll up smaller businesses and what the pipeline might look like currently?

Speaker 2

Well, look, I think we have a pipeline. We have a number of prospects we always look at, but we have what we do is we look to say we have runways for growth, Enhance the van channel, expand with repair shop owners and managers, extend the critical industries and build in emerging markets. And we're always looking for something That's operating in the critical task space where the penalties for failure are high. In other words, not DIY, but professional space that can advance our position along one of those runways. There isn't much in the Tools Group because Tools Group was already in a strong position there and it doesn't need too much.

Speaker 2

But if you look at and in emerging markets, maybe in emerging markets now that's It's going to start opening up with all the turbulence that's been floating around there. But our 2 sweet spots in this have been in Expand repair shop owners and managers, that's a junk to RS and I or extend the critical industries. And when we look there is give us a product that gives us more to sell to those customers Or a new technology that's important to the customers or gives us a presence with customers. So for example, I mentioned Norbar. Norbar is an acquisition which got us bigger in torque.

Speaker 2

It's critical. It's a technology we could use some help in at the top end. So we acquired it and it was a great success story. You can see the same kind of thing And Harriss and I with the acquisitions of Dealer FX where we wanted to beef up our software position in dealerships, 1, because It's a profitable situation, but 2, because it gives you strategic advantage in terms of the visibility of new products that are going to enter the market just as you talked about, The new products you get a better view of it. So that's the kind of thing.

Speaker 2

So things that will advance us down those runways for growth are things we have money for and we have no shyness about acquiring things, big or small, but we're careful. We take care of our money. So we don't Transform the company, we're looking for coherent acquisitions. And there are a bunch of those, but sometimes when we look at something, it isn't it's only 30 That's what we do. Or sometimes it isn't what we thought as where we thought it was and we decide we don't want to have it.

Speaker 2

Other times we do. In case of Norbord dealer effects, we thought positively.

Speaker 4

All right. Great. Thank you, Nick.

Operator

Sure. And our next question will come from Scott Denver with MKM Partners. Please go ahead. Good morning, guys, and thanks for taking my questions.

Speaker 2

Sure, Scott.

Operator

Nick, you talked about the big ticket items really driving the show for the Tools Group, but how did hand tools Performed the

Speaker 2

quarter. Hand tools were flat. So hand tools have been booming. They were like going wild In last year and the 1st part of this year, and they are the high actually, believe it or not, they're the highest margin business in the hand tools. And so they're great.

Speaker 2

But when they back down a little bit, that puts a little margin pressure on them in the Tools Group or if you don't have flat is okay though They're really still strong, but tool storage is a great margin business and that was up strong double digits. In fact, Best tool storage ever. In fact, I had a guy tell me, I was out talking to the sales guy. He told me he could sell every tool storage unit I could build for them. Our backlog is exploding in tool storage.

Speaker 2

So we can sell a lot of them. And then you so and that that doesn't have much effect on margin. The real margin the source of the margin comment here was diagnostics. Diagnostics makes a lot of money for the corporation, but the tools group shares the margin with RS and I. Remember, RS and I makes it And sells it to the Tools Group.

Speaker 2

So from a Pure Tools Group OR when you're looking at diagnostics, that margin is a lower one for them. And so the flatness of hand tools and the rise in diagnostics created that margin pressure that moved it down Somewhat in this period. But we thought this is great. It's one of the reasons why we're at 21.5%, one of the reasons why RS and I was up 50 basis You see, because the diagnostics sells well for them. So that's sort of the way.

Speaker 2

The other thing as I said before, I want to emphasize, Boy, I think it's a good sign for the future that big ticket is strong. Now you might argue, okay, diagnostics had a special case because we launched the ZEUS and it's best thing since sliced bread and everybody loves it. But the fact that tool storage is selling well, it really indicates an underlying confidence in the customer base, Which speaks well for our situation.

Operator

Got it. And then just last question, what's the relationship of sell in versus sell through on the off of the van?

Speaker 2

Yes. Look, we look at these things. They're about in the range where we like to see them, about sort of equal. So when you look back From sell in to sell out, we see that being about balance. Now it always goes up and down a little bit every quarter, but this is kind of in the range.

Speaker 2

I think this quarter it's about

Operator

Got it. Thanks again. Sure. And our next question will from David MacGregor with Longbow Research. Please go ahead.

Speaker 5

Yes. Good morning, gentlemen. Good morning, Eric.

Speaker 2

Good morning, David. How are you doing?

Speaker 5

Listen, let me ask you about your balance sheet. Your working capital investment continues to grow. I can appreciate you've got more inventory in transit and safety stock. But Can you talk about your plans to harvest that cash? And is the inventory accumulation concentrated within specific lines of business or specific products?

Speaker 5

And How much of that's Tools segment versus the other two segments?

Speaker 2

I like our inventory because we have a lot of faith in the future, but I'll let Aldo has got to answer a question. I'll let him say something here. Aldo, why don't you say something?

Operator

Well, David, if you're looking year over year, yes, the Tools Group makes up a major portion But it's not all of it. But actually the Tools Group has their inventories kind of reflective of the fact that they've had very consistent organic growth. And therefore, I think it's suitable. If you look at some of the other areas where we're investing, I mentioned in my prepared remarks, It's not insignificant the amount of money that's tied up in in transit inventories and safety stocks. Again Snap on has made a strategic decision to on the side of availability.

Operator

So that is priority number 1. So long answer to your question, we think the inventory is appropriate given As we see in front of us and the fact that we don't want to miss on the opportunities that present themselves as we go forward and not have disruption from the supply chain. Now again Snap on is blessed for lack of a better word with we're not a typical consumer retail oriented company And therefore, we're not subject to the fashion sense as I like to say, many other companies have to be concerned about. So Our product doesn't really obsoles on the shelf, so to speak. I mean, yes, you have to update the algorithms in a diagnostic unit or an alignment machine, but Pretty much, we feel pretty confident that making an investment in inventory is going to pay off and being able to capture sales and projects or programs That manifest themselves as we go forward.

Speaker 5

I can appreciate that you need that inventory to support the sales activity, but continues to grow. And I guess the question is, at some point, do you have enough? And at what point, if any, is there an opportunity to harvest that Or is this kind of a structural

Operator

step up? There's probably opportunities to harvest it, David, you're absolutely right. But I wouldn't Model it that way. In other words, I just told you what our strategic decision is. And trust me,

Speaker 2

you're going

Operator

to have even more inventory. You will never have exactly the right At the right time, so you have to be prepared to have a flexible factory and a flexible distribution center because 80,000 different SKUs to forecast with the accuracy you would like and then you multiply the statistical probability of having them when you have to put arrays of kits that can have 100 to 200 pieces together and you can see what drives the need for a lot of product. And then on top of it, You have spare part requirements sometimes imposed by regulations. So if you're going to sell machines that have a life of 10 plus years such as lifts and Alignment machines, tire changes, wheel balances is obligations behind the scenes to keep ample supplies of spare parts on hand. So you put that all together and again, we will air in favor of availability.

Operator

There could be opportunities to harvest. I'm just saying that we don't model ourselves cash flow growth from reduction in Even though that certainly is theoretically possible.

Speaker 5

Good. Let me thank you for that. Let me ask you about growth and you mentioned the improving supply channels. How much of the growth in each segment would you estimate is driven by shipping from backlogged orders rather than new orders?

Speaker 2

Well, look, Certainly isn't much say in the critical industries. Our backlog just keeps growing there. That's because they Keep being bedeviled by the supply chain disruptions. That's sort of the thing I was saying. Our backlog is really strong there.

Speaker 2

And I don't think much is in the Tools Group. Our backlog in Tools Storage is at all time high. And we're actually expanding 2 of the plants in the Tools Group this year to try to keep up with this whole situation. You can look at different places like you'd be entitled to the idea that, geez, I think Europe is a little bit under the weather. So you see that kind of thing there, but the U.

Speaker 2

S. Seems to be booming to me. So I don't know. You can It seems to me as though I think you can look at it that way. U.

Speaker 2

S. Is pretty strong and We're trying to look. We have real confidence in the future. That's why we're expanding our capabilities here. If I could expand more tool storage, I would tomorrow.

Speaker 2

I think I said before, the guys said he could one of the guys one of the top sales guys said he could sell everything I could give him. So I think we're sitting Some pretty good strength in that situation. So I think you called it book to bill last time. I think that's pretty healthy in the U. S.

Speaker 2

A lot a little more turbulence in Europe. Yes. So last question Yes.

Speaker 5

Okay. Yes. Thanks for that, Nick. Last question for me. Just The 10 Q is not out yet, so maybe if you could just give us the finance receivable charge offs.

Speaker 5

And then just how were overrides this quarter?

Operator

Overrides are not as dynamic as what they've been in the past. Again, that decision is made with the franchisee. All right. They've been a little bit more conservative compared to the 2016 to 2019 window. We still think personally that's a good bet because we have a lot of metrics behind it and process that kind of gives a higher Sense of collectability on things like that as compared to other companies that might be more upstart so to speak when it comes to lending to the credit profile of Mechanics.

Operator

But to directly answer your question, over turns are not as high as what they've been in the pre pandemic world. And the charge offs, I think I made a remark in my prepared remarks. The charge offs, if you look at the provisions, they're actually narrower. I think we're about 4 point what was it, 4 $4,000,000 difference in the rate of provision, the differential between charge offs is actually less than that. What drove the provision up a little higher It's actually with the significant increase in originations.

Operator

We from experience have to book extra reserve provisions because of that because While everything starts out well, there's going to be a need for some reserves. So the fact that you had high originations in the quarter actually drives a higher provision as well. So probably the increase year over year is About $1,100,000 or so higher provision just associated with higher originations.

Speaker 5

Right. You had provisioned pretty aggressively back in '20, which was to your credit, but you've been working that down with charge offs exceeding provisions for 8 of the 9 last quarters. So

Operator

You're not getting back now to pre pandemic levels. That's what makes the comparisons tougher now, David. Exactly right. Probably by the end of Q1 of 2022, The reserve was probably reduced because of the net we finally realized we didn't need it as much as what we had provided for In 2020 2021. And that's why I like to use the expression we're returning to a more normalized rate of provision and that's what you kind of see now.

Speaker 5

So thanks for taking my questions.

Operator

And our next question will come from Bret Jordan with Jefferies. Please go

Speaker 6

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

Operator

Sure.

Speaker 6

In the C and I Business, are there any other areas internationally to highlight? You've spoken about a bit here with the European hand tools, but is the weaker economic environment the main drag there or is something else driving that?

Speaker 2

No, it's the weaker economic. The UK has got a whole bunch of problems, the revolving door of prime ministers and so on and that kind of thing. And It tends to be more organized around the northern parts of that business. I think driven in the 4th quarter pretty much by a lot of angst. I was in Europe in the 4th quarter Over the fuel situation and that weighed heavily on the people.

Speaker 2

And I think their whole idea that the recession is coming, the recession is coming there, has kind of hit them. You got China, who is like, it's chaos in China. I mean those guys went from being 6 weeks in All of a sudden, let everything go, come to work with COVID. And 3 quarters of the population, some people say, Got COVID. So I think things kind of went standstill because of lockdowns in various cities and it standsstill because everybody is getting So that thing has been afflicted.

Speaker 2

So I'm not sure how quickly it comes back. So we have that. The other international markets like other parts of Asia, like Southeast Asia seem pretty good In that situation. So I think it's just COVID in Asia, particularly China, and the general sort Recession is coming, fuel angst, in England reemergence of now we're out of COVID, the Brexit problems reemerge And the whole idea of the war is there kind of casts a pall over Europe. Although lately, I just heard some data that said the GDP is going to grow in Europe Higher than other places?

Speaker 2

I don't know. I'm from Missouri on that one. I think Europe is a little weaker than Maybe it's been reflected in that. That's what you added. And then one other thing you do see is that we have a I think I said this before, we have a strong Demand in the critical industries, if we could source a little better, if we didn't have the varying disruptions of what's in supply, We could.

Speaker 2

We would have been much stronger in this quarter and in past quarters. So one of the things that drives both the maybe some of the It casts an overhang on the sales and puts a hang on the margins because of you have to pay for the spot buys and they will always come And that's really in the critical industries where if you don't realize it, there is our custom kits with maybe 200 or 300 items in them and they must be Ship complete. So if you don't have 1 or 2 of them, you can't ship.

Speaker 6

Got it. That's helpful. Thank you. And then maybe could you talk a bit more on the subscription side of the RSI business? How sizable is that today?

Speaker 6

And how does the growth outlook there compare to the subscription?

Speaker 2

Well, it's like in part it's not growth outlook is pretty good. The subscriptions are going up. I mean, they're going up through the roof. But the thing is, remember that you probably you may or may not realize this is that the other The former version and still we do some of this is we would sell what we call not subscriptions, but titles. So every 6 months we come out with a new software addition and technicians could buy it for their diagnostic unit or not.

Speaker 2

And we're transitioning from that sort of every 6 months or every year pop to, okay, pay I mean every month. And so there's some balance in that. But software is growing in this situation and We can see some positivity in that regard. And so that's one of the things that is starting to help out Software in the help out the RS and I margin. In fact, I think we want to make sure we focus more on that going forward.

Speaker 2

So I think that's one of our great opportunities. We see a lot of opportunity in things like dealership software and independent repair shop software. And the Mitchell One business, which we didn't mention in this, is still growing like clockwork. It's growing nicely and its profitability is strong. It's just not up in Double digit range, but the subscription business is growing nicely.

Speaker 6

Great. That's all I got. Thank you.

Operator

Sure. And our next question will come from Ivan Feintas with Tigris Financial Partners. Please go ahead.

Speaker 7

Thanks for taking my questions and congratulations again on another great year and a great quarter.

Speaker 2

Thank you.

Speaker 7

So I have just two questions. One, as far as new product development, where do you see going with as we core onboard ADAS systems continue to grow increasing diagnostic and calibration capabilities inside, let's say, Apollo and ZEUS. And then also, the CEO of General Motors has said many times she envisions $50,000,000,000 in revenue coming From software and subscriptions, especially as cars become increasingly have increasingly software defined functionality. And though the dealerships will have to kind of become an increasing integral part of that equation. So how do you see that benefiting dealer

Speaker 2

Well, I think it benefits us greatly because look, if you want to sort of like it isn't a $50,000,000,000 example, but We do have examples associated with just what you said, ADAS, the Advanced Driver Assistance Systems and the calibrations associated with that. That's behind that's sold enabled both through our diagnostics, like you said, like Zeus and Apollo and those, And it's enabled through our undercar equipment business. And those are the 2 businesses that taste the RS and I group. They were both up nice double digits. And really the software and the physicals associated with calibration have been helping Drive the situation in undercar equipment and the input around ADAS systems in Mitchell 1 and in Diagnostic systems has helped drive their attractiveness.

Speaker 2

And as more of that goes in, those products are going to get more and more essential To the technician. You see, what you're seeing, I think another way to talk about this, Ivan, is this, is that Right now, let's say, if you look at the total car park, like maybe 45% of the repairs require But if you look at new units, it's like 80%. And as software starts to rise, More and more are the places where we have leadership in terms of repair information and in the software that's going to wield that information. And the calibration will be important for us. And that's all making money for us now.

Speaker 2

And the wider it gets, the more we're going to have in that So we're developing products along that line. One of the things that you don't even think about is in collision. I think you know this very well, but But the thing is, right now, new cars are like a neural network of sensors. And if they get dinged, you get your bumper dinged, it's a major operation To recalibrate it and reseat the sensors and so on. And that's making that's driving a lot of the underneath car, the under car activity In RS and I.

Speaker 2

So we're already seeing that. And so we're focusing on that stuff as well. A big portion of our business now our development now is associated with software. Ed, you're going to see that we're going to focus on it more and more as we go forward.

Speaker 7

I believe software Sales is going to be an increasing opportunity for you, so I'm excited for

Speaker 2

it. Yes. We're going to make sure we get big focus on But I think we already have a pretty good position in it. We just see as it develops, these are going to create opportunities that are going to lay out there in front of you.

Speaker 7

Thanks again and congratulations again. Wish you all

Speaker 2

a good day. Thanks a lot, Ivan. Take care.

Operator

And this will conclude our question and answer session. I'd like to turn the conference back over to Sara Bernstein for any closing remarks.

Speaker 4

Thank you

Speaker 1

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

Operator

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

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Snap-on Q4 2022
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